Construction Spending Rises On Private Infrastructure Investment
Construction spending data for February wasn’t bad. At 1.1% it is better than forecast and accelerating from the previous month. This is good for market sentiment and investors but you need to be careful where you invest not all segments are experiencing the same gains. Residential spending is one example. While overall contruction spending is robust, spending on residential projects lags other sectors and is down -3.6% from last year.
Digging a little deeper into the data is is easy to see where the money is going. By far the largest inflows of new money are into infrastructure projects. Infrastructure, the facilities and services that are required for daily life, is one of the fastest growing economic segments worldwide and fueled by rising need.
Bringing it back to the U.S., construction spending is growing fastest in four sectors; Highway and Street, Water Supply/Management, Conservation & Development, and Sewage & Waste. Spending in these sectors grew an average 15% and not expected to slow soon. Our rapidly growing and urbanizing population demand good roads, clean streets, fresh water, and proper sewage treatment. The sectors seeing the largest amount of spending if not the fastest growth are Power, Transportation, Commercial, Highway & Street, and Manufacturing.
Oddly enough, most of the money for these projects is coming from the private sector. Historically, because infrastructure cost so much to build, those projects have been taken on by governments and communities. Now, because of the same reasons, governments are turning to the private sector to help defray cost.
Private equity firms have been raising record amounts of cash for investment in infrastructure projects, roughly $90 billion in 2018. The reason infrastructure has become so popular with private equity is two-fold. The first reason is that there is a need for new and upgraded infrastructure that can’t be sated, this sector will be strong for decades. The second is that infrastructure projects like parking decks, water facilities, power plants, and toll roads all generate steady income protected by government oversight.
The reason why infrastructure is such an attractive investment is simple. Governments worldwide need to spend trillions of dollars right now just to maintain the existing infrastructure needed to drive the global economy. That estimate doesn’t count the need for new infrastructure. Governments will need to spend trillions more building out and connecting new services in under-served areas as the world’s population grows.
- Infrastructure investment is important not only to serve the needs of growing populations but also to support economic activity. The build out, operation, and maintenance of waterways, railroads, airports, pipelines, highways, and electric utilities means jobs and income.
Historically governments and municipalities have been the primary investors, owners and operators of infrastructure. That is changing due to the high cost of operations and maintenance and that is where the private equity firms come into play.
The spending gap in the U.S was estimated at $3.4 trillion in 2018, a gap that many think will be filled by private investment. Governments can contract with private equity and their money will be spent on new projects, the private equity firm will operate the utility etc. in return for fees (ie the water bill, power bill, gas bill, tolls at the highway) and those fees will be passed on to investors in the form of dividends.
Three High-Income Infrastructure Funds, One To Own And Two To Watch
1- The Brookfield Global Listed Infrastructure Income Fund (INF) – Brookfield’s Global Listed Infrastructure Income Fund is unique in its focus, global listed stocks, with roughly half of its holdings outside the U.S. The portfolio is dominated by energy, utility, and industrial plays with a sprinkling of telecom and tech to round it out. At current prices, the fund is paying nearly 8.0% in yield.
2- The BlackRock Utility&Infrastructure Trust (BUI) – BlackRock’s Utility&Infrastructure Trust is another closed-end fund focused on global equities. It has about 45% of assets invested overseas but that is where portfolio similarities stop. The BUI portfolio is heavily skewed toward utilities at 65% of holdings which makes this more a
3- The Cohen&Steers Infrastructure Fund (UTF) – Cohen&Steers Infrastructure Fund is a U.S.-centric broadly-focused closed-end fund. The
Of the three the Brookfield Global Listed Infrastructure Fund is the most attractive from a valuation basis. At -15.0% it is trading at the deepest discount to NAV of all three of these funds which provides the most savings for investors. While the discount to NAV can be a value trap the Zee statistics reinforce INF’s attractiveness from the value perspective. The INF’s Zee statistic, a measure of the discount to NAV, is negative which suggests it is undervalued relative to past performance. The ZEE statistic for the Cohen&Steers Infrastructure Fund and BlackRock Utility&Infrastructure Trust are both positive suggesting they are overvalued.