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The Differences Between Investing In Housing And Mass Infrastructure
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From an investor's perspective, the ROI in housing might be greater than that achieved from road and rail projects. But infrastructure is fundamental to development and deserves holistic thinking.
The relationship between housing and public infrastructure has always been strong, even if indirect. One need look no further than the London Crossrail project, which is adding 75 miles of commuter trains to the city's system and where, to no one's surprise, housing values near new system stations are rising rapidly.
But to an investor, if a choice must be made between financing various kinds of infra (transport, utilities, broadband, flood mitigation, and more) and residential development, it can be challenging to determine which might yield the greatest return on investment. These are not simple "apples to apples" comparisons, and the potential for growth in some types of real assets funds is not always easy to ascertain. Yet because the two are interdependent it is entirely logical for investors to consider them within the same investment decision-making process.
This discussion is ramped up by the pressing need for additional housing in the UK. This is strongly incorporated into the National Infrastructure Plan 2014 by HM Treasury, the Government's economic and finance ministry. The report cites several infra projects where housing and public amenities could be inextricably linked if the Plan is fully implemented, as well as where previous public projects have succeeded:
Suburban network rail connected: A Government loan (contingent on a principal heads of terms agreement) of £55 million to extend the London Overground to Barking Riverside, predicted to help deliver 11,000 homes.
Land remediation and infrastructure: In Ebbsfleet, a £100 million infrastructure fund will enable up to 15,000 homes to be built in a new garden city.
Rail upgrades: Already, a major upgrade since 2010 of King's Cross Station rail unlocked 2,000 new homes.
Road transport and public spaces: A spend of £23 million for a road crossing between Swindon and Wichelstowe (on the M4) opened a new site for thousands of homes. Meanwhile, construction begins in 2015 to provide transport links and public spaces that will transform Battersea, Nine Elms and Vauxhall, with the potential for creating 16,000 new homes.
Very often, both housing and major infrastructure programmes are a mix of private and public funding. But housing exists in a different sphere, providing returns to investors in relatively short order and the majority of homes are built by the private sector. True, financiers, including those who work in real asset portfolio investing, may need to go through planning authority processes, but it is largely a transaction amongst owners of UK land, site assembly professionals, builders of utilities and structures, as well as the private individuals who buy the homes.
Investors working in infrastructure through municipal bonds are not as common in the UK as they are in the United States and other European countries. The majority of local government borrowing is historically through central Government, but since 2014 a consortium of local councils has begun to fund the Local Capital Finance Ltd. Agency, which takes bonds to investors. The Chartered Institution of Highways & Transportation called for a greater sense of interdependency in public and private projects in a 2012 report (Action Plan for Change; Infrastructure Funding & Delivery), stating "A hybrid public and private sector infrastructure fund should be created for a discrete geographical area which, whilst not generating mainstream capital market investment returns, would deliver infrastructure that benefits local land values and local businesses." The problem, argue some, is that infrastructure lacks data and benchmarking, lending an opacity to municipal investments that makes councils and investors skittish; the broadest benefits of roads, rails and flood abatement are at best proven over decades, not quarters or fiscal years.
Investors need to weigh many factors relative to development in the UK. While the overarching economic factors of population growth and housing inventory suggests strong opportunities, individuals are wise to engage an independent financial advisor to examine where development projects fit wealth building objectives.
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