This week the Government revealed the contractors who would be responsible to build the first phrase of HS2 – the new high speed railway between London and Birmingham. The initial contracts are worth a weighty £6.6 billion.
Shares in those winning contractors Carillion (CLLN), Costain (COST) and Balfour Beatty (BBY) rallied following the announcement, as investors looked to benefit from their participation in the HS2 construction. Carillion was up 20% at the end of the trading day on Monday, while Costain and Balfour Beatty ended 5.4% and 3.1% higher respectively.
This £56 billion HS2 rail networks project plans to connect London to Birmingham and to Manchester and Leeds. The first trains are not expected to run until 2026. Investors looking to profit from the completion have years to wait, and should steel themselves for disruption during construction that could cause the completion date to be delayed.
Shareholders have the Crossrail project, which links Ealing with Central London, as an example of these disappointments. Last month Crossrail said the project would be delayed until 2019 – although it was meant to be finished by the end of August this year.
Profiting from Existing Infrastructure
Mike Pinggera, manager of the Sanlam FOUR Multi Strategy fund says investors would be better off investing in operational infrastructure, as projects that have been completed are a relatively less risky option.
“If something goes wrong in these developing constructions, they cost money. However, it is less risky to own a wind farm which has already been working for two years. You know how much power it produces and how reliable the income is. When the wind blows and produces electricity that is your revenue stream,” said Pinggera.
Pinggera added that his renewable energy infrastructure investments generate up to 6% yield in his portfolio.
Nathan Sweeney, senior investment manager with Architas Multi-Manager echoes Pinggera’s views. Sweeney believes that infrastructure is currently a better investment than property.
“The lease term of an office building is short when you compare it to an airport. The Government can offer the lease to a private company, which the lease of that airport can be more than 12 years that is longer than offices. It is a more volatile investment when you have a shorter lease, as the market can go down when you are renewing the lease,” said Sweeney.
Dan Kemp, chief investment officer at Morningstar Investment Management reminded investors that infrastructure is a very diverse investment area and so it is essential that the investor knows exactly what they are buying before they invest.
“An element of this diversity comes from the variety of contracts under which infrastructure projects operate. For example, some pieces of infrastructure are demand led leading to volatility in profits while others have more stable returns as the contracts simply require them to supply the infrastructure assets,” he explained. Equally some infrastructure projects are built using long term concessions and will revert to government ownership over time. Consequently, the investor is acquiring a stream of cash flows rather than the permeant ownership of the assets,” said Kemp.
Liquidity and Infrastructure Investing
Last year during the first week of July, following the Brexit vote, a number of open-ended UK commercial property funds suspended trading, thereby restricting investors’ ability to redeem their shares.
Liquidity is a key question investors should ask when investing in UK commercial property funds – and other less liquid assets such as infrastructure.
Morningstar Investment Management’s Kemp says that infrastructure trusts can often trade at a big discount or premium to their net asset value – creating volatility for the shareholder. He urged investors to be mindful of this characteristic before investing.
“While all of this does not necessarily diminish the usefulness of infrastructure as an asset class, it does necessitate a lot of digging and hard work to ensure success – much like HS2,” said Kemp.
Architas’ Sweeney agreed, saying he only invests in closed-end funds with a level of price stability.
“We invest in John Liang Environmental Assets (JLEN), which is an investment trust investing in solar panel and windfarms. They are very UK-centric. Basically it pays 6% yield a year, by selling electricity back to the grid,” he explained.
“They are very consistent in delivering them. These windfarms can run for more than 20 years, and their fields are backed by government subsidy. These windfarms will be less impacted by political headwinds, to us, they are offering a more stable investment.”
Sanlam FOUR’s Pinggera also invests in renewable energy investment trusts, including Greencoat UK wind (UKW).
Sweeney also likes the Bronze Rated First State Global listed Infrastructure fund and Legg Mason Global Infrastructure Income fund. He believes global infrastructure spending will start picking up as global central banks stop helping to the economy, which will force the Government to introduce taxation or infrastructure investments in order to boost the economy.
Farima Khizou, Morningstar fund analyst said First State Global Listed Infrastructure is a seasoned duo of infrastructure specialists and a disciplined investment approach that have rewarded investors well thus far.
