As published in The Australian on 6 May 2017
The government’s decision this week to fully finance the second airport in Sydney at Badgerys Creek has put the spotlight back on infrastructure assets, such as airports
Essential infrastructure assets are used by most of us every day. If you use roads to drive to a hospital appointment, send children to a school or buy goods that passed through a port you are relying on the infrastructure that is necessary for an organised, efficient society.
Infrastructure assets are the physical assets that form the foundation of an economy but do not include the companies that utilise those assets. For example, infrastructure typically includes transport assets such as airports (but not airlines), seaports (but not shipping companies), roads (but not logistics companies) or rail (but not rail operators).
The government’s decision this week to fully finance the second airport in Sydney at Badgerys Creek has put the spotlight back on infrastructure assets, such as airports. Though the government will initially finance the airport, it is widely expected the private sector will later get involved for the very good reason that airports – especially airport services – can be very good investments.
Perhaps the most high profile infrastructure asset in Australia where private investors can easily invest is Sydney Airport, which earns income from airlines negotiated on a bilateral basis, rental income, car park and taxi fees.
In a recession Sydney Airport income is less volatile than the airlines that have to lower prices to maintain yields on the airplanes – its assets, demonstrating the attractiveness of the infrastructure asset.
Individuals can invest in infrastructure through shares or bonds, with the shares possibly outperforming if the assets appreciate in value. However, the bonds are the more stable option given their legal obligation with set interest payment dates and repayment of face value at maturity.
Sydney Airport shares have a current dividend yield of 4.4 percent with no franking. The company has two inflation linked bonds. One maturing in 2020 has a yield to maturity of 2.58 percent per annum plus inflation, and the 2030 bond 3.31 percent per annum plus inflation.
While Sydney Airport management rejected the offer to develop the new Badgerys Creek airport, so in time will lose its monopoly position, it should maintain its competitive advantage for years given:
- Its proximity to the city
- Existing rail infrastructure
- The cost and time to develop Badgerys Creek
- The development of Avalon Airport in Melbourne has made little difference to Tullamarine
SMSFs, particularly those in drawdown would do well to consider adding infrastructure investments to their portfolios for its predictable cashflows and relative stability.
Top infrastructure assets such as Sydney Airport, Transurban and AusNet Services offer both shares or bonds.
Separately, some companies such as PPP projects or other private infrastructure assets are not listed on the ASX but have issued bonds, including Australian National University, Royal Women’s Hospital and rail logistics company, SCT.
Why we like infrastructure investments
Infrastructure assets take a long term view. They are generally expensive to build, so investors need some assurance that they will have a market and cashflow over time. Usually assets have a life of at least 20 years, and so the accompanying business model also takes a longer view than most corporations.
Investing in infrastructure isn’t without risk – there have been some very disappointing projects such as Brisbane’s Brisconnections and Sydney’s Lane Cove Tunnel that defaulted a few years ago. But, business models are designed to survive no matter what the economy is doing.
A good example is when the Queensland coal mines were flooded. The miners were affected but the coal port operators continued to receive income from the mining companies, even though little coal was being shipped through the ports. The coal terminals had ‘take or pay contracts’ in place, ensuring the ports still got paid even though volume was low.
You can see the positive implications for investors – especially those looking to generate long term, certain cashflows.
Infrastructure provides returns with:
1. Low levels of business risk – by their nature most infrastructure assets are low risk businesses. As most are ‘long dated’, management and lenders, seek to lock in long term support contracts to lower the risk of the long term investment horizon. An example would be the long term gas supply contracts for a gas pipeline. By locking in supply and pricing, the infrastructure asset is able to significantly lower its risk profile.
2. Regulated returns providing predictable outcomes – most infrastructure assets are subject to regulation by a relevant authority. This regulation effectively sets minimum amounts for capital expenditure levels and revenue for example, for the coming regulatory period. In doing so, the regulator makes the returns of the assets highly predicable, lowering the risk to lenders.
3. Limited competition – by their nature, most infrastructure assets are natural monopolies which is why they are often regulated. It is often not financially viable to replicate infrastructure assets operating in parallel, and as a result, this lack of competition significantly decreases the business risk of the asset.
4. High levels of recovery, even in difficult economic times – infrastructure assets remain attractive assets to investors even in difficult or challenging times. In particular, super funds are natural buyers of infrastructure assets due to their long term focus on returns. This attractiveness ensures a market remains for infrastructure assets even during troubled times, even during troubled times such as the global financial crisis.