Shift to more investing in infrastructure gathers pace

A recurring topic of conversation at the recent MIPIM trade fair in Cannes was the heightened interest shown by investors in infrastructure, as many take the view that returns on traditional real estate investment is likely to remain muted over the coming three to five years.

While the phenomenon is a global one, Germany's infrastructure sector is also witnessing a significant uptick in investor interest, driven by crucial developments in energy, transportation, and digital infrastructure. Unlike the somewhat saturated German real estate market, which has been grappling with valuation uncertainties and regulatory changes, infrastructure investment offers a new frontier for both institutional and private investors looking for stable and long-term returns.

Recent trends indicate a shift towards infrastructure as an asset class, particularly given the immense need for modernization and expansion of critical infrastructure across Germany. This includes significant investments in energy transition projects like renewable energy sources, expansion of the Deutsche Bahn rail network, and enhancements in digital and grid infrastructure.

A recent report from the Berlin-based analysis firm Scope from early 2024 highlights a burgeoning interest in infrastructure investments, with asset managers planning an increase in offerings such as closed-end AIFs, ELTIFs, and open-ended infrastructure funds.

Renewable energy projects, especially photovoltaics and onshore wind, have garnered particular attention. Investors are increasingly drawn to these sectors due to their potential for high returns and alignment with global sustainability goals. "Investor demand in renewable energies, including charging infrastructure and storage technologies, is expected to rise sharply over the next three years," notes the Scope survey, underlining a growing preference for investments that also contribute to environmental sustainability.

Infrastructure's competitive edge

The appeal of infrastructure investment has been heightened by the competitive yield it offers compared to traditional real estate. Since the rapid rise in interest rates in 2022, real estate has struggled due to a range of economic pressures, while infrastructure has shown resilience and even growth. Although a relatively newer asset class than real estate it's now increasingly seen as a viable alternative to more traditional investments.

At INREV's annual MIPIM seminar recently, Vera Fehling, the chief investment officer at DWS Group, stressed what a hot topic infrastructure was among investors, particularly in the field of energy transition, and that many investors felt they were underexposed to infrastructure compared to real estate. In the ensuing panel discussion Anne Gales, co-founder and partner of London-based Threadmark, which specialises in capital-raising for both asset classes, confirmed that she was seeing a shift towards more asset allocation to infrastructure.

And although real estate and infrastructure investors could be looking to buy the same assets in some cases, as Gales pointed out, they could be doing so with different costs of capital. The infrastructure investors would typically have a longer-term horizon as well as lower return requirements, which could provide opportunities for real estate investors to sell assets to these lower-cost sources of capital, said Gales.

Challenges and opportunities

Despite the optimistic outlook, investing in German infrastructure is not without its challenges. Asset managers cite ESG requirements, a lack of suitable assets fitting the desired risk/return profile, and regulatory hurdles as major concerns. However, these challenges have not dampened the enthusiasm for infrastructure, with many new products poised to enter the market.

Infrastructure properties such as healthcare facilities, educational institutions, and data centers are particularly appealing due to their long-term leases and high tenant loyalty. These properties have demonstrated resilience during economic downturns, including the recent coronavirus pandemic, making them attractive to investors seeking stability.

The evolving landscape

The lines between real estate and infrastructure investments are beginning to blur, with increasing crossover in the assets sought by both sectors. For instance, data centers, student housing, and healthcare properties are targeted by both real estate and infrastructure investors. This convergence presents new opportunities but also requires investors to adapt their strategies to navigate overlapping interests and differing cost structures.

Konrad Finkenzeller of Patrizia predicts a significant shift in investor allocations: "In the next four to five years, we expect to see a merging of real estate and infrastructure allocations as the distinctions between the two become increasingly blurred."

In conclusion, the rise of infrastructure as a preferred investment avenue reflects broader economic shifts and a growing recognition of its potential to generate stable returns while contributing to societal and environmental objectives. As Germany continues to invest heavily in upgrading and expanding its infrastructure, the sector is set to offer lucrative opportunities for both seasoned and new investors, reshaping the investment landscape significantly.