Investors are generally bullish about the prospects for infrastructure but are challenged by high valuations on brownfield assets and tight supply in some regions of the globe, according to the results of a March poll conducted by AsianInvestor and the Queensland Investment Corporation.

The survey shows infrastructure assets competing head to head with other yield plays for investor attention as the interest rate cycle swings upwards. While the expected rotation into fixed income securities has yet to take hold, investors are thinking deeply about the returns generated from infrastructure assets.

The survey asked a range of institutional investors and bankers across Asia to provide information about their allocation strategies and to indicate their preferred investment approach. They were also asked about the challenges they face when investing in the sector.

The full results will be made available in the next print edition of AsianInvestor, after a similar survey was conducted in 2016.

Ross Israel, head of global infrastructure at QIC, said the survey results painted a broadly positive picture of rising allocations and market maturation. “I think this points to a generally bullish outlook for global economic growth and the fact that many governments see infrastructure spending as a key driver for economic activity.” 

“In the US there has been an infrastructure plan put forward by the new administration and China is pushing ahead with its One Belt, One Road plan to open up logistics corridors through Asia and into Europe,” he said.

BELT AND ROAD IMPACT

How China chooses to move forward with its One Belt, One Road initiative is likely to have a large impact on supply, Israel said.

Countries along the proposed corridor are watching closely to see if the construction boom created by the plan is spread evenly among local and global contractors, or if all of the upside goes to Chinese entities. Once projects are complete, there is a question around asset ownership and whether the productivity generated by the operation of the assets will land on local national accounts or be funnelled back to China.

“It is taking time for the policy around Belt and Road to take shape,” Israel said. “As yet we haven’t seen a set of investable guidelines for the initiative nor have we seen a detailed list of commercial projects. This is a great concept but there are many geopolitical hurdles to navigate.”

The poll results show asset owners are looking to fine-tune their portfolios over the next year or two with a focus on diversification.

“Investors are applying a sophisticated lens to their exposures,” he said. “They are weighing geographical preferences, the risk/return dynamics of brownfield versus greenfield assets, and the importance of cash flow and income versus capital gain.”

GEOGRAPHICAL DIVERSITY

Geographical preferences are likely to widen as the sector deepens. OECD countries remain popular destinations for investments, but there is growing interest in emerging markets. Respondents to the survey point to an increase in exposures in South America over the next 12 months, for example.

“Emerging markets offer a good macroeconomic backdrop at the moment and investors who already have significant exposure to OECD countries will be looking further afield,” Israel said. “Asia is still a strong target for capital allocation, though the supply and access to projects is more challenging.”

QIC is on top of investment trends as it finds a home for its A$2.35 billion ($1.81 billion) Global Infrastructure Fund, which reached final close in February 2017. QIC has a two-year target to invest the funds and has executed three deals so far: a share in Lochard Energy, a gas storage and processing facility in the state of Victoria; a stake in the privatised Port of Melbourne; and a joint venture, PARF, with utility company AGL to build solar and wind farms.

QIC is seeking assets in the energy, utilities, transport, and public–private partnership sectors, and the current focus is on opportunities in the UK and Europe.

“We are also looking at the US market,” Israel said. “There are opportunities but it’s a market where you have to position well and leverage capabilities to identify relative value and to differentiate your business plan.”

Israel said once QIC has successfully completed this investment phase, it will move forward with raising a second fund. “We are on track for 2020,” he said.

The survey, conducted in March, gathered feedback from all types of firms, including family offices and endowments. Overall, 18% of respondents said they worked for insurance companies, 42% represented commercial banks and 16% were from public and corporate pension funds. Geographically, the majority of investors hailed from Hong Kong, Australia, Japan, Thailand, the Philippines and Singapore. Full results will be published in the next print edition of AsianInvestor.