Infrastructure: Overcoming the Brexit effect
Tom Sumpster is head of infrastructure finance at LGIM Real Assets
As ministers relentlessly provide assurances that the UK is open for business, with Brexit at the forefront of the minds of the masses there is no hiding from the fact that these are unprecedented times. With uncertainty comes challenges, but those who are forward thinking and able to flex to the changing political and economic backdrop will prosper.
Infrastructure forms the backbone of a strong economy, but it tends to mean different things to different people. On the whole, most definitions have the same thread running through them: infrastructure has the power to increase our living standards, drive economic growth and boost productivity. It enables trade, connects workers to their jobs and powers businesses.
The increasing need for investment in core infrastructure such as telecommunications, transport links, buildings, energy projects and pipelines has pushed infrastructure as an asset class to the mainstream for investors.
In 2016, the World Economic Forum ranked the quality of the UK’s infrastructure as 24th in the world, slipping five places since 2006, and sitting firmly in the middle in terms of other industrialised nations.
Better infrastructure builds a stronger future and further cementing the imperative for investment in this sector is the UK government’s National Infrastructure and Construction Pipeline, published last year.
The government has projected total public and private investment in infrastructure at £600bn (€666bn) over the next 10 years. Alongside this is a consistently supportive policy framework that gives investors and the supply chain confidence to commit to the long term, despite Brexit uncertainty.
Investors in this sector are sanguine about the consequences of Brexit and have recognised the benefits of infrastructure allocation at a time when calls for infrastructure investment grow louder.
Contrary to the uncertainty of the political backdrop, the characteristics of an infrastructure asset are unchanged. UK infrastructure assets benefit from the transparency and consistency of regulation, and as an investment it brings stable, predictable long-term (over 10 years) cash flows with a low margin of forecasting error. Offering relative insulation from the business cycle and diversification with other asset classes, the demand for core infrastructure assets do not tend to correlate with economic winds.
Banks continue to reduce their appetite for long-term debt as they seek greater value in short-dated debt instruments. This funding gap, increasing year-on-year, presents significant opportunities for institutional investors who have a record for long-term investment into the fabric of the UK.
The market has been active for more than 25 years, so is relatively young and predominantly private. But to demonstrate the resilience of infrastructure during even the most difficult times, we can call upon data collected by MSCI Global Quarterly Infrastructure Asset index during the 2007-09 global financial crisis: it shows core infrastructure losing 10-15% of its value, compared to a 30% loss in commercial real estate.
However, nervousness persists for international investors. A post-Brexit retreat by foreign investors would present opportunities for UK institutions to use their insight, experience and intellectual capital in a market they understand, while delivering to investors.
For UK institutions wishing to invest in sterling-denominated, long-term infrastructure investments, less demand from foreign investors leads to a broader choice of investments, creating portfolio diversification within the sector, an ability to deploy capital more quickly, and an assurance that value and risk mitigations are protected for investors. This should give investors confidence that the UK infrastructure market continues to be an economic and resilient place to invest.
While there are of course risks, and in spite of the largely political issues that could impact the prospects for core infrastructure, there is consistency in the reasons for investing in this asset class.
As much of the western world recognises that its competitive potential rests in making smart infrastructure choices, a significant opportunity arises for those who have the insight, intellectual capital and experience to identify UK investment opportunities that will support the evolution and regeneration of UK infrastructure while delivering value to investors.