Asia offers significant infrastructure opportunities to investors who are able to identify unmet macro trends. These macro-driven strategies are often able to produce high income returns, SuperReturn Asia heard.
Heinz Blennemann, principal, Blennemann Family Investments, said: “by going overseas to Asia you get opportunities at purchase prices and growth rates that are hard to get in Western countries.”
Jie Gong, Partner at Pantheon, shares her thoughts on the key themes shaping Asian infrastructure.
LimeTree Capital Partners, which specialises in investing in under-researched asset classes, has tapped into one of these macro trends through its investment in carparks in China.
James Goulding, managing partner at LimeTree, explains that with China selling around 200 million new cars a year, an enormous imbalance has emerged between the supply and demand of parking spaces. “The government has announced that there is a shortage of 50 million parking bays in China,” he said. The firm buys existing carparks in the key commercial districts of major cities and uses technology to transform them from being very labour intensive, to being automated, with licence plate recognition, online reservations and payment through Alipay and WeChat Pay. It has also bought in yield management techniques from the airline industry to get maximum value out of each parking bay.
“The use of automation and technology is key to expanding our margins. The carparks have low margins when we buy them, but within 6 to 12 months the margins are up to 50%,” Goulding said. He adds that they only need 15% occupancy to cover operating costs, but their carparks run at 60% occupancy over 24 hours, and during business hours they are 100% full.
LimeTree is helped by the fact that the Chinese government deregulated parking rates five years ago. The average parking rate in major cities in China is USD1 per hour, compared to around USD4 to USD5 per hour in places such as Singapore, Hong Kong and Tokyo. “We only need to go from USD1 to USD1.60 for the strategy to deliver 10% to 12% yields,” Goulding said. “We think those yields will continue to grow as parking rates go from USD1 to USD2 to USD3 in the next 10 to 15 years.”
He adds that the average purchase price per bay of one of the firm’s carparks is USD20,000. “People are buying their own parking bays in Beijing and Shanghai and they are paying USD60,000 per bay. The average carparking bay in Hong Kong is USD300,000,” he said.
Indospace Capital Advisors is also tapping into macro trends. It was set up to meet demand for grade A institutional quality warehouse and industrial space in India. Ten years later, it is the largest developer of industrial warehouses in the country.
Sharad Gohil, managing director of Indospace Capital Advisors, said: “We have a landbank of 30 million square feet and an operational built up portfolio of just under 13 million square feet. We will add another 10 million square feet to that in the next few months.”
The logistics sector in India is currently worth around USD160 billion, and it is expected to grow by around 35% in the next 18 months to be a USD220 billion industry. Gohil said the introduction of goods and services tax, the government’s Made in India initiative, and the rise of e-commerce had all created significant growth opportunities for Indospace.
He explained that the introduction of GST and the removal of state-level taxes, had enabled significant multinational occupiers to consolidate their warehousing and industrial requirements from 60 small units across various states, into better quality, larger warehousing.
“This puts Indospace in a stronger position because we are the only people who can deliver a 500,000 square foot warehouse,” he said.
He added that until recently Indospace was the only institutional quality warehouse provider in India, although there is now growing interest from joint ventures and sovereign wealth funds. “Historically, we have achieved yields of 13% to 16% across our development funds,” he said.
Focusing on energy
Neil Brown, partner and head of development investment group at Actis, which invests in energy and infrastructure, has found that having a tight focus has helped to boost returns.
“Over the years we have invested in multiple segments within infrastructure, but we realised in our markets it is important to have deep operational expertise. We use that focus to improve returns whether that is in managing the construction process or doing the operations,” he said.
Brown said there was a mythology in the market that if you defined yourself too narrowly, you would end up seeing no deal flow. However, from their experience, they have found that the narrower and more specialist you get, the more deal flow you will see.
“Our experience that is playing out now over four energy funds is that the narrower you get, the more focused you get, the more specialist you get. It becomes a virtuous circle and that is why we have focused on power,” says Brown.
The firm gets around half of its deal flow from Latin America, with 25% to 30% from India and Asia and the rest from Africa, which tends to have the smaller projects but offer good growth. He explained: “If you use Africa as an example, it has countries within the continent where the level of electrification is in the single digits.”
Brown said Actis’ markets have two main two structural drivers of opportunity. One is that the markets are seeing a massive shift to urban-based living, which is a huge driver of demand for electricity. The second is that unlike much of Europe, they are seeing strong population growth. “We are getting 12% growth in revenues in some markets in Africa,” he said.