Carlos Díaz, Head of real state investments at MAPFRE Inversion
In these challenging times, careful thought needs to be given to which investments we should make. The health crisis continues to affect the economy, and the longer the lockdown lasts, the greater the impact will be on different types of investments. There is a lot of uncertainty about the depth, duration and way out of the recession.
To cite an example, in the real estate sector we’ve yet to see a widespread decline in valuations like we have in publicly listed companies. We’re seeing very different behaviors across the various sectors; while the logistics sector is still buying and selling, others have virtually suspended investment activities. This means that it’s still too early to tell what impact the crisis will have on the real estate sector from the perspective of investor pressure. We also have to wait and see how the crisis will impact revenue for each sector, which will affect both valuations and returns.
One sector that stands out from the rest is infrastructure. It’s a relatively ‘new’ option for the insurance industry that has only been around a few years. Traditionally, it was financed by banks, but after the Lehman crisis and given the increased regulations and capital requirements for banks, other investors (e.g. insurance companies) have taken over this role. We’re referring here to investments in essential services that will always be needed by society.
These used to be strictly public investments, but nowadays they’re made with at least some private capital. Private initiatives make it possible to improve infrastructure in less time and optimize implementation. They usually also entail very large sums of money, making it difficult for many to participate. It should also be pointed out that, unlike the abundance of managers we find in other sectors, there aren’t many with experience in the infrastructure sector, and it is less mature than fixed income, equity or private equity.
The sheer size of infrastructure makes it a very long-term asset, allowing for a long-term revenue projection that makes it easier to meet investors’ needs. It is usually inflation-linked, meaning long-term returns are protected.
All of this makes infrastructure different from other types of investments, and it’s an important way to diversify companies’ portfolios. It also offers great growth potential and a high dividend yield.
Asset management is key in infrastructure. As essential activities, they’re often subject to different regulations in different places, complicating things for the teams managing these assets. And it goes without saying that technical knowledge on how they function is needed to optimize operations and take full advantage of their long-term value. Management should include an analysis of which costs can be adjusted without harming the asset and what investment should be made every year to improve it. When a fund or investor is looking to sell an asset at the end of the ownership period, it needs the asset to be in good condition, having been very well managed, to get the best selling price.
The COVID crisis will affect some infrastructures more than others. For example, transport will be heavily impacted by this crisis, with air transport currently affected more than maritime transport. By contrast, telecommunications networks are seeing more traffic as a result of telecommuting and, in some cases, infrastructure has been improved to address this new need. In this sector, the negative impact stems from the suspension of temporary investment.
Renewable energy is another relatively insulated sector. When it comes to production, infrastructure isn’t affected because it’s not dependent on manpower, though maintenance may suffer if the situation continues. Issues with permits and supply shortages will indeed somewhat delay new infrastructure, but all in all it is performing well. Technological improvements are delivering ever-increasing yields and making it a much more interesting investment. These renewable energies also have a promising future with the current deficit brought on by the transition away from fossil fuels like coal, and the closure of nuclear power plants in coming years. This trend to improve energy quality and drive down pollution is beneficial to society as a whole and will improve the quality of the environment, ushering in a better future.