All aboard for infrastructure
Many of us have worried at some point about how the UK’s aging infrastructure will cope with increased demand. Mostly we are stuck on trains when this thought occurs. But as investors we are also encouraged to think beyond terrifying figures (such as the UK population hitting 70 million people by 2027) and appreciate the opportunity ahead of us.
If the thought of solid returns and economic development should cheer us up, then you’ll be delighted to know that the UK has more than 600 infrastructure projects in the pipeline with a combined value of £375 billion. From a public pension fund perspective, the UK government has demonstrated its focus by urging the 89 local authority funds in England and Wales to develop their expertise in, and invest in, infrastructure.
Infrastructure can be classed as an income-producing investment. It has similarities with real estate in that both consist of long duration assets that have enduring value, both simultaneously generate an economic rent, and both provide institutional investors with much needed diversification.
Real estate ownership can be held indefinitely and at any time can be linked to the economy. However, infrastructure is less correlated to economic trends and because of this quality it can come at a higher cost to investors. But it does mean that this asset class is protected from market volatility.
Very close to infrastructure on the asset spectrum are timber and agriculture. Timber’s peculiarities are that investors may own the rights to the timber and the land underneath it; alternatively they may just own the rights to the crop. Meanwhile, agriculture funds invest in land and subsequently farm it to provide income.
It has been reported that more pension funds are invested in these diversifying assets than ever before, and as a result demand for these investment opportunities can outweigh the supply. Having said that, there’s hardly a bubble in infrastructure yet. Research by consultancy Mercer indicates that in 2018 2% of European pension schemes had part of their exposure to real assets in timberland or agriculture thus providing inflation protection and access to long-term income.
The Lens would argue there is still room in infrastructure investment. Certainly more room than you’ll find on the 7.55am to Waterloo.
*Look out for CAMRADATA’s infrastructure roundtable in the coming month, and whitepaper to follow.