Europe eyes extra US$1tn of infrastructure investment to drive recovery

  • Global institutional investors have funds of US$1tn at their disposal for potential investments in European infrastructure assets over the next ten years. 
  • Global investors from Canada, China / Hong Kong, the GCC region, Japan and South Korea are helping to fuel this cash mountain, having increased their investment in European infrastructure assets by 465% between 2010 and 2013, compared with the previous four years. This trend is set to continue.
  • The range and number of institutional investors now seeking the long-term, high-yield returns offered by the infrastructure asset class in a low interest rate environment are further fuelling the pot of money available.
  • If fully invested, this capital is predicted to drive a 1.9% improvement in the level of annual UK GDP and 1.4% improvement in the level of annual EU GDP between 2014 and 2023.
  • Across the EU, governments have the opportunity to secure investment which can boost their national GDP by launching new projects, releasing assets for sale and providing a stable regulatory landscape.

Call to action

Europe risks missing out on US$1tn of funds that global institutions have available to invest in European infrastructure over the next decade, as a weak pipeline of assets and regulatory uncertainty put the region’s nascent economic recovery at risk, according to new research commissioned by Linklaters.

The law firm found that the UK could grab as much as a fifth – equal to US$200bn  - of this wall of money, which, if fully invested, is forecast to drive a 1.9 per cent improvement in the level of annual UK GDP growth between 2014 and 2023. The slower growing European Union could see a 1.4 per cent improvement in GDP per annum over the same period from the significant boost to economic growth that investment in infrastructure assets can deliver.

Linklaters found that this mountain of cash is being fuelled by global investors from Canada, China and Hong Kong, the Gulf Co-operation Council countries, Japan and South Korea, which increased their investment in European infrastructure assets by 465% between 2010 and 2013, compared with the previous four years.

Ian Andrews, Infrastructure Sector Co-Leader at Linklaters, said the US$1tn of private sector finance available was a call to action. “Governments have an excellent opportunity to secure private finance for national infrastructure projects by boosting the pipeline of projects available and to encourage investment by creating a hospitable regulatory environment. This will be crucial to assist Europe’s infrastructure revival,” he said.

He added that with a limited number of assets available and inflated prices in the more economically stable countries of northern Europe, investors are being pushed to stretch their risk appetite and consider assets in the markets of southern, central and eastern Europe.

GDP boost from investment

A private investment injection of US$1tn, phased in at US$100bn a year over a ten year period, could have a substantial impact on EU GDP. Infrastructure investment has significant multiplier effects on national economies, expanding their productive potential, benefiting supplier industries such as construction and raw materials and boosting job creation, which in turn boosts consumer spending and tax revenues.

Economic analysis conducted by Oxford Analytica on behalf of Linklaters, found that the potential cumulative GDP impact of the additional spending in European economies could reach US$3.1tn by 2023 - more than a three-fold increase on the total outlay on infrastructure assets of US$1tn.

UK could gain big chunk of available infrastructure investment

The UK’s emergence from recession, perceived stable regulatory environment and its appetite for private investment into large scale projects could enable the UK to grab as much as a fifth of the US$1tn available for European infrastructure investment. If this capital is fully invested, the UK economy is predicted to see a 1.9% improvement in the level of annual GDP over the next decade, according to the Linklaters research.

To put these GDP figures into perspective, the UK economy actually grew by 1.9% in 2013 and is forecast to expand by 2.4% this year. If additional investment is successful, this could boost growth into the 3-3.5% range for both 2014 and 2015.

Mr Andrews believes the UK infrastructure market can still provide attractive opportunities for private investors looking for big projects yielding long-term, steady returns. He warns, however, that decisions about future pricing regulation could have a significant impact on the UK’s ability to secure private investment. Investors are wary of regulatory environments that are perceived to be hostile or unstable.

Foreign money fills the void of declining infrastructure spending at home 

Historically, the European infrastructure market has been driven by European players, but the Eurozone crisis has seen their share in infrastructure merger and acquisitions tumble.

For example, southern European organisations slashed their expenditure on European infrastructure assets by 81% to just US$59.3bn over the last three years. Investors from northern Europe also reduced their investment in European infrastructure assets by 62% to US$181bn over the same period.

Conversely, Linklaters’ research found that investors from China, Canada, the Gulf Co-operation Council (GCC) region, South Korea and Japan increased their investment in European infrastructure assets by 465% over the last four years. Although this could not offset a sharp slowdown in spending by southern and northern European funds, it signals a shift in the European infrastructure market.

Linklaters found that Chinese funds, of which many are state-backed, stepped up their investment in EU infrastructure, with investments made in roads, bridges, nuclear power plants and airports, increasing by 7,973% – over an 80-fold increase – to US$22.7bn between 2010 and 2013, compared with 2006 to 2009. Investment funds from Canada, the GCC region, South Korea and Japan also stepped up their investment in European infrastructure assets by 657% to US$13.5bn, 81% to US$13.4bn, 19,125% to US$3.1bn and 667% to US$3.1bn, respectively, between 2010 and 2013, compared with 2006 to 2009.

The level of investment from these funds, such as sovereign wealth funds, is expected to continue growing over the next decade and this additional financial capacity and its ability to attract leverage is changing the market dynamics, driving the price of assets, such as airports, back up to pre-crisis levels.

Iain Wagstaff, Infrastructure Sector Co-Leader at Linklaters, confirmed that the firm has seen a marked increase in investment in infrastructure from sovereign wealth and pension funds. “As the Eurozone becomes more stable, these investment flows are expected to grow.  But this is dependent on the availability of sufficient high quality assets and projects, as well as continued regulatory and economic stability,” he said.

Concerns grow over asset bubble

Many of the 40 leading infrastructure players interviewed for the Linklaters report cite the possibility of an asset bubble due to the limited supply of assets and projects to invest in, despite the significant cash mountain of US$1tn available for European investment over the next decade.

Interviewees pointed to a simple case of supply versus demand resulting, in many cases, in inflated asset prices. Airports are an asset type that has seen highly inflated prices over the last three years.

Rising asset prices are leading to an increase in corporate disposals as companies sell their newly-valuable European subsidiaries to allow them to reduce debt levels and generate cash for future investments. Higher asset prices also offer governments the opportunity to generate large sums of much needed cash to pay down public debt, through sales of national infrastructure. (see: Call to action).

Please click here to access the full report and accompanying infographic.