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Infrastructure is not a glamorous topic — it isn’t satirized on late-night TV, nor is it trending on social media. But the need for increased infrastructure investment is real across the globe. Given expected demographic trends, disruption by new technology and insufficient spending in the past, we at Invesco Real Estate believe infrastructure-related companies could be poised for decades of growth.
The private sector may help fill the spending gap on infrastructure
Infrastructure is defined as the physical and organizational facilities necessary for a society to operate at its most basic level. Despite the critical nature of infrastructure assets, stretched public finances have created funding gaps for these projects worldwide. According to the World Bank, an estimated $97 trillion will be needed for infrastructure projects globally between 2016 and 2040 — and the current funding gap is projected to be as much as $18 trillion.1
With a strong likelihood of increased funding gaps going forward, we believe that infrastructure-oriented companies and private-public partnerships will fill some of the capital void and could provide sufficient money to improve some existing infrastructure assets and create new projects. With the global infrastructure spend as a percentage of gross domestic product (GDP) expected to increase in most regions (see chart below), we view infrastructure companies and private funding as an inevitable component of infrastructure solutions for the future.
This opens a wide range of opportunities to invest in the companies that will help build the world’s infrastructure for years to come.
|Infrastructure region||Current level (% of GDP spend on infrastructure)||Forecasted average 2016-2040 (% of GDP spend on infrastructure)||Expected change (current vs. forecasted)|
Source: Oxford Economics, Global Infrastructure Outlook, Sept. 4, 2017
Disruptions in demographics and technology drive increased infrastructure spending
With the demand for services provided by infrastructure-related assets being relatively inelastic, we believe global population growth will spur further demand for infrastructure spending. More specifically, the number of middle-income households is expected to grow by nearly 65% worldwide over the next 15 years,2 with significant increases coming specifically in China, India and Brazil. The growth in consumption from these households is expected to significantly boost demand across the infrastructure continuum.
Changes in technology are also expected to become disruptive in sectors such as communications and energy. We expect this to spark demand for new generations of infrastructure assets.
Defining the universe of investable infrastructure companies
There is no universally agreed-upon definition of what type of companies fit inside the infrastructure universe. Invesco Real Estate estimates there could be as many as 500 companies operating in the infrastructure space. However, we believe further refining this universe into “pure plays” may lead to better risk-adjusted outcomes.
To that end, when looking for infrastructure opportunities, we seek companies with at least 75% of operating earnings derived from owning and operating infrastructure assets worldwide. Our research shows that these businesses have more stable and predictable cash flows than the more cyclical sectors of the infrastructure universe such as construction and engineering. Our focus tends to lend itself to investments in utilities (water, electricity transmission and distribution), transportation (toll roads, airports, seaports, railways and tunnels), energy (natural gas, and oil storage and transportation) and communications (cell towers, data centers and satellites).
How do infrastructure investments differ from traditional stocks and bonds?
Given the stable and predictable cash flows generated by monopolistic “pure play” infrastructure assets worldwide, the performance attributes of these companies tend to differ compared to traditional equity and debt. This helps make the asset class a diversifier for strategic asset allocation.
One of the differentiating factors is the ability to pass price or cost increases through to the customer more swiftly versus most traditional asset classes. Given the highly regulated nature of infrastructure businesses, these companies often work hand in hand with municipalities to determine acceptable user fees and price escalators. It is often in the best interest of local governments to ensure that infrastructure companies earn acceptable returns given the critical nature of the services they provide. One of the benefits afforded to the vast majority of “pure play” infrastructure companies is the ability to raise prices or fees in lockstep with inflation due to contractual riders. Invesco Real Estate has found that infrastructure companies tend to have among the highest betas to rising inflation among other liquid real asset classes including real estate, commodities, natural resources, timber and agricultural companies.
Mispriced infrastructure securities may be an early stage opportunity
Institutional investors, such as pension plans, often have long-term experience investing in private infrastructure. On the other hand, retail investors tend to be more recent entrants into this asset class. According to Preqin Ltd, there is approximately $425 billion managed in private infrastructure accounts across the world on behalf of institutional investors. By comparison, according to Evestment and the Global Listed Infrastructure Organisation, there is $84 billion invested in globally listed infrastructure accounts worldwide.
With a relatively limited pool of capital invested in dedicated, globally listed infrastructure companies today, Invesco Real Estate believes that this asset class may be currently mispriced, similar to where publicly traded real estate investment trusts (REITs) were in the late 1990s and early 2000s, when the market was developing. In our view, the price-to-cash flow of listed infrastructure securities today is similar to the price-to-adjusted funds from operations multiple for REITs during the period of 1995 to 2004.3
US REIT vs. global infrastructure multiples (1995 through 2017)
Source: Invesco Real Estate, data from Bloomberg, L.P. as of Dec. 31, 2017. US REITs represented by FTSE Nareit All Equity REITs Index. Global infrastructure represented by Invesco Global Infrastructure Strategy. US REIT multiple is the ratio of price to adjusted funds from operations. The infrastructure multiple is price to cash flow.
The multiple for US REITs rose by nearly 50% from 2004 through the end of 2017 (see chart above). We believe it is likely that globally listed infrastructure securities will also appreciate, eventually commanding a greater multiple as the asset class grows out of its incubation period and becomes more well-known. Our chart also illustrates how the early stage multiple for REITs is very similar to the current global infrastructure multiple. Our research suggests the multiple expansion that has taken place with REIT investments may repeat itself with infrastructure companies in the coming years.
Real asset solutions
Invesco Real Estate has nearly 475 employees in 21 different markets worldwide with current assets under management exceeding $64 billion as of June 30, 2018. Invesco has a wide range of real estate and real asset solutions including US real estate, global real estate, global real estate income, infrastructure and MLPs. For more details on the Invesco Global Infrastructure Fund, please click here. For further details on our broad range of real estate and real asset solutions, please click here.
1 Source: The World Bank, Forecasting infrastructure investment needs for 50 countries, 7 sectors through 2040, Chris Heathcote, Aug. 10, 2017
2 Source: Oxford Economics, Global Infrastructure Outlook, Sept. 4, 2017
3 Source: Invesco Real Estate, data from Bloomberg, L.P. as of Dec. 31, 2016. US REITS represented by the FTSE Nareit All Equity REITs Index. Global infrastructure is represented by DJ Brookfield Global Infrastructure Index. REIT multiple is shown as price/adjusted funds from operations. Infrastructure multiple is shown as price/cash flow.
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Inelastic demand describes a condition where the rise in price of a good or service is not accompanied by a corresponding drop in demand.
Operating earnings per share is a measure of a company’s earnings that excludes non-operating expenses such as interest and taxes.
A multiple is any ratio that uses the share price of a company along with some specific per-share financial metric to measure value. Generally speaking, the higher the multiple, the more expensive the stock.
A real estate investment trust (REIT) is a company that owns (and typically operates) income-producing real estate or real estate-related assets.
The Dow Jones Brookfield Global Infrastructure Index measures the stock performance of companies that exhibit strong infrastructure characteristics.
The FTSE Nareit All Equity REITs Index is an unmanaged index considered representative of US REITs.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.
Investment in infrastructure-related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors.
Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.
Senior Client Portfolio Manager
David Wertheim is a Senior Client Portfolio Manager focused on real asset securities. In this capacity, he works with Invesco’s real assets investment management team, serving as its representative to clients and prospects.
Mr. Wertheim began his career in 2000 and joined Invesco in 2018. Prior to joining Invesco, he was a senior client portfolio manager for real assets, commodities and equities with Deutsche Asset Management.
Mr. Wertheim earned a BBA from George Washington University with a dual concentration in international business and marketing.
Managing Director, Portfolio Manager
Invesco Real Estate
Darin Turner is a Managing Director and Portfolio Manager for Invesco Real Estate. He performs quantitative and fundamental research on real asset securities, and his primary portfolio responsibilities include midstream energy, utilities, renewables and transportation infrastructure on a global basis.
Mr. Turner joined Invesco in 2005 as an acquisitions analyst and later served as the associate portfolio manager for Invesco Real Estate’s US Value Added Funds. Prior to joining Invesco, Mr. Turner was a financial analyst in the corporate finance group of ORIX Capital Markets, where he was responsible for the daily evaluation of a structured finance portfolio, as well as for analyzing the performance of specific collateralized debt obligations. Additionally, he was responsible for the execution of a high yield repurchase facility and a leveraged loan swap agreement, as well as the implementation of certain portfolio hedging strategies.
Mr. Turner earned a BBA in finance from Baylor University, an MS degree in real estate from the University of Texas at Arlington and an MBA degree specializing in investments from Southern Methodist University.