The rise of emerging Asian economies, climate change, technological disruption and the ageing demographic, are among trends creating massive opportunities for investors.
Understanding these trends is key to getting involved.
The Asian Century
The middle class in China has expanded enormously in recent years. As much as 75 percent of China’s population is expected to be classified as middle class in 2022, up from just 4 percent in 2000, according to a McKinsey Quarterly report in 2013. Similar trends are evident in India and south-east Asian economies. According to PwC, six of the world’s seven largest economies in 2050 will be current emerging economies; three of the top four being in Asia.
This trend is driving the need for new infrastructure in those societies. The Chinese government’s One Belt, One Road initiative is an example of this, whereby the government is embarking on a vast program of infrastructure building throughout China’s neighbouring regions.
Apart from transport infrastructure, education-related infrastructure is likely to see growth. A university education in an English-speaking developed country is highly regarded across Asia. Education is now Australia’s largest service export, and this influx of international students is increasing the need for student accommodation attached to leading universities.
This market expects a higher quality standard than traditional student housing, but its enhanced ability to pay gives rise to long-term high-yield investments that provide protection against inflation.
The emerging Asian middle class is also spending its new-found wealth on overseas travel. Long-haul air travel in the Asia Pacific region is forecast to grow in excess of 6 per cent per year over the next 20 years.
Australian international airports have taken advantage of this, achieving some of the highest EBITDA growth amongst developed economy airports. A lack of spare capacity and technological improvements that enable more long-haul direct flights are boosting demand for new infrastructure projects to support this growing demand.
The 2015 Paris Climate Change Agreement committed countries to take measures that would limit global warming to 2 degrees Celsius. This promise and the immediate impact of pollution are leading to the restructuring of transport and energy sectors.
Road congestion and pollution are leading to electric vehicles, greater experimentation with road charging, high-speed rail links and the expansion of mass transit networks in large urban areas. Such developments require large-scale construction projects and/or the handling of large volumes of data.
Climate change has also led governments to adjust the incentives that apply to energy supply in favour of renewables at the expense of fossil fuels. The profusion of wind, solar, hydro and tidal projects is well-established, however, these are likely to continue to expand as their historic cost disadvantage continues to diminish.
Climate change also represents a challenge for the management and distribution of scarce urban water resources, in which private sector capital may well have a role to play.
Disruptive technology on a micro level is leading to energy cost savings for households when rooftop solar panels are integrated with advanced battery technology and connected to the electricity grid. Individual households have achieved cost savings in excess of 80 per cent of their annual electricity bills by exploiting this technology.
Technology costs are expected to continue to fall, making such systems increasingly viable for the typical homeowner. Furthermore, integration with network operations can improve grid productivity and also opens up an alternative power generation opportunity for infrastructure investors.
Technological disruption is initiating a fourth industrial revolution as devices become automated and connected.
The decentralisation of work, energy and service provision is leading to more home working, energy self-sufficiency and local/home delivery. However, these trends require ongoing investment in the data and logistical infrastructure required to support these lifestyle shifts.
Hybrid and electric cars and delivery trucks are already becoming a common sight across developed countries. Electric vehicles will be cheaper for consumers and permit the decarbonising of the transport sector. Looking further ahead, automated vehicles will eventually deliver a more flexible alternative to conventional public transport and private car ownership.
However, this will depend upon massive infrastructure investment to support the power and data transmission that will be required for the safe and reliable use of road space.
The ageing demographic in most developed countries is leading to greater health spending. Take for example the UK, where some 40 per cent of the state-financed National Health Service is spent on the over-65s, a proportion that will continue to rise. Longer-term aged care facilities will also continue to see increasing demand.
These trends will lead to ongoing infrastructure capital expenditure as new facilities are established by both public and private sector providers.
These major global structural themes are already emerging and can be expected to drive significant new infrastructure investment opportunities in a range of areas including transport, energy, data and communications, and healthcare.
While some of these opportunities, such as airports, will be quite familiar, others will be new, such as disruptive technologies.
Many of these opportunities will also be found in emerging economies. This will provide infrastructure investors with the potential for higher returns, but also subject them to higher risks, which highlights the importance of sound portfolio construction, good project selection, and high levels of positive control accompanied with strong asset management of investments.