The Rise of Asia Pacific Infrastructure Asset Class

• China REITs add a compelling dimension to the real assets sector in the region.
• Enabling the sustainable financing of these massive projects will spur the development of new financing vehicles and foster the development of infrastructure as an asset class.

INDIA – 16 June 2021 – China’s highly anticipated REIT pilot program finally came to fruition this week, with the launch of the retail tranches of its first nine REITs all oversubscribed on its first day. China REITs are currently only backed by infrastructure assets packaged in a mutual fund structure, deliberately picked by authorities to spearhead the country’s recovery from the pandemic.

Together with China, there are an estimated 28 infrastructure-backed offerings securitized in various structures listed across the region currently, with a market cap of close to US$80 billion. While this is dwarfed when seen in relation to the value of its infrastructure investments, momentum is building.

The offering in the region’s largest economy adds a compelling dimension to the real assets sector in the region. Given the sheer size of China’s infrastructure market, its pilot programme for REITs is a prelude to a market that could eventually rival that of the US. According to S&P, the securitization of just 1% of such assets implies an over US$2 billion market. India’s infrastructure investment trust market is also expected to expand to over US$100 billion in the next five years, according to CRISIL Ratings.

Source: APREA
Note: Data as of 1 June 2021

As countries look to bounce back rapidly from the pandemic-induced recession, governments are placing infrastructure-led investments high on the stimulus agenda. Infrastructure spending has long been viewed as a powerful lever that governments can pull to stimulate the economy. Supranational bodies like the International Monetary Fund have also weighed in, noting that current low interest rates is a window of opportunity that should be seized upon.

“Infrastructure investments form a crucial part of this equation, to fast track the region’s recovery from the pandemic and secure its economic future,” observed Sigrid Zialcita, CEO of APREA.

The Asian Development Bank estimates that the region will need to invest $26 trillion from 2016 to 2030 if the region is to maintain its growth momentum, eradicate poverty and respond to climate change – that works out to US$1.7 trillion a year to the end of the decade. Currently, only about US$900 billion are estimated to be invested annually. This yields a financing gap of close to US$1 trillion a year to the end of the decade.

Given the substantial outlays involved, the requirements are unlikely to be met by traditional sources of banking. Public budgets, already stretched by fiscal responses to the pandemic, will also be limited. This entails new financing bases – from asset recycling or monetization strategies, private equity and private-public partnerships – to drive repeated rounds of infrastructure investment by tapping on institutional capital and the mobilization of retail savings.

Enabling the sustainable financing of these massive projects will gain traction and foster the development of infrastructure as an asset class. For example, infrastructure trusts, like REITs, provide a long-term source of capital that funds development cycles, catalyzing urbanization through which a country’s economy can be elevated.

“Infrastructure trusts can form a critical layer in the capital stack for financing infrastructure developments in the region. Not only will it enable developers to recycle capital, the vehicle can also form an effective exit strategy for infrastructure funds in the region,” noted Miss Zialcita.

With the pandemic exerting some urgency, there is now growing expectations that infrastructure financing volumes in the region will surge. It is not only because of the considerable multiplier effects that such massive investments generate, it is also the groundwork it lays for future economic growth. As the focus increasingly turns from containment to longer-term recovery, countries will be keen to ride on the anticipated post-pandemic economic boom which a synchronous global recovery will drive.

“The region’s largest economies are pivoting to infrastructure investments in a big way. We see this as an acceleration of the securitization trend in infrastructure and the pent-up demand for industry players eager to tap into its potential. Aside from the oft-mentioned fast-tracking of digital trends and e-commerce, the pandemic has also been game changing in hastening the securitization movement in the region,” Miss Zialcita noted.

Investors are also turning bullish over the long-term fundamentals of the sector. Global investment firm KKR just closed this year its first Asia Pacific fund at US$3.9 billion to become the largest pan-regional infrastructure fund in the region. While the lack of investment grade projects available remain an obstacle for now, development is expected to accelerate.

“As an asset class, infrastructure is inherently less susceptible to economic cycles, delivering diversification benefits in addition to a predictable long-term stream of income. With the requirements needed by the rapidly developing economies in a region that could eventually host more than half of the world’s megacities, investments into the very assets so critical in driving its growth is a trend that will be played out over decades,” said Miss Zialcita.

By 2030, seven of the world’s 10 largest megacities will be in the Asia Pacific. The region’s urban population will expand by close to three billion. The region remains a hot bed of construction activity and as its cities continue to grow, the fundamental demand for real estate and infrastructure will increase in tandem. Plans to integrate the region’s economies through infrastructure diplomacy programs will also fuel the development boom.

Anticipating the enormous implications of these megatrends, APREA rebranded recently to expand its reach to include infrastructure investments in its mandate. The benefits of investing in institutionalized assets will be more evident as the world inches towards a post-pandemic future and the securitization of the very assets so critical in driving its growth will be a massive investment opportunity.

“The region remains primed to take advantage of this revolution in real assets. APREA’s goal is to pave the way for the expansion of investment opportunities in the region and catalyse the rise of Asia Pacific’s infrastructure asset class,” Miss Zialcita added.

About APREA
APREA celebrates its 16th anniversary with the association’s mission redefined: To promote growth in the real assets sector by being the voice of members in all policy matters, providing access to industry-advancing research and insights and connecting members to business opportunities, with an aim to create value through the following key focuses:

A nchoring Success
P rofessional Development
R each out to industry leaders
E ducation & Research
A dvocacy