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Unlisted Infrastructure

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Looking for an asset with inflationary protection?

20 Apr 2022 | By Tim Rocks

As inflationary risks continue to be top of mind, there is an investment option which can offer some protection and still deliver attractive returns. We take a closer look at the asset class and the recent developments that have contributed to its growing appeal.

Unlisted infrastructure builds its case

Tim Rocks, Chief Investment Officer at E&P Financial Group, says as we approach a time when returns on listed assets are likely to be low, as earnings growth slows, and looming interest rate rises put pressure on market valuations ― unlisted infrastructure has the potential to still deliver attractive returns for a number of reasons.

“As an asset class, this could translate to a return of 8-10 per cent per year over the next few years ― with relatively low risk.” he says.

The role of revaluations

Rocks says returns from most interest rate securities are also likely to be small, given the low starting point for rates and spreads, and in this instance returns on unlisted assets would be favourably supported by both cash yields of around 2.5 to 3 per cent, and revaluations.

“These revaluations could come from competition for assets and upgrades from valuations downgraded in the early phase of the COVID crisis, where many funds cut asset values by 10-20 per cent in the early stages of COVID.” he says.

Rocks says even though revenue from these assets was affected by lockdowns, particularly for airports ― physical property markets and valuations have, in the main, remained strong.

“The opportunity now is that large superannuation funds are still on the hunt for assets and the pool of available assets is falling after a large number of deals in 2021. As major investors continue to search for assets, valuations could be bid higher.” he says.

A key upside for investors is that many unlisted assets are protected from inflation through explicit pass-through clauses, which are common with toll roads and utilities. For this reason these are one of the few asset classes with some inflation protection.

“This combination of factors could offer investors the income they’re looking for.” he says.

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