Investing in infrastructure and real estate for solid returns
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Sponsored article: If you want the best returns for the least risk, infrastructure and specialist real estate are likely to deliver, as William MacLeod explains.
If, as an investor, you want steady returns and dependable, reliable income, then infrastructure and specialist real estate may be for you.
Offering long-dated contractual income—arising from the next generation of specialist property or circa 25-year mortgage-like repayments for the construction of infrastructure assets, or even income from the generation of each unit of renewable energy—then specialist real estate and infrastructure are worth exploring, even if they are rather dull.
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REITs
Specialist real estate, in our view, is best accessed through Real Estate Investment Trusts (REITs); closed ended companies that own buildings which are inherently illiquid, but the shares of which are traded freely.
REITs are managed by experts who focus on specific sub-sectors such as healthcare or accommodation. We believe there are four demographic and technological trends shaping the future of property investing: urbanisation, “generation rent”, ageing population and digitalisation. These four trends are changing the way we use property, ranging from high specification office space, or snazzy private rental sector housing (PRS), to new primary care facilities and logistics centres.
These sectors, accessed through REITs, are delivering the long-term dependable income we expect from specialist real estate.
Beyond traditional property, specialist real estate extends to the buildings that support the digital world and are often owned by REITs.
These companies also deliver the long-dated contractual income and reliable returns many of us seek.
The digital infrastructure sector features telecommunications towers, data centres, cable companies and logistics warehouses that enable e-commerce. The assets attract hundreds of tenants—many of whom provide the “must have” services for today’s society. They include our mobile phone networks, TV streaming services, and the e-commerce businesses we have all readily embraced. Each tenant will sign multi-year tenancies to use these assets—often including contractual rent escalators—while committing to pay (growing) rent. And this means consistent income in real terms for investors.
Infrastructure
Opportunities to achieve steady returns and reliable income also exist in the infrastructure sector. With investments in government-backed projects such as schools, hospitals, fire stations, etc., (in other words, the essential buildings that support society), these opportunities deliver long-dated income from contracted cashflows.
The original cost of these assets is paid back, by the State, to the funds that own the assets over the long-term, generally a period of 25 years, much like a repayment mortgage.
There are similarly great opportunities in renewable energy projects from which long-dated predictable income is generated. As daylight delivers UV rays which, when absorbed by photovoltaic cells, is converted into electricity or spinning wind turbine blades generate electricity; in both cases the electricity feeds into the Grid and generates revenue.
Both forms of generation are locked into water-tight contracts obliging the recipient of the power to pay, minimising investors’ risk, and resulting in long-term predictable income, often linked to inflation.
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Investing in these assets is not racy and investors are unlikely to shoot the lights out (even if they do keep them on), but the sector is growing, and they do deliver steady returns.
The combined effect of small sums of income generated from hundreds, if not thousands, of assets which we increasingly regard as critical to society is a godsend for investors keen to avoid surprises.
Each of the sectors referred to above are those that Gravis focuses on: investment ideas which are inherently dull, but which should ensure predictable and largely dependable returns for many years to come.
William MacLeod is managing director, Gravis Advisory Ltd, the investment manager which advises the Gravis funds:
Gravis funds include VT Gravis UK Infrastructure Income Fund; VT Gravis Clean Energy Income Fund, VT Gravis UK Listed Property (PAIF) Fund and the VT Gravis Digital Infrastructure Income Fund. For more information click here: Gravis Capital.
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