The connection between real estate and investment in infrastructure in the UK has in the UK been significantly underplayed.
Regeneration is identified by government and industry alike as one of the key drivers of UK growth and a game-changer in retaining international economic competitiveness. It is here that the worlds of infrastructure and real estate visibly collide. To treat them separately is not just short-sighted but deeply inefficient.
From an investor perspective, the synergies are clear. As asset classes, both offer long-term, stable cash flows with the potential for growth, secured against enduring assets. For both, a high degree of the value is in the income that is generated. Providing diversification from equities and publicly-rated credit, they also have strong liability-matching qualities. As direct investments, they offer investors a high degree of control, with opportunities to actively manage assets to enhance values and cash flows. In a world where some investors pay handsomely for the ability to switch in and out of assets in seconds, the slow money controlled by pension funds and insurers is increasingly concerned with extracting a premium for investing in less liquid assets that are suited to their long-time horizons.
At an asset level, historic boundaries have already blurred. Assets which may once have been considered as ‘social infrastructure’ are now being found in commercial real estate portfolios; witness the high level of activity in the student housing sector, for example. At Legal & General, this has meant we have invested in student accommodation across our infrastructure, real estate lending and real estate equity platforms.
Equally, there is increasing crossover in economic infrastructure. For instance, as an owner of land on which a new waste-to-energy plant is planned, we understand how the due diligence in leasing it to an operator naturally extends to underwriting the machinery itself. If one is willing to provide
the capital to fund the land, why not the facility that sits on it.
The third area of synergy is in skill sets. The processes and disciplines used to underwrite real estate and infrastructure transactions have a great deal in common. The need to appraise credit quality, underlying asset values, legal structures and financing options are all central to delivering robust risk-adjusted returns. Opportunities are entwined, as are the third parties involved.
If all of this is true, why have real estate and infrastructure not been sufficiently considered together before? In many ways, insurers and pension schemes have always been ideal owners of infrastructure assets. What has changed is the increasing inability of either the banking sector or the government to finance long-term infrastructure investment, leaving a funding gap that the slow money is well placed to bridge.
Partnerships between public and private sector organisations are a major part of the answer. Where the private sector provides the necessary capital and skills to bring forward complex schemes, local government can provide the access and support to unlock opportunities.
There is a great opportunity to invest in the urban renaissance of cities around the UK. As a result of major demographic and social change in recent decades and ahead, a new approach to investment is emerging, where real assets are an essential part of the future. Only those that see this opportunity and can adapt will outperform the market.
Bill Hughes is managing director of Legal & General Property and president of the British Property Federation