Search for higher yield leads to infrastructure

INFRASTRUCTURE is seeing solid interest from investors. Not only does it offer relatively attractive yields and return potential, it's also a good diversifier. With ultra-low bond yields and equities limited by constrained growth prospects, infrastructure can provide a source of relatively stable returns underpinned by reasonable yields and inflation-linked revenues. This note reviews the key characteristics of infrastructure and its role in a diversified investment portfolio.

Infrastructure refers to assets used to satisfy general community, societal and economic needs, and underpins the operation of society. These assets include utilities (electricity generation, transmission and distribution, telecommunications, gas and water distribution); transport infrastructure (toll roads, rail, airports and ports); and social infrastructure (such as schools, hospitals, prisons and public housing). The broad range of infrastructure assets means that it is not a generic asset class. It encompasses lower-returning, lower-risk social infrastructure through to regulated utilities and demand-based infrastructure such as ports, airports and telecommunications.

Infrastructure assets typically follow a life cycle that sees them start off as greenfield assets where yield is low but capital growth is high, through to mature assets where yields are high and growth potential is more in line with the economy. As such, infrastructure assets are subject to different risks at different stages of their life cycle. Most investors are reluctant to accept greenfield risk, where demand may not be assured. Consequently, many investors focus on mature operational assets, where patronage has already been proven.