Infrastructure has become a meaningful allocation for many Asian institutional investors, but only half intend to invest more into this area over the coming year, a smaller proportion than raised their exposure to the asset class in 2015, according to a new survey*.
The poll, conducted by AsianInvestor and Australian investment house QIC, asked insurance companies, commercial banks and public and corporate pension funds about their infrastructure investment strategies.
While two-thirds of respondents said they had increased their infrastructure allocations over the past 12 months, 52% said they would increase their exposure over the coming year, while some 40% said it would remain the same.
However, Ross Israel, head of global infrastructure at QIC, pointed out that infrastructure as an asset class had gained importance with asset owners. Thirty-seven percent of investors who answered the poll said they hold 10% or more of their portfolio in the asset class.
Uncertainty over investing has caused many asset owners to look to higher-quality, defensive investments in the infrastructure space. As a result, investors are looking more to investments in developed markets over emerging ones, with allocations to North America and Western Europe rising as a proportion of portfolio assets, while investments into Latin America and Asia will fall.
Israel believes that the low- or even negative-interest-rate policies in many developed market economies accounts for the slowing of infrastructure investments. “It’s hard to know where the true risk-free rates lie at present,” he said.
Asset owners increasingly favour buying into brownfield assets too, or infrastructure assets that have already been built and thus represent less risk.
Of course, these assets also generate the most interest. The low-interest-rate environment allows acquirers to borrow very cheaply, even as it forces more types of investor to consider alternative forms of asset investing such as infrastructure.
The result is that the competition for brownfield assets has never been stronger, which is driving up their cost. “Risk is being distorted by the low interest rate environment,” said Israel.
Indeed, 21% of respondents to the poll said valuation concerns were the greatest challenge facing infrastructure investing – the highest-ranked of the eight options presented.
The cost of infrastructure projects is rising. An example was the A$10.3 billion ($7.6 billion) privatisation of Transgrid in Australia in December 2015. The winning consortium paid 1.64 times the regulated asset base, well above market expectations.
A big problem for would-be infrastructure investors is to understand exactly what represents value in this market environment, particularly as it is uncertain how long interest rates will remain low.
“If interest rates stay low for some time, then the valuations being paid now could be seen as reasonable in the future,” said Israel. “But if markets bounce and the returns on other assets increase, then today’s prices will be seen as high.”
* Look out for part two in this series, when we discuss the return expectations of asset owners buying into infrastructure. For the full poll results and analysis, please see the June edition of AsianInvestor magazine.