Infrastructure - MAY 19, 2015

Infrastructure: In a class of its own

by Sheila Hopkins

So what is infrastructure and how does it differ from real estate or other real assets? Investors might not be able to define infrastructure, but they know it when they see — or use — it. Infrastructure is typically defined as the interrelated systems and assets that supply the services necessary for a city, region or country to function. It is the utility grids that supply energy and water; it is the transportation systems that enable commuters to move from home to work; it is the communications towers and satellites that connect the populace. On the social infrastructure side, it includes the schools, hospitals, courthouses, prisons and city buildings that underpin efficient government services. These large, long-lived assets have monopolistic characteristics (many are true monopolies), have high barriers to competitive entry and generate steady revenue through government-regulated fees or very long-term contracts.

Investors often place infrastructure in the same bucket as real estate because they have similar characteristics. Both have an income component, and both obviously have physical underlying assets. Yet the two classes serve different purposes in the portfolio.

“Real estate is a more economically sensitive real assets class,” explains Jeremy Anagnos, managing director at CBRE Clarion Securities. “It performs well when there is economic growth that supports demand for space, but it can struggle when the economy slows. Infrastructure assets, however, fall low on the spectrum of economic sensitivity because the underlying assets are providing essential needs. So while real estate and infrastructure are complementary, they actually perform differently based on expectations of economic growth.”

Because these are clunky, expensive assets, infrastructure investment has historically been the purview of institutional investors and funds. In the past few years, however, listed infrastructure funds suitable for individual investors have begun to appear. Although most investors look for a long-term track record when selecting investments, infrastructure funds might be the exception to the rule. In fact, their newness might even be a good thing when it comes to generating returns.

“We consider this early stage in the growth and development of listed infrastructure to be an advantage to investors,” says Todd Briddell, CEO and CIO of CenterSquare Investment Management. “REITs have served real estate investors over the past two decades, and global listed infrastructure presents the next opportunity for investors seeking compelling growth, stability and liquidity for their alternative asset allocations.”

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