This article is sponsored by PATRIZIA Infrastructure
After an eventful 2022 for investors, 2023 is shaping up to be a pivotal year. With inflation having surged to multi-decade highs and interest rates rapidly increasing, central banks will have to perform a delicate balancing act to avoid plunging economies into recession. While contemporary factors remain front of mind, the 2023 investment environment for infrastructure – both in the Asia-Pacific region and globally – will continue to be influenced by secular trends. A raft of extreme weather events in 2022 across APAC and other regions is likely to offer a tailwind for assets that generate sustainable outcomes, while the pandemic-era drive for digitalisation is showing no signs of abating. Against this backdrop, APAC sustainable infrastructure continues to offer attractive opportunities for investors.
APAC’s infrastructure outlook
There are a number of drivers underpinning the investment case for APAC sustainable infrastructure. The positive demographic story – with both a rising middle class and urbanisation rate – will help underpin a robust pace of GDP growth relative to regions such as Europe and North America. Likewise, fiscal funding gaps are likely to remain a challenge for heavily indebted governments. This is especially true given recent increases in borrowing costs which, barring an unexpected exogenous shock, are unlikely to revert to ultra-low pandemic-era interest rates any time soon.
As with the broader global economy, economic growth in the APAC region is expected to slow over 2023. Correspondingly, the investor appetite for infrastructure in the region may tilt to assets with reduced linkage to the economic cycle as investors worry about a material slowdown in global growth.
However, on a relative basis to the rest of the world it is expected that the APAC region will continue to post GDP growth above trend, with growth expected to accelerate in the second half of 2023. Infrastructure investors with longer-term investment horizons should look through the short-term volatility of macroeconomic factors and continue to favour investments which align with the longer-term fundamentals of the region. GDP growth, a burgeoning middle class, and urbanisation are all driving strong demand for infrastructure.
For infrastructure investors focused on near-term stability in cash earnings, assets with availability-based payment models – where the owner receives an agreed periodic fee not linked to patronage – are likely to be insulated from bouts of economic weakness. Similarly, classes which tend to exhibit rigid demand profiles can also offer enhanced defensiveness. Social infrastructure, which includes education and healthcare, is a class that can offer such benefits. Social infrastructure is a nascent space in the APAC region – not only in emerging economies where rising household wealth has led to expectations of better social outcomes, but also in highly developed countries where social infrastructure public-private partnerships have started to gain traction.
We also continue to see an increase in dry powder accumulated by managers in Europe and North America, which can increase the impetus to execute transactions and increase competition for limited assets. This has been more prevalent across strategies with a large-cap focus – broadly speaking, transaction enterprise values in excess of $1 billion. By contrast, dry powder levels remain relatively low for strategies with an APAC focus, providing a more favourable backdrop for deploying capital.
The sustainability challenge
The APAC region will be at the forefront of the global sustainability challenge. Its high reliance on fossil fuels and acute exposure to climate risks will require resilient infrastructure. While the region’s rate of decarbonisation remains materially below the global average, sustainability themes continue to increase in popularity. While the developing state of the region’s renewable energy infrastructure presents a challenge, it also offers an opportunity for private capital deployment. We believe emerging opportunities exist in sustainable generation amid the transition toward energy sources. These include wind, solar, hydro and biomass, the expansion of transmission and distribution networks, the development of storage solutions for energy – such as lithium-ion batteries – and hydrogen energy infrastructure.
A recent, global surge in digital transaction activity reflects the world’s increasing digitalisation megatrend, which remains a key theme across the APAC region. Digital infrastructure can generate sustainable outcomes through “smart city” technology by improving transport efficiency and reducing energy and water usage. Assets such as data centres, sub-sea cables, towers and fibre networks are essential to providing communication services and facilitating the associated data consumption.
This is particularly so given increased urbanisation. For example, a city may collect and use data from its residents to understand how people utilise the city. The opportunity is especially compelling in emerging APAC nations, where there are low levels of internet penetration and high affordability barriers. Smart metering systems are another emerging form of digital infrastructure. For example, smart metering for water networks can help identify system leakages and predictive maintenance, as well as provide more granular information to both suppliers and end users.
Singapore is a trailblazer of digital infrastructure transformation in the region. In 2014, its government announced plans to become the world’s first “Smart Nation”, aiming for whole-of-nation digitalisation. More recently, it completed work on creating the first “digital twin” of a nation. Taiwan is another, with the government looking to create an “Asian Silicon Valley” requiring an estimated $30 billion in infrastructure investment over eight
Amid a broadly challenging market environment, we believe the outlook for sustainable infrastructure assets is more attractive than ever, with numerous benefits such as inflation protection, stable cashflows and a resilience against volatile economic cycles due to its essential service nature. These benefits are further enhanced by the decarbonisation and digitalisation megatrends as well as demographic changes, such as ageing populations and urbanisation. A favourable demand/supply imbalance also enhances benefits. When combined, all present an extremely attractive set of investment opportunities for private capital in the APAC region, while simultaneously generating positive, sustainable outcomes.
One asset where PATRIZIA has taken action in the social infrastructure space, on behalf of its underlying investors, is at ITE College West, a leading post-secondary education institution in Singapore.
ITE creates opportunities for its students to develop their skills and knowledge, increasing employability and promoting lifelong learning. The asset was the first social infrastructure public-private partnership in Singapore and the first education project in Asia developed with an availability-based payment mechanism. Various state-of-the-art facilities assist around 13,000 students on-campus, including a functional hotel and restaurant, enabling practical work experience with industry partners.
Since the ITE acquisition in 2019, the PATRIZIA investment team has endorsed and supported management initiatives to reduce emissions, including the installation of rooftop solar panels on-campus and implementing various digital initiatives, such as chat box technology to assist help desks, digital payment enablement and an energy portal monitoring system.