Think about the phrase “real asset investment” and what might come up are the main product types: Multifamily and residential, office, industrial, retail and medical office. Yet one “real asset” that has lurked under the real estate headlines is infrastructure. A research article published in The Review of Financial Studies reports that since the 2010s, institutional investors have been funneling capital into infrastructure projects.
The article’s authors write that the reason for growing activity in this sector is because it’s regarded as an asset class that isn’t subject to much volatility. Another reason is non-correlation to equity markets. The authors ended up dispelling some of those assumptions. But other write-ups make the case for infrastructure as a potential addition to portfolios.
What it Is
Infrastructure investments are physical assets that support movement of many kinds. This can include roads and highways, telecommunications towers, port facilities, airports, railroads, water networks and utilities. Because of their physical nature, infrastructures often tie in with real estate investment, as their development requires land.
The most traditional form of infrastructure investment includes revenue bonds and municipal bonds issued by federal, state and local governments. Private infrastructure funds are also in play, as are publicly listed exchange-traded funds.
According to Marcel Brinkman and Vijay Sarma with McKinsey & Co., funds holding infrastructure investments are broken into three categories: super core (lowest risk and return), core (relatively low risk and low return) and core-plus (riskier but offering returns similar to private equity investments).
The Impact of Change
Though infrastructure has been around as an asset class since the 1990s, changes are impacting this investment type including the following:
COVID-19. The pandemic has led to changes in travel, supply chain disruptions and consumer behavior, while lockdown measures meant a decline in public transportation and road usage. While certain sectors are re-opening, analysts with PwC point out that COVID-19 will have an impact in operational resilience, technology adoption and sustainability.
Infratech. Speaking of technology (and citing another McKinsey & Co. report), other infrastructure asset types, like software platforms, fiber and camera networks, “retail the predictable cash flows of traditional infrastructure services.”
Sustainability. As it is in structural development, ESG is a prominent theme in infrastructure development and maintenance. A recent report issued by RBC Capital Markets’ Sustainable Finance Group indicated that various environmental initiatives are underway, even as global infrastructure investment continues scaling up.
The takeaway here is that infrastructure can be perceived as a viable long-term option for investors. But as is the case with other real estate, investors should be sure to perform due diligence on both underlying assets and limited and general partners involved with funds and ETFs.
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