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This is a financial promotion for The First State Global Listed Infrastructure Strategy. This information is for professional clients only in the EEA and elsewhere where lawful. Investing involves certain risks including:

  • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
  • Currency Risk: Changes in exchange rates will affect the value of assets which are denominated in other currencies.
  • Single Sector Risk: Investing in a single sector may be riskier than investing in a number of different sectors. Investing in a larger number of sectors helps spread risk.
  • Charges to capital risk: The fees and expenses may be charged against the capital property. Deducting expenses from capital reduces the potential for capital growth.
  • Listed infrastructure risk: Investments in infrastructure may be vulnerable to factors that particularly affect the infrastructure sector, for example natural disasters, operational disruption and national and local environmental laws.

For details of the FCA authorised firms issuing this information and any funds referred to, please see Terms and Conditions and Important Information below.

For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund.

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

Real Estate
vs Infrastructure

These two key alternative assets play very different roles in a portfolio.

When talk turns to alternative assets, real estate and infrastructure are often uttered in the same breath. I've even met a few investors who consider the two interchangeable in a portfolio.

I'll admit: at first glance, real estate and infrastructure do seem alike. They're both tangible assets, with easy-to-understand business models and stable cash flows. Both are long duration income generators. And both offer some protection against inflation. 

"Real estate and infrastructure aren't identical twins."

But real estate and infrastructure aren't identical twins. Though in broad strokes the two assets may appear similar, upon closer examination real differences emerge, such as:

  • How much market competition exists
  • The elasticity of consumer demand
  • Potential growth over long timeframes
  • Responsiveness to global macroeconomic trends

Difference #1: Fewer Entrants, Greater Power

Funding infrastructure requires deep pockets. Unlike in real estate, where land is cheap and relatively available, infrastructure's barrier to entry is high, especially for new projects or players.

Assets like new airports or railroads tend to require large, expensive tracts of land. They may also require several rounds of regulatory approval, sometimes across municipalities or state lines. Even repairing or replacing old infrastructure is no small feat: Whereas you can always tear down an old office tower and replace it with a new one, that's much harder to accomplish for, say, old bridges or water pipes. 
These costs add up: Typically, an office tower can be built for tens of millions of dollars; a new highway system or port terminal, however, could cost tens of billions of dollars.

Supersize costs inherently limit how many competitors enter any given infrastructure sector; in fact, many verticals end up self-organising into natural monopolies or duopolies. Consider public utilities, which generally monopolize whichever market they serve; or American freight rail, which is dominated in the East by Norfolk Southern and CSX, and in the West by Union Pacific and BNSF.  

With less competition, the few companies that do exist become entrenched, wielding significant pricing and decision-making power (though they also tend to be regulated heavily). The real estate market, in contrast, remains much more in flux, with no single company amassing monopolistic market share. Its available investment universe remains much more diverse.  

Difference #2: Inelastic Consumer Demand 

There is a natural floor under infrastructure demand that just doesn't exist in the real estate world. In real estate, consumers can, and do, put off buying new homes or renting new offices if the economics aren't favorable enough. But consumers can't go without water or power, no matter what shape the economy is in. 
Inelastic demand, combined with the paucity of competition, gives infrastructure companies strong pricing power. A utility company, for example, can raise rates to keep pace with inflation or a rise in the cost of raw materials as needed, without meaningfully impacting volume. 

What this means is that infrastructure accrues steady, stable revenues, regardless of economic cycle – which in turn means the potential of steady, stable income for investors.  

Difference #3: Long Duration, Long Growth Potential 

Both real estate and infrastructure projects are long duration assets that provide income over long periods of time. Between the two, however, infrastructure generally has the longer, more active lifespan, due to its essentiality. Assets like sewer systems or highways rarely fall into disuse; and indeed, they're often pushed well beyond their expected lifetimes, simply because consumers cannot go without their services. (Compare this to the average apartment complex or shopping mall, which sustains prolonged vacancies during poor economic cycles.)
Furthermore, scaling up capacity is often easier for infrastructure than for real estate. Real estate developers are limited by land-use restrictions, zoning requirements, even engineering limitations. Infrastructure developers, meanwhile, usually can scale up as needed to accommodate additional users. Consider, for example, toll roads: As the number of vehicles on the roads increase, operators can expand capacity by adding new lanes and additional on/off ramps, or by introducing electronic tolling.  

Difference #4: Propelled by the Fundamentals 

The same macroeconomic trends propel growth in real estate and infrastructure, but to varying degrees. In many cases, I see infrastructure as the clearer winner. Consider:  

  • Urbanisation: The U.N. estimates that 70% of the world's population will live in cities by 2050. This bodes well for residential developers and essential service providers alike. However, in metropolitan areas space exists at a premium, meaning real estate developers will be forced to compete fiercely for land and zoning rights. Meanwhile, municipalities will likely prioritise infrastructure projects that can relieve congestion – e.g., light rail transit, toll roads – or increase their constituents' access to essential services, including new sanitation or power plants. 
  • Energy Security: Historically, "energy security" has meant securing access to foreign deposits of oil. But in a world threatened by climate change, it also means building out clean energy infrastructure, including upgrading the electric grid to better handle renewable power. Doing so will require massive investment in infrastructure, greatly benefitting companies in that space. Smart real estate developers may also be able to capitalise on the clean power switch (e.g., erecting buildings with rooftop solar, or in proximity to next-gen power plants), but existing urban planning paradigms usually assume petroleum-based energy infrastructure (which can transmit power across larger distances). This will take serious rethinking to unwind. 
  • Underinvestment: Residential and commercial real estate do boom and bust, but they face no shortage of investment capital. Infrastructure spending, on the other hand, has languished for years. The Congressional Budget Office estimates that public spending on U.S. transportation and water infrastructure has declined 9% since 2003, even as these infrastructure systems age and fall into disrepair. To fill this need, the current administration has proposed $1 trillion in infrastructure spending over ten years, much of which will be achieved through public-private partnerships. 

Infrastructure: Not Real Estate's Twin

These are by no means the only differences between real estate and infrastructure; I haven't touched on their differing risk profiles, operational models, and so on. But even this cursory list should be enough to demonstrate that real estate and infrastructure are very different assets, with very different roles to play in a portfolio. 

As always, investors should do their homework to assess which asset best fits their target diversification and risk/return objectives.