$1trn of global capital targeting Europe

Investors from China, the Gulf, Canada and elsewhere have their eyes on the UK in particular – but could be foiled by pipeline and regulatory weaknesses.

Global institutional investors have funds of $1 trillion available for investment in European infrastructure assets over the next 10 years, according to a survey by law firm Linklaters.

The survey said this would continue a trend that has already seen global investors from Canada, China/Hong Kong, the Gulf Cooperation Council, Japan and South Korea increase their European commitments by 465 percent between 2010 and 2013 compared with the previous four-year period.

These investors are driven by a need for long-term, high-yield returns, with the low interest rate environment acting as a spur to activity.

If all the available capital were fully invested, Linklaters estimates it could boost UK gross domestic product (GDP) by 1.9 percent per year and European Union GDP by 1.4 percent per year between 2014 and 2023.

That’s the good news. The bad news is that the region risks missing out on this windfall due to a “weak pipeline of assets and regulatory uncertainty” which could “put the region’s economic recovery at risk”, the survey concluded.

“Governments have an excellent opportunity to secure private finance for national infrastructure projects by boosting the pipeline of projects available and to encourage investment by creating a hospitable regulatory environment,” said Ian Andrews, infrastructure sector co-leader at Linklaters. “This will be crucial to assist Europe’s infrastructure revival.”

Andrews pointed out that the lack of available assets and price inflation in northern Europe was pushing investors to “stretch their risk appetite” by considering investing in southern, central and eastern Europe.

While the UK stands to grab some $200 billion of the total $1 trillion available – given its emergence from recession, traditionally strong regulation and appetite for private investment in big projects – Andrews warns that “decisions about future pricing regulation could have a significant impact on the UK’s ability to secure private investment”.

The survey found that non-European capital moving into the region is filling the gap left by the lack of European capital. Over the last three years, southern European organisations have slashed their spending on European infrastructure by 81 percent to just over $59 billion – while northern Europeans have cut back by 62 percent to $181 billion.

By contrast, Chinese funds – many of them state-backed – have increased their expenditure over the same period by 7,973 percent (an 80-fold increase) to almost $23 billion. Big hikes in investment were also recorded by funds from Canada, the Gulf Cooperation Council, South Korea and Japan.