By Subarna Poddar,
Senior Analyst - Investment Research at Aranca
In the current global scenario where traditional asset classes no longer assure stable returns, listed infrastructure is attracting investors in a big way. In 2015, investors have largely been cautious about the equity markets due to expectations of stable growth in the US and the likely interest rate hike by the US Federal Reserve (Fed) amid declining jobless claims and improving consumer sentiment. However, inconsistent economic indicators, the Greek crisis and a slowdown in China impacted returns. Even amid concerns about the global economy, bond yields were at their lowest in most developed economies, making fixed income investments unattractive. Moreover, the continued fall in gold prices more than eroded the safe-haven appeal of the precious metal.
Global fund managers consider real estate an alternative investment avenue for stable returns on their investments, as real estate assets are likely to witness substantial price appreciation. Listed infrastructure, an upcoming segment of the real estate sector, is gradually gaining traction among fund managers due to its monopolistic nature, price inelasticity, stable predicted cash flows, and inflation hedging characteristic. Although these assets are also traded in the form of equities, the underlying asset is immune to default risks due to strong government backing. Furthermore, these equities act as defensive plays during the downturn.
Listed infrastructure assets are largely government or quasi-government owned. The sovereign backing makes ongoing infrastructure projects less likely to default compared with other privately held real estate asset classes. These assets work in a cost plus model; hence, profitability is already hedged. Also, listed infrastructure assets typically enjoy monopoly due to entry barriers set by the local governments, thus maintaining stable cash flows. Demand for these assets is often inelastic to price changes, such as electricity, water, toll, as people continue using these utilities despite tariff changes. Thus, this asset class provides stable returns even during an economic downturn. Although investment in infrastructure is capital intensive, the equity route makes it cheaper, investor friendly and keeps transactions transparent.