The New Paradigm of Infrastructure Investing

Author: John Scott - Head Of Institutional Investments @ NdG

During the past several months, the COVID crisis has fundamentally impacted the outlook for infrastructure investing. The pandemic, which has led to rising geopolitical tensions, massive fiscal stimulus programs, and unprecedented quantitative easing by central banks has led to changes in the decision-making of infrastructure investors.

Unprecedented quantitative easing by central banks has led to changes in the decision-making of infrastructure investors.

Historically, the decision to allocate capital to this asset class has been based on the assumption that hard assets, which provide essential services, can generate stable long-term cash flows. However, our recent conversations with investors suggest that the past several months of global lockdowns and massive economic dislocations have resulted in a re-thinking of investment strategies pertaining to infrastructure assets.

Consider, for example, the current ”new normal” of working from home. The rapid acceptance of telecommuting may have resulted in a permanent shift in employer attitudes regarding the need and desirability of central office locations.

In the opinion of many industry observers, the broad-based de-centralization of office workers may become a permanent and commonly accepted practice. If so, there will be considerable financial consequences attributable to a secular decline in mass transit usage. For example, a permanent reduction in mass transit commuters will result in the need for the fixed costs of transportation assets to be redistributed to the remaining passengers in a manner that does not lead to further demand destruction.

Even before the crisis, there were early indications that the Eurozone property markets were showing signs of a slowdown. For example, the number of deals still under contract (€40 billion) was unusually high and surveys suggested that prospective buyers were increasingly cautious. Moreover, the average deal size had risen considerably during 2019, reflecting an increased appetite on the part of cross-border investors for large and high-quality trophy properties.

The average deal size had risen considerably during 2019, reflecting an increased appetite on the part of cross-border investors for large and high-quality trophy properties.

If people increasingly move to suburban, exurban and even rural areas while continuing to work from home, the customer base for telecom assets will begin to marginally shift away from large-scale enterprises in dense commercial districts toward fragmented customer bases in less densely populated regions. As retail demand growth for telecom services accelerates, telecom providers will need to invest more heavily in last-mile connectivity such as fiber-to-the-home (FTTH) in order to properly service this growing subset of their client base.

A more distributed customer base will also impact the manner in which energy is consumed. For example, residential properties are typically less energy efficient than crowded high-rise office buildings. As a result, higher levels of energy consumption will result from more people working from home. Should higher home energy consumption occur, the economics of rooftop solar panels and behind-the-meter batteries may improve, which in turn may lead to increased residential renewable energy penetration.

Should higher home energy consumption occur, the economics of rooftop solar panels and behind-the-meter batteries may improve, which in turn may lead to increased residential renewable energy penetration.

Working from home is only one part of this equation. We have witnessed an unprecedented collapse in air travel. The COVID crisis may have demonstrated that only a small percentage of business travel is mission-critical, and that videoconferencing can successfully replace face-to-face meetings.

In this “new normal,” transportation providers have begun to adapt their operating practices. Airlines are establishing new seating protocols in order to attract returning passengers. Likewise, trains and buses are altering their operating models in order to lower passenger density and improve overall hygiene.

We are only at the early stage of fully understanding the consequences of the most profound challenge to global stability since World War II. Corporate executives are clearly re-thinking their business models in an attempt to protect shareholder value while employees are endeavoring to readjust their skill sets to a new economic reality.

It remains to be seen if the COVID crisis will accelerate the shift to automation and artificial intelligence. After all, machines are immune to disease as well as political pressures.

Stay tuned. There is much more yet to be written.