US$1.2 trillion available capital to drive growth of non-core infrastructure across Europe

  • New research from Linklaters, shows a 60% increase in European infrastructure investment since 2012, totalling over £330bn (US$490 billion)
  • Growth largely driven by non-core (or core+/core++) infrastructure deals, which account for 55% of deal value, up from 32% in 2012
  • Appetite for asset class likely to remain strong with up to US$1.2 trillion of institutional capital available to invest over next decade
  • Asian and North American investors amongst front runners executing core+ deals

Jessamy Gallagher, partner and Co-head of Infrastructure at Linklaters, says:

“We have seen increasing deal pressures in the core infrastructure market in recent years as an increasing volume of capital chases a limited number of assets across Europe. This has pushed traditionally more risk-averse infrastructure investors into higher-yielding core+/++ investments. These investments now account for over half of deal value in the European market.”

Rise of core+ and core++ investing
Car parks and hydro power have been the fastest-growing non-core assets since 2012, with a number of sizeable asset sales over the last 12 months. In addition, investors have shown strong interest in specific new sub-sectors – including fibre, data storage and smart metering assets – which have emerged as a result of technological developments. The growth of renewables deals has also been significant with an almost three-fold increase to 270 deals in 2017, compared to 102 in 2012. Increased activity here has largely been driven by changes to regulation in the energy sector.

Ian Andrews, partner and Co-head of Infrastructure at Linklaters, commented:

“We expect core+/++ infrastructure investment in Europe to remain buoyant as investors seek returns in a highly competitive market, with a backdrop of decreasing returns on regulated core infrastructure. Whilst rate rises across Europe and the US may stabilise demand, we don’t believe they will reverse the growing trend for non-core investing. As investors build their experience of core+ assets they will be better able to manage the commercial risks presented by these assets, and the diversification offered by core+/core++ assets within a long-term portfolio will still hold strong appeal.”

Tightening economic regulation has had a significant impact on the attractiveness of core infrastructure assets, as regulators tighten the screws on allowed rates of return, further increasing the appeal of non-core, unregulated assets. The Linklaters report, ‘Opportunity plus. Understanding the opportunities and risks of core, core+ and core++ infrastructure investment’ shows that the allowed cost of capital across Finland, France, Germany, Ireland, Italy and the UK has decreased on average by 1.5% in the latest round of price control determinations, with some decisions resulting in a decrease of as much as 2.3% in the case of Finish electricity distribution.

Risk factors in the new landscape
The report’s risk card, examines the risk associated with both core and non-core infrastructure investments across France, Germany, Italy, Spain and the UK in more detail. It recognises the increased risk associated with non-core assets across all countries as compared to core infrastructure assets – largely as a result of higher commercial and delivery risk. A further conclusion drawn is the dispersion of risk by country for core infrastructure as compared to non-core, highlighting the impact of government decisions on the overall risk associated with regulated infrastructure. Changes to regulation and political instability have the potential to significantly cool investor appetite. For example, in the case of the UK – a historically stable market – issues such as Brexit and the possible future nationalisation of essential public infrastructure are seen as significant risk factors to future investments.