How can SMSFs gain access to infrastructure?
Private ownership of infrastructure assets is increasing, providing more opportunities for investors. Infrastructure can provide portfolio benefits ranging from high-growth to low-volatility, bond-like characteristics. Infrastructure expert Michael Cummings sheds light on how SMSFs can access infrastructure.
Infrastructure provides the essential services that underpin the day-to-day operation of society and drive economic growth. It encompasses a broad range of assets and includes sectors such as:
• Social infrastructure (incl. schools, hospitals, justice facilities, car parks).
• Utilities (like water, and electricity and gas transmission and distribution networks).
• Transport (things like - roads, rail, airports, seaports).
• Communications infra (such as mobile phone towers).
In developed economies, most infrastructure is owned by the public sector. But private sector ownership is increasing, and this increases opportunities for investors.
Each of the sectors above have their own characteristics as an investment ranging from high-growth to low-volatility, bond-like characteristics.
For instance, passenger volumes at strategically-located airports such as Melbourne Airport are exposed to the growth of international travel in the Asia-Pacific region. This asset demonstrates high-growth potential with moderate risk and valuations have achieved double-digit growth over the past 15 years.
Other assets such as an electricity utilities form natural monopolies and are subject to economic regulation. This ensures consistent, but moderate returns, balanced between yield and growth, which are largely divorced from economic cycles. (For example, AMP Capital’s Core Infrastructure Fund invests in Powerco, a large regulated electricity and gas distribution business in New Zealand).
Concession assets or public private partnerships (PPPs) are commonly used for the delivery of social infrastructure. Such assets have revenues underpinned by long-term contracts with governments. At AMP Capital we manage a broad portfolio of social infrastructure assets, one of which is a group of six school assets in Adelaide. For the use of these facilities, the South Australian government pays an inflation-adjusted amount every quarter for the remaining life of the concession, provided the facilities are properly maintained. Such assets provide high yields at low levels of risk.
Accessing Infrastructure for retail Investors
For a retail investor, an infrastructure investment may be made either in listed securities or as an investment in an infrastructure fund. The very large ticket size takes the cost of a direct investment in unlisted infrastructure beyond the reach of almost all retail investors.
Both approaches invest in the same types of underlying assets and theoretically should produce similar returns over the long term. However, each investment approach has its own characteristics and can bring different benefits to a portfolio.
The major benefits of listed infrastructure include diversity and liquidity. Specifically, a diverse portfolio of infrastructure securities can be acquired andsold in a short space of time.
The major benefits of unlisted infrastructure include stability of valuation (or low volatility) as unlisted assets are not exposed to the speculation that occurs on listed exchanges. Investors also benefit if their infrastructure manager has control of an asset as it provides significant opportunities to drive value and manage risk through active asset management.
The benefit of having infrastructure in a portfolio is that portfolio diversification is markedly improved. Diversification is improved where assets have a low level of correlation. That is, their values do not tend to move in the same direction at the same time. Unlisted infrastructure, shows very low levels of correlation with listed markets, making its inclusion in a portfolio an effective means of increasing diversification and reducing portfolio risk.
At AMP Capital we have long believed listed and unlisted infrastructure can be complementary in a retail-focused portfolio and that the combination of listed and unlisted infrastructure can deliver attractive returns with very low volatility.
We have been running a strategy investing in both unlisted and listed infrastructure for almost 10 years. That strategy is the AMP Capital Core Infrastructure Fund.
Spotlight on Melbourne Airport
One of the AMP Capital Core Infrastructure Fund’s most well-known assets is Melbourne Airport. Melbourne Airport is Australia’s second busiest airport and services approximately 35.2 million passengers a year. The federal government privatised it in 1997 under a 50-year lease with a 49-year extension option, giving the concession an effective length of 99 years.
Melbourne Airport has delivered strong performance for our investors over the long term and we think it will continue to enjoy growth opportunities. Some key merits to this investment include its dominant market position, favourable regulatory environment and diversified revenue base.
Melbourne Airport is a geographic monopoly with no competitor airport of significance close by. Partly due to its dominant market position, Melbourne airport has exhibited robust passenger growth with passenger numbers showing resilience through shocks such as the bird flu epidemic in 2006 and the global financial crisis. Melbourne Airport has had uninterrupted traffic growth since 2002.
It operates under a “dual-till” model, through which a light-handed regulatory framework applies to the aeronautical component of the business and other revenue streams are unregulated. The framework, which applies to the four largest Australian airports, has been in place since 2002 and emphasises commercial negotiation between airports and airline customers for setting airport usage prices.
Another attractive aspect of Melbourne Airport is its well-diversified revenue base across four key segments: aeronautical, retail, car parking and ground transport, and property. Furthermore, aeronautical revenues can be separated into domestic and international. While some of these revenue streams may exhibit a strong correlation such as international aeronautical and retail, or domestic aeronautical and car parking, they are not necessarily all strongly correlated. For example, a change in foreign exchange rates will likely have a differing impact on domestic aeronautical charges and international aeronautical charges.
We have been seeing strong growth in both domestic passengers and international passengers and we expect this to continue, particularly in the international segment. This is positive because an international passenger delivers two to three times the revenue of a domestic passenger. Key drivers of international passenger growth include growth in tourism from China, as well as strong growth from other Asian countries, and from the UK and the US.
Melbourne Airport is in a strong position to deal with increased demand. Specifically, it does not have any curfew, which allows for significant flexibility to accommodate new services. Additionally, Melbourne has a large land bank, which allows for capacity expansion. Over the coming years Melbourne Airport intends to construct a third runway, which will provide additional capacity for the growing number of airport users.