One of the unanticipated outcomes of the covid-19 pandemic has been the ease with which many employees have switched to remote working. As authorities encouraged people to remain at home wherever possible to avoid spreading the coronavirus more widely, homes became workplaces overnight. But for many workers and executives living in rural areas, remote working has proved to be a bit more challenging.
Although investment in recent years has poured into the development of so-called ‘smart cities’ – where data and digital technology have combined to deliver new services and make workplaces more efficient – rural areas have sometimes been left behind. Patchy mobile data and difficulties in rolling out high-speed broadband to more remote areas have often made working from home difficult for those living in rural communities.
“Covid-19 and remote working have served to highlight the absolute need for high-quality broadband as people have realised the existing copper-based broadband network is not fit for purpose,” says Peter Bachmann, manager of the British Strategic Investment Fund. “With multiple home occupants all trying to use their existing broadband, issues of contention have [included] people’s video services not being functional or blighted by significant service problems.”
Bachmann adds that the impact has been more severe for rural communities: “Many do not have the luxury of switching to mobile-based services when their broadband services become constrained or fail, as people in city centres have.”
Pre-covid, this was not such an issue. However, enforced remote working has highlighted the benefits of working from home – improved work-life balance for employees and increased productivity. This could see many continuing to work from home even after it becomes safe to return to offices.
A survey by consultancy PwC found 69 percent of respondents describing their remote working experience as positive, with 51 percent saying their ideal way of working would be split between the office and the home.
As such, there is likely to be an increased need to invest in the digital infrastructure required to support remote working from more rural areas.
The existence of an urban-rural gap in accessing the internet has been well-documented in every global region.
Almost all urban areas globally are covered by a mobile broadband network, according to the International Telecommunication Union’s Measuring Digital Development 2020 report. Some 72 percent of households in urban areas had internet access at home in 2019, compared with around 37 percent of households in rural areas. Yet although the gap is small in developed countries – 87 percent in urban areas and 81 percent in rural areas – in developing countries urban access to the internet was 2.3 times higher than in rural areas: 65 percent compared with 28 percent.
“How much longer can we tolerate the significant gap in household connectivity between urban and rural areas,” asked ITU secretary-general Houlin Zhao, calling the faster roll-out of communications infrastructure “one of the most urgent and defining issues of our time”.
It is urgent enough to be one of the United Nations’ 2030 Sustainable Development Goals. More specifically, it concerns SDG 9 – industry, innovation and infrastructure – and its target of significantly increasing access to information and communications technology and providing universal and affordable internet access in the least developed countries by 2020.
Yet, while some might consider digital infrastructure an issue for developing markets, many developed nations are struggling to tackle the urban-rural divide on digital infrastructure.
The Organisation for Economic Co-operation and Development noted in its Regions and Cities at a Glance 2020 that although the shift to remote working during the pandemic had increased the need for fast and efficient internet connections, there were considerable differences among its members.
According to the OECD, countries such as Belgium, Denmark, Spain and the UK have succeeded in ensuring broad access to high-speed internet connections to more than 90 percent of households. But in countries like France and Hungary, there remain significant regional disparities between the highest and lowest high-speed internet coverage.
The OECD report also found that one in three households in rural areas do not have access to high-speed broadband on average. Moreover, just seven out of 26 countries have succeeded in ensuring access to a high-speed connection for more than 80 percent of households in rural regions. Tackling the urban-rural connectivity gap is therefore becoming an increasingly important political issue. Many governments are flush with new funds after embracing expansionary fiscal policy or at least have the will to spend, particularly since the onset of the pandemic, and this is finding its way into infrastructure plans.
‘The new electricity’
For example, President Joe Biden’s planned $2 trillion infrastructure bill specifically includes $100 billion to support digital infrastructure in rural communities in the US. The bill aims to bring “affordable, reliable, high-speed broadband to every American, including the more than 35 percent of rural Americans who lack access to broadband at minimally acceptable speeds”.
“Broadband internet is the new electricity”, the White House highlighted in a policy briefing statement in March. “It is necessary for Americans to do their jobs, to participate equally in school learning, health care, and to stay connected. Yet, by one definition, more than 30 million Americans live in areas where there is no broadband infrastructure that provides minimally acceptable speeds. Americans in rural areas and on tribal lands particularly lack adequate access.”
Expanded and faster broadband coverage is also a priority in Europe, as part of the EU’s €750 billion NextGenerationEU – a recovery instrument to help repair the economic and social damage caused by the pandemic.
The level of attention being showered on the telecoms sector – as a result of a greater focus on digital infrastructure – is starting to be reflected in its growing share of deal activity. This increased significantly last year, according to alternative investments data provider Preqin, likely driven by the demands of remote working during the various lockdowns.
The sector’s quarterly share of total infrastructure deal count among fund managers more than doubled from 4 percent during 2016-19 to 9 percent in 2020. Deal valuations could remain high for some time, according to Preqin, as remote working remains the norm after the pandemic and further investment is required.
The increased focus on digital infrastructure has arrived at an auspicious time for the investment community. As well as offering the diversification benefits associated with real assets, particularly during more volatile times, digital infrastructure often provides reliable cashflows. Additionally, as income becomes harder to come by in an even lower-rate environment than before the pandemic, institutional investors with targeted yields could find digital assets an attractive proposition.
Matthew Norris, director of real estate securities at infrastructure asset manager Gravis Capital and advisor to the newly launched VT Gravis Digital Infrastructure Income Fund, says yields of 3 percent in infrastructure real estate are common and much more attractive than those available in the fixed-income market.
The VT Gravis Digital Infrastructure Income Fund invests in companies that own and operate the physical infrastructure assets that facilitate and support the digital economy, such as data centres and telecom towers.
“When you look at the troubles facing investors looking for places to have property in their portfolio, all the usual avenues they would have trusted in years gone by are causing them strife,” says Norris. “But this is [an area] where we know there’s an enormous amount of growth ongoing.”
It is not just an income opportunity. Businesses that install and own new broadband and digital infrastructure assets – and those that service them – can also offer some attractive long-term growth opportunities.
Solutions such as edge data centres – locally located data centres that reduce latency, overcome intermittent connections, and store and compute data close to the end user – and altnets (alternative broadband providers) could emerge as bigger players in rural areas and provide significant investment opportunities. Edge data centres are expected to grow into a $13.5 billion market globally by 2024, up from $4 billion in 2017, according to PwC.
Waking up to the opportunity
“As the sector develops, there will be further opportunities to provide more edge data centre assets for rural areas,” says British Strategic Investment Fund’s Bachmann. “In the medium-to-long term, we believe there will be substantial consolidation opportunities as the various regional altnets become aggregated to provide national or semi-national infrastructure owners.”
With the digital economy continuing to grow in size and importance, new infrastructure – such as 5G – will be required to support it, opening up new opportunities for investors. Furthermore, as faster connections become the norm, the digitisation of services and other aspects of everyday life is likely to follow – and it will be crucial that rural communities are not left behind.
“Without this new high-speed broadband infrastructure, none of the other critical video-based services needed to create wider social inclusion will be possible, such as telehealth, remote learning or remote working,” adds Bachmann.
As such, there are likely to be more opportunities in rural digital infrastructure emerging in the coming years as further investment in new technology is required, greater speeds are reached and existing infrastructure undergoes maintenance.