While infrastructure as an asset class isn’t likely to escape the volatility of the current macroeconomic environment entirely unscathed, the overriding view of key players in the industry over the past year has been this: strong investment opportunities still remain. So much so, that a number of traditionally real estate-focused firms, particularly those centred on Asia, have decided to go after those same opportunities.

Take, for example, PAG, which recently made serious in-roads in not one, but two infrastructure sectors, establishing platforms in the renewable energy and digital infrastructure space. First came the firm’s launch of FLOW Digital Infrastructure late last year. The company – which, in May, partnered with Manila-headquartered real estate developer AyalaLand Logistics to focus on data centre development in the Philippines – intends to invest upwards of $10 billion into digital infrastructure across the APAC region.

PAG then doubled down on its infrastructure strategy, following this up with the July 2022 launch of its Asia renewables platform, PAG Renewables. Wholly owned by the firm, the platform plans to invest over $1 billion in renewable energy projects across Asia.

Joining the charge into infrastructure is ESR which, in July 2022, reached a $1 billion first close for its Asia-Pacific-focused inaugural data centre fund ESR DC Fund 1. It also announced its first foray into traditional infrastructure when its wholly owned subsidiary ARA Asset Management – acquired by ESR early last year – launched China-ASEAN Investment Cooperation Fund II, which reached a $1 billion final close in November.

“We’re building on our strength in logistics and commercial real estate development into data centres… because a lot of the skills around finding land and building property and design are consistent across the two asset classes”

Diarmid Massey
ESR

The firm, which bills itself as the world’s third-largest real estate investment manager, has a long history of building logistics centres and, according to ESR data centres chief executive Diarmid Massey, sees Asian infrastructure – and data centres in particular – as a natural target.

“The things that make real estate companies successful at what they do are applicable to a number of areas. In our case, we’re building on our strength in logistics and commercial real estate development into data centres, and we’re doing so because a lot of the skills around finding land and building property and design are consistent across the two asset classes,” Massey says.

“Obviously, there’s some extra complexity around data centres but the basic skills that the business has – the access to capital, the access to skilled work in countries – makes us a great partner for people that want to operate in that space.”

ARA head of infrastructure investment Kanishk Bhatia says the same holds true for the other infrastructure sectors ESR is focusing on, such as transport and energy.

“Whether it’s rooftop solar on warehouses or looking at a port asset with a warehouse next to it, there are obvious synergies. It’s a logical move for a number of real estate firms to look at adjacent sectors,” Bhatia notes.

Navigating Asia

Such firms may be relatively new to the infrastructure space but, given their track records in real estate, there is no denying their established local presence and development know-how across multiple markets in Asia-Pacific. And given the complexities of the region, having a proven ability to navigate the demands of many different markets can be a significant advantage.

“Unlike Europe or North America, there’s no common market in Asia – there are no common practices. To be able to develop in Japan, in Korea, in Australia, in India, in China, in Thailand, and provide a whole solution, that adds a lot of value to companies that want to move into the data centre or any infrastructure space,” Massey explains.

Having this know-how during a time of rising interest rates and inflation further adds to the ability of such firms to be able to hit the ground running with cost-efficient infrastructure projects.

According to Charles Cosgrove, executive chairman of recently launched Asia-focused digital infrastructure platform Digital Halo – an affiliate of real estate investment manager Arch Capital Management currently gearing up to launch its inaugural fund and focused on digital infrastructure across Southeast and north Asia – this is certainly a key benefit of being an established player in the region.

“Inflation is expressing itself across the board, both in materials costs and also with labour. And it means that we’re building in a higher cost structure in an industry where, certainly, the end users are pretty clear that they wish to see discipline and control in final costs,” Cosgrove says.

“If you have an ability to execute on the ground, as we do in certain Southeast Asian markets where we have a strong track record of building efficiently and profitably, then the real estate execution side becomes important from the standpoint of competitive cost structures.”

According to Massey and Bhatia, being well-versed in the intricacies of building projects across Asian markets has become an even greater asset at a time when the region is gearing up to meet accelerating demand for data centres and renewable energy.

“There’s no doubt that there is an ever-increasing demand for data centres as a foundation for the digital infrastructure that the world is rolling out. It makes sense for any organisation that wants to grow, to do so into a growing asset class,” Massey points out.

“North American and European data centre growth has not slowed down in the last few years, so we’ve got a fair way to catch up in terms of density and growth yet in the Asian market.”

“If you look at where Europe is in terms of renewable energy development and compare that to Asia, we have a long way to go,” Bhatia adds.

Beware the bubble

With infrastructure proving its resilience and the overall surge in investment in the energy transition and digital sectors expected to continue, more such firms are likely to follow suit. But what will an influx of newcomers – regardless of how seasoned in other areas – mean for the asset class in the region? James Chern managing partner at Singapore-headquartered infrastructure fund manager Seraya Partners, which focuses on data centres and energy transition projects in Asia, is cautiously optimistic.

“Investors are chasing growth and returns, and these sectors clearly have structural growth opportunities behind them. That potentially creates a short-term capital bubble where there’s too much undifferentiated capital from real estate players chasing after highly technical sectors where they may not have a prior track record and experience,” Chern says.

“It’s very positive to have ample capital supporting an industry. But one downside that we have seen across many infrastructure sectors and economic cycles is that there will unfortunately be capital wastage, with capital not going to the right projects, the right companies, and the right management teams.”

He predicts that an influx of inexperienced capital – whether from real estate or other sectors chasing high-growth infrastructure projects – will likely lead to some poor returns that will, over time, put an end to more “hot capital” coming in. The long-term trend, he says, will be to reveal the need for experienced, disciplined investors in those sectors.

“It’s very positive to have ample capital supporting an industry. But one downside… across many infrastructure sectors and economic cycles is that there will unfortunately be capital wastage, with capital not going to the right projects, the right companies, and the right management teams”

James Chern
Seraya Partners

Massey also highlights the likelihood that having a lot of new investment in growing sectors like data centres and renewable energy can run the risk of oversupply but, ultimately, he believes demand across the region will catch up.

“The market itself will generally correct if needed. There is still such a long way to go in terms of growth… I always say you never see competitors coming into a shrinking market,” Massey says.

Bhatia agrees. “If you look at the Asia-Pacific region, with its strong macroeconomic trends, its rising incomes, growing middle class and its big infrastructure deficits, especially in emerging Asia, we hope that the opportunity set will keep expanding, as well, over time,” he says.

“The pandemic proved that infrastructure is a highly resilient, defensive asset class, providing essential services with monopoly-like characteristics. That hasn’t changed and I don’t think recognising that is specific to real estate firms. I think everyone is realising that.”