October 2020 – Stable yields over long terms: Especially in turbulent economic times institutional investors look for long-term safe havens for their capital. Infrastructure projects are coming increasingly into focus.
It was a premiere - and what a premiere it was: Originally planned as a live event for spring 2020, the "Infrastructure Investor Global Summit 2020" in the German capital was also a victim of the corona pandemic. Around six months later, the summit meeting of the world's leading players in the market for infrastructure investments took place for the first time as an online event in mid-October 2020. Dr. Nicolas Blanchard, Chief Market Officer of Hamburg Commercial Bank, was a member of a panel on the first day of the event. His conclusion after four very intensive days of online conference: "Infrastructure projects in Germany are and will remain 'The next big thing'".
Upon closer inspection, the crisis experienced by the infrastructure conference’s organizers could, however, prove to be a virtue. Like the global economy as a whole, the infrastructure project segment is also experiencing a radical paradigm shift towards digital projects. The ongoing corona crisis also taught to project developers, investors and banks two clear lessons: Firstly, classic infrastructure projects such as railroad projects or airports are no longer risk-free investments. When hardly anyone commutes to work by train, business trips are cancelled or vacations are mainly spent on the coast or mountain lakes in one’s own country, then railroads, airport operators and airlines have a massive problem. Secondly, and this is the even bigger lesson from covid-19, Germany has a great deal of catching up to do in the area of digitalization. Homeschooling in the Spring was only just possible, the IT equipment of many schools and authorities is antiquated. Many employees, especially those living far from large metropolitan areas, were barely able to access the office server during the lockdown due low bandwidths. Not to mention the continuing lack of a nationwide high-speed mobile network. Little has changed in this situation since spring 2020, and the need for investment remains high, particularly in the area of digital education. This is likely to become apparent once again in the coming hard winter months with the threat of new lockdowns.
Put positively: For infrastructure projects in the field of digitalization – from fiberglass networks, through data centers, cell towers through to fully digitalized, distributed energy supply stations – there is a great deal to do between the North Sea coast and foothills of the Alps. Inka Klinger, Head of Infrastructure at Hamburg Commercial Bank has some advice for investors: “The future of infrastructure clearly belongs to the topics of digitalization and sustainability. Investors should keep an eye on these trends and plan their future commitments accordingly.”
The interest in applicable investments from institutional investors is immense. The main reason for this are the very stable cashflows in infrastructure projects – and this over long periods. “It is exactly that which every investor seeks in turbulent times. It is for precisely this reason that these investments are particularly popular with insurance companies and pension funds. These investors often have very long financial obligations, which have to be covered by correspondingly secure earnings . Consider, for instance, the often decades-long saving and later paying-out phases with private endowment or pension insurance,” says Kraus.
However, infrastructure projects are not easy going. “Financing options must be identified and structured, contracts are often complex and require in-depth analysis”, says Kraus. The Hamburg Commercial Bank has been active in the special area of infrastructure projects for decades and is very well networked.
The reward for the work searching for promising infrastructure projects is higher returns. Tilo Kraus. “We recently compared the returns from infrastructure projects with those of classic bonds from providers: The result was a yield increase of between 125 and 175 basis points.”