What are the infrastructure trends?

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Legg Mason
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Supported by
Legg Mason
What are the infrastructure trends?

Infrastructure is not just booming in the UK but also globally, so where should your clients be looking if they want exposure to the trend?

The UK government has already committed to spending billions on infrastructure over the next five years.

In the 132-page HM Government Green Paper: Building Our Industrial Strategy, the government outlines its plans for wholesale investment in infrastructure projects, ranging from improvements to the creaking rail system, through to developing better affordable housing.

The document states: “We are providing greater certainty and a clear long-term direction. Central government economic infrastructure investment will now rise by almost 60 per cent between 2016/17 (£14bn) and 2020/21 (£22bn).”

This is repeating across the globe, according to research from S&P Global Ratings. According to its Quarter One figures for 2017, 16 funds secured $29bn (£21.3bn) in investor capital, with unlisted infrastructure fundraising reaching an all-time high.

In developed markets, there is a significant amount of expenditure required to bring existing infrastructure stock up to a standard that meets current needs. Nick Langley

Mar Beltran, senior director and infrastructure sector lead for Europe, Middle East and Africa in the infrastructure ratings division of S&P Global Ratings, says: “Moreover, almost $100bn (£73.6bn) of aggregate capital was raised across the infrastructure fundraising market. 

“North America and Europe continued to be the front-runners”.

What is trending?

According to Nick Langley, co-chief executive and co-chief investment officer at RARE Infrastructure, a Legg Mason affiliate, infrastructure is in a “multi-decade secular growth phase”, so many infrastructure assets, and many countries, will see positive returns over the next few years, he believes.

Mr Langley says: “Estimates vary, but they all point in the same direction: the global stock of infrastructure assets is set to expand greatly over the coming years.”

He points to research in 2014 by David Hale Global Economics, which suggests the global stock of infrastructure will double to more than $110 trillion (£80.9trn) over the next 15 years, with energy, transportation, water sanitation and telecoms all beneficiaries of the rising tide.

James Smith, manager of the Premier Global Infrastructure Income fund at Premier Asset Management, comments: “We are all travelling more, whether in cars or by public transport, and we therefore believe the demand for road, rail and airport infrastructure will only increase with time.”

Renewables 

Clean energy is also getting a boost, certainly on one side of the Atlantic, given the enormous political and scientific will and pressure to deliver cleaner alternatives to fossil fuels.

Mr Smith highlights clean energy as a growth area for infrastructure investment.

He says: “We are moving from fossil fuels to clean energy, which means investment not only in new sources of production but also in the grid infrastructure to connect them.”

This story is repeating not just in the UK but around the globe. 

S&P Global Ratings’ June 2017 report, Developing US Infrastructure in an Era of Emerging Opportunities, speaks specifically about the US’s infrastructure spend on renewables up to the end of 2016.

Citing figures from the US Energy Information Administration, the report showed 14.9 per cent of the total US utility scale generation in 2016 was in renewables (see pie chart). 

This is estimated to rise significantly over the next decade as green technology evolves.

The report said regulated utilities in the US have been addressing the expansion of renewable and distributed generation capacity, and many are developing higher efficiency utility-scale solar and storage resources that can meet state renewable portfolio standards.

Whether the positive regulatory environment and supportive tax structure for renewables infrastructure in the US will continue under President Trump, who publicly stated climate change had been created by the Chinese to annihilate the US’s economic interests, remains to be seen. 

For Ian Simm, chief executive of Impax Asset Management: “Even President Trump’s announcement to withdraw the US from the Paris Climate Agreement has done little to dent investor enthusiasm for investments in companies that provide solutions to environmental challenges.”

Who will pay?

The David Hale Global Economics report, Infrastructure as an Investment: Global Risks and Returns, also predicts the private sector will play an increasingly central role in the expansion of global infrastructure assets.

The fact is, government balance sheets have been stretched considerably, especially since the global financial crisis, so the private sector has been picking up the slack already and will continue to do so – hence the rise in the listed infrastructure asset class over the past decade. 

In the case of large-scale projects, there is a case for bundling infrastructure projects together.

For example, in the US, the Penn State’s Department of Transportation bundled together 558 bridges into one project to help save money, deliver replacement of structurally deficient bridges more quickly and provide better value to taxpayers. 

This was done in partnership with private initiatives. Similarly, Vela Energy Finance bundled together the financing for 42 solar energy parks in Spain.

This could present investors with a new potential infrastructure asset class.

The future

Mr Langley comments: “This expansion will be driven by growth in both developed markets and emerging markets. 

“In developed markets, there is a significant amount of expenditure required to bring existing infrastructure stock up to a standard that meets current needs.”

“Alongside this,” he continues, “is the investment required to meet future needs. In the emerging markets, we see a significant amount of infrastructure asset growth, as a result of rising populations, urbanisation and the growing demand for cleaner energy and better transport links.”

It is clear infrastructure needs to be improved drastically, not just in the UK but in most developed and all developing markets.

The world’s population is not getting smaller, people are not staying put in the countryside, and technology and the way we live is creating the disruption that necessitates better, cleaner and smarter ways of living and working.

What is also clear, according to Collins Roth, managing director at MPC Industrial Projects, is global governments are struggling to keep up with these infrastructure needs. 

This is creating opportunities for many companies to get involved in the infrastructure space – although not all of these will be long-term winners. 

“More are turning to public-private partnership models to provide what they cannot from their own balance sheets (PPPs),” he says. 

“As a private equity investor, the issue is less about following where spending or number of potential PPPs are the largest, but more about finding quality projects.

“That requires judging the underlying economics, the financeability of the project, the political support and opposition, and so on. We don’t follow the spending, but the individual projects.”

simoney.kyriakou@ft.com