“The value of UK infrastructure continues to be underpinned by a wall of investors attracted to the class by the strong cash flows they typically generate. Increasingly however, as domestic funds watch from the sidelines, our infrastructure has been bought by foreign investors who have long-recognised the cash flow qualities of the asset class and over a longer period have developed a clearer understanding of what good value looks like.
Whilst few major infrastructure projects have completed over the last 12 months, global demand for UK projects continues to be high. French firm EDF Energy’s involvement in Hinkley Point; China’s Beijing Construction Engineering Group in Airport City Manchester; and Canada’s La Caisse in the London Array wind farm in Kent have all grabbed headlines this year. Simple supply and demand economics suggest that until more projects from the UK Government’s infrastructure plan are built, valuations generally are likely to rise.
Energy (along with transport) remains one of the most attractive sectors for investors. Within this, renewables continues to attract capital and as the capital costs (for panels and turbines) continue to fall and we get closer to grid parity (meaning power generated from renewable sources at a cost comparable with fossil fuels), renewable energy continues to be an attractive yield play for many annuity type investors. Competition for assets will continue to be high which inevitably drives yield compression and upward pressure on valuations. How much more compression we’ll see in 2015 remains to be seen and will be linked partially to the Bank of England’s interest rate policy.”
Tomas Freyman is a partner in the valuation team of advisory firm BDO.