For many investors, infrastructure used to be a reassuringly boring asset class. Managers would simply invest in assets, often enjoying a monopoly, which could be relied upon to deliver decent returns. Back then, the focus was simply on choosing the right asset – with asset management after purchase less of a priority.
This isn’t surprising. Assets such as road networks, energy plants and airports – essential to the economic and social development of any country – are often mature and long established. Barriers to entry for other industry players are high and, as a result, they are not easily challenged.
But globalisation, the demanding regulatory landscape and the rise of technology have all impacted the industry in recent years.
Technology has perhaps been the biggest driver of change. For the first time, infrastructure assets are facing competition from ‘smarter’ alternatives brought about by technological advancement.
These are often easier and cheaper to use by both industry and consumer users. Some infrastructure assets might eventually become replaceable.
CHECKING OUT OF HOTELS
This has already hit industries elsewhere. Take the hotel sector, for example. Historically, the building of a hotel chain required decades of investment in prime real estate, marketing, constant refurbishment and maintenance. Hotel assets had to be carefully positioned so as to be attractive to and known by the information-constrained tourist.
AirBnB, the holiday room rental website founded in 2008, has changed this. Now everyday city dwellers can rent out their apartments to people they have never met, making every bedsit or flat into a hotel room. Users can advertise their spaces at very little cost, and tourists are increasingly being attracted to previously unknown locations. This has posed a threat to the hotel industry, traditionally able to rely on its position as being the only option for holiday-makers. Without investing in real estate and with a limited number of employees, AirBnB is fast becoming the biggest hotelier in terms of room nights and even market capitalisation.
This example shows how technological advancement has changed the way that business operates. The same impact is being felt in the infrastructure industry. With new technologies, infrastructure owners can no longer rely on their assets ‘owning the space’. New challengers have arrived, and so asset managers must step-up and adapt to maintain their position.
Infrastructure investors must now purchase the asset and much more proactively manage the business. This could mean embracing new technologies or adding new services to that asset. Essentially, it is about approaching the asset as an active investment into order to maximise return.
In this sense, infrastructure has moved from being a bond-like investment – characterised by fixed, reliable and slow-incoming yields – to an equity-like investment where managers must become involved. We have observed this change, with traditional infrastructure managers having been replaced by managers with business backgrounds and mentalities.
You can see this change with Vinci Park (VP), the European car-park operator that we invested in, a prime example of how technological evolution has driven change in an asset’s business model. With the rise of internet platforms and sharing services – such as the ability to turn privately owned parking spaces into public car-parks – traditional car-park operators need to adapt their offering.
VP has been a pioneer in this industry, adapting its business model by creating seamless parking solutions (through a digital platform and smartphone apps) and the development of new services to become a mobility hub of city services, such as a drop box and self-storage.
Another example is London Luton Airport. In recent years, the rise of shops and commercial spaces in airports has demonstrated how much revenue can be created in an airport by non-airline activities. What this has meant is that those airports not offering added services are not only not as profitable, but also not as attractive as destinations for consumers.
In response to this we have worked with the airport management and our partner Aena to invest £100 million in an extensive redevelopment project. Total retail space at the airport is set to more than double in size to over 8,700 square metres, and we are also working to expand parking facilities and improve surface access.
We are also investing in technologies to improve operations efficiencies and customer experience. A few examples include:
The move from assisted check-in to baggage self-service using assisted bag-drop and bag-tag printing; a mobile app for improved interaction with passengers regarding flight information, airport notification statuses, tailor-made advertising and retail promotions; business intelligence solutions to optimise passenger flow through the airport terminal, the profiling of passengers and improved effectiveness of commercial opportunities; the development of instrument landing systems which will allow aircraft to land in any meteorological conditions, thus increasing airport throughput.
By implementing these initiatives we project that we can grow the airport’s capacity from 12 million to 18 million passengers by 2026 as well as increasing the commercial performance of the airport as a business.
So is technology evolution a risk or an opportunity?
To many fund managers in the sector it would seem to be a risk; the industry is changing, and those that do nothing will be marginalised and left behind.
And yet we see the industry’s evolution as an opportunity. Yes, it will require the industry to adapt and change its methods, but for the savvy infrastructure investment manager, moving towards active asset management will be a clear differentiator going forward.