19 May 2017
Investors are financing more Asian infrastructure projects as the region’s economies grow and governments open up to private investment.
With returns on traditional markets such as fixed income still depressed, global investors are embracing infrastructure as an asset class.
They are increasingly funding projects in countries where urbanisation and a growing middle class have created strong demand for infrastructure assets such as roads, power plants and water treatment facilities.
“Pension funds and insurers are increasing their allocations to infrastructure globally,” says David Luboff, Senior Managing Director, Macquarie Infrastructure and Real Assets. “We are also seeing greater levels of demand from global investors for Asian infrastructure exposure. Pleasingly there is a strong pipeline of opportunities offering attractive risk adjusted returns to investors.”
Greenfield vs. brownfield
Financial investors have traditionally favoured existing brownfield assets over greenfield investments, says Luboff. Brownfield assets have an established track record and existing cash flows, while those in the greenfield stage incur higher risks including construction, contracting and forecasting.
“But well-structured projects can accommodate these risks,” says Luboff. “We're seeing some really attractive opportunities in the greenfield space, particularly in the renewable energy sector, and we expect both greenfield and brownfield projects in Asia to attract more private capital.”
The Philippines has embarked on the extension of Light Rail Transit 1 line in Manila, the oldest metro rail system in Southeast Asia. This was one of the largest infrastructure projects in 2016 and involved the construction of new assets. It will be the biggest transportation public-private partnership in the nation's history, with the existing line expanding by 11 kilometres into the Cavite region of the Philippine capital.
It's an exciting time for a region that is maturing in terms of privately funded infrastructure investments offering attractive risk adjusted returns.
Many infrastructure opportunities include both brownfield and greenfield elements as operating companies seek to accommodate increasing usage. This is particularly the case in China where high levels of urbanisation and a growing middle class are driving the need for expansionary private funding in environmental infrastructure companies, such as water supply and treatment plants.
The Indian government’s plan to increase the country’s solar energy capacity was a key target for private Asian infrastructure capital in 2015 and 2016. This trend is increasing - in February, one of the largest single solar investments to date was made with the private sector acquisition of a 327 megawatt solar portfolio. The portfolio comprises 18 solar farms across India with growth potential through new build opportunities.
Luboff, who has overseen such investments across the region, says having the right contractors and counterparts is key for the viability of greenfield projects.
A heterogeneous region
Luboff says it’s important to analyse opportunities on a case-by-case basis, given the diversity of economic and regulatory environments across Asia. He says China, India, the Philippines and South Korea have traditionally offered attractive infrastructure investment opportunities.
For example, firms that built roads in India over the last the decade are now selling these operating assets to infrastructure funds and financial investors, raising capital for the next round of projects as India continues with its ambitious transportation plan.
In the Philippines, an early liberalisation of rules on private ownership of infrastructure and the availability of local funding make it an attractive market, while South Korea is a sophisticated market for private sector financing of infrastructure projects, across both the core and core-plus sectors.
Japan is also embarking on a large government-lead privatisation program in which many core assets such as toll roads and airports will be sold to the private sector in the years ahead. Markets like Indonesia and Thailand may also become increasingly interesting due to demographics and liberalisation, Luboff says.
“It's an exciting time for a region that is maturing in terms of privately funded infrastructure. Importantly, the levels of risk adjusted return are attractive for well-structured and considered projects,” he says.