Infrastructure as an Investment Asset Class

Caught between the lack of adequate income return from safe Government bonds and bank deposits etc and the elevated risk of higher yielding traditional equities, investing in infrastructure projects might well represent a happy compromise.

Strictly speaking infrastructure does not constitute a separate investment class as access to infrastructure as an investment is normally through particular equities or bonds (or by direct investment normally accessible only by so called sophisticated investors). The key sectors of infrastructure include social infrastructure, such as schools, hospitals, car parks and justice facilities; regulated utilities which include regulated gas and electricity transmission and distribution businesses; transport infrastructure such as roads, trains, airports and seaports; and communications infrastructure which could include mobile communication towers.

Examples of infrastructure investments accessible through the equities market are Transurban, the company with ownership and operating rights over a number of tollways both in Australia and overseas, Sydney Airport running the country’s largest airport and AGL operating gas and electricity production, transmission and distribution businesses. Then there are specialised bonds such as the JEM (NSW) Schools index annuity bond, the Wyuna Water indexed annuity bond and the Novacare indexed annuity bond.

A common characteristic of most investment grade infrastructure businesses is the long term nature of their projects, their commonly regulated and sustainable returns that often include provisions that provide protection for interest rate changes. Many, but not all, are less sensitive to economic cycles than other assets. Generally, therefore infrastructure is considered to be less risky than traditional equities, but riskier than fixed-interest securities. Commensurately, the income returns are normally somewhat lower than for high yielding equities and the capital gain prospects are often more modest. However, the risk return equation varies considerably from one to the other depending on the sector concerned and the particular parameters of their underlying investments.

In general terms, infrastructure investments in Australia have a track record of producing attractive and reliable income returns with less volatility than other equity based investments. Many equity investors do consider this kind of investments as being boring – perhaps not a bad characteristic in uncertain times.