Next Real Estate Frontier?

Infrastructure like toll roads, bridges, wastewater treatment facilities and the like does not precisely count as real estate, though it is a physical asset that produces a revenue stream, so the difference may be only academic. Infrastructure deals are not exactly net lease structures, either, but here, too, are similarities. When an investor “buys” a bit of infrastructure, it is usually leasing the property under a very long-term lease with the right to the long-term revenue stream in return for a boatload of cash paid upfront to the “seller.”However one categorizes infrastructure deals, they seem to be catching on in the United States and elsewhere. The sellers tend to be cities, counties, states and other governmental entities that have traditionally developed and held on to infrastructure but that now face severe budget crunches as the recession deepens and tax revenues decline.Recently the city of Chicago made news as the seller of an unusual piece of infrastructure, most of its parking meters. In return for a 75-year lease of the meters, the city will receive payments totaling $1.8 billion from a consortium of three funds that specialize in infrastructure investment. Other infrastructure deals in the United States recently include the $3.8 billion sale of the Indiana Toll Road and the near sale of The Pennsylvania Turnpike this summer for a whopping $12.8 billion. That one fell through, but the matter might rise again before long.So who are the buyers? Often, they are funds established to invest in infrastructure, and according to Probitas Partners Inc.’s “Infrastructure Market Overview & Institutional Investor Survey,” the appetite among investors for infrastructure is still fairly strong, despite the credit freeze and the recession.According to San Francisco-based Probitas, infrastructure funds raised only $2.4 billion worldwide in 2004. By 2007, that total had mushroomed to $34.3 billion. In the first nine months of 2008, the total was not on track to surpass 2007—that would be too much to ask in these tough times—but the funds managed to raise $21.5 billion, only a little less than 2006’s $17.9 billion and 2005’s $5.2 billion put together.Moreover, infrastructure-investment-specific funds are not the only interested parties. Probitas surveyed 218 senior investment executives in pension funds, insurance companies, foundations, endowments, fund-of-funds and other entities and found that 36 percent already had active infrastructure-investment programs and another 50 percent were actively considering infrastructure. The firm conducted the survey in September, just as the financial situation became much more serious. Still, investors remained interested in infrastructure.Of those surveyed, 29 percent also said they plan to increase their allocations to infrastructure, and 25 percent intend to invest amounts similar to their 2008 allocations. Most of the rest had no projection for 2009, and only 5 percent planned to decrease infrastructure investment.