A growing number of investors are looking beyond conventional office buildings and shopping malls, and parking their cash in the infrastructure that surrounds them — in particular, toll roads, bridges, electrical transmission lines, communication lines and pipelines.
A growing number of investors are looking beyond conventional office buildings and shopping malls, and parking their cash in the infrastructure that surrounds them — in particular, toll roads, bridges, electrical transmission lines, communication lines and pipelines.
Indeed, infrastructure has be-come a hot spot for investors thanks to the sector's stable, predictable cash flows and robust business prospects amid the weak economy.
"The need for infrastructure repair — certainly in the United States — and the growth of that in emerging markets, is driving" in-vestor interest in the sector, said John Prestbo, executive director of Dow Jones Indexes, a unit of Dow Jones & Co. in New York.
At least $2 trillion will be needed each year to build infrastructure assets or repair existing ones globally for the next 10 years, said Kim Redding, chief executive of Brookfield Redding, the unit that handles infrastructure investment for Brookfield Asset Management Inc. of Toronto. "We need to repair what we have, but we also need to build new [infrastructure]," including roads, electrical transmission lines, water treatment plants, ports and pipelines, he said.
Infrastructure "tends to be less affected by the ups and downs that might hurt more-volatile sectors of the economy," Mr. Prestbo said. "They offer some cushion, some haven from the terrible things happening to financials," he said.
Dow Jones Indexes teamed up with Brookfield Asset Management last week to launch 19 infrastructure indexes to track the sector's performance.
The 19 trackers include a global index (which monitors companies with a global reach), eight regional indexes (which track the sector by geographical region), eight sector-based indexes (which follow the group by infrastructure type), a master limited partnership index, and a composite index, which en-compasses all of the subindexes. The global index includes National Grid PLC in London, Enbridge Inc. of Calgary, Alberta, and Spectra Energy Corp. of Houston.
If the newly created Dow Jones Brookfield Global Infrastructure Index had been in place five years ago, its average annual returns would have been 15.2%, according to Mr. Prestbo, who calculated the performance. While infrastructure may be less vulnerable to the ebbs and flows of the economy, the sector isn't immune, he said.
The global index is down about 12.2% so far in 2008. Still, it has fared better than the Standard & Poor's 500 stock index, which is off 16.3%.
"We wanted to create a benchmark that measures how the assets themselves are performing on a global basis," Mr. Redding said.
Ken Rosen, chairman of Rosen Consulting Group, a real estate market research firm in Berkeley, Calif., and chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley, sees tremendous opportunity for investors to get involved in financing badly needed repairs to the nation's crumbling infrastructure.
"Over time, we're going to have to have a pretty massive rebuilding of our infrastructure program," he said while speaking at a real estate conference in New York last month. And with state and local governments strapped for cash in today's weak economy, Mr. Rosen said, politicians will be looking for new avenues of funding.
"Governments and the population don't have the wherewithal to either raise taxes or pay the taxes to support all of the needed improvements in infrastructure," Mr. Redding said. As a result, "the public-private partnerships are going to grow," he said.
Australia has led the way in this regard, allowing the private sector to finance much of its infrastructure for the past five years, Mr. Redding said. In the United States, this trend is in its infancy.
Chicago recently sold a 99-year lease on the Skyway, which is a toll road that links the city with Indiana, and is selling a long-term lease on its Midway Airport.
"They took the dollars generated from the [Skyway] sale and built more infrastructures, whether it is hospitals, schools, roads and other things," Mr. Redding said. "Governments, through these public-private partnerships, can creatively raise money to either improve or build new infrastructure."
As an investment, infrastructure assets generate steady cash flow through tolls, airport landing fees, gas pipeline transmission charges and similar fees.
"They offer safe, dependable income streams without a lot of volatility," especially amid the turbulent stock market, Mr. Redding said. Also, most of these assets have a monopolistic advantage in that they normally don't have competitors offering the same service in that area.
"Someone isn't going to come and build a competing line to transmit electrical power," Mr. Redding said.
Many private-equity players have jumped into the sector in the past couple of years, and he expects many of them to team up with public companies and governments to purchase or construct infrastructure.
"There's too much money for any one source to do on its own, and so it will be a combination of governments, private equity and public companies, and oftentimes in partnership with one another," Mr. Redding said.
"It's just beginning," he said. "The interest is building, but we're early in the process."
The tragic collapse of the I-35W bridge in Minneapolis last August brought the need for infrastructure repair to the forefront. As a result, Mr. Prestbo thinks that the sector has significant growth potential.
"It will last even when our troubles are over and the bull returns because of all of the work that needs to be done," he said. "It's a niche with staying power."
E-mail Janet Morrissey at -jmorrissey@investmentnews.com.
