Friday Letter Ich bin ein Berliner

Not too far from East Berlin’s impressive Hauptbahnhof, which claims to be the largest and most modern train station in Europe, sits the Radisson SAS hotel on Karl-Liebknecht Strasse. 

The Radisson was the venue for the 2007 InfrastructureInvestor Forum, an inaugural event organized by our sister publication, Private Equity International, which drew hundreds of delegates eager to explore an area that has undoubtedly become the asset class du jour.

Given its recent history, Germany—and Berlin in particular—seemed a fitting backdrop for a conference that touched on the intersection of infrastructure and real estate, not just for the benefit of its inhabitants but for the enrichment of investors as well.

The crossover between the two asset classes has been highlighted in numerous deals in the past 18 months across Europe—from the £10 billion acquisition of BAA by Ferrovial to the numerous deals in the UK ports sector. But, as the conference highlighted, it has not just been Europe where private investment in infrastructure has taken hold.

For example, Aashish Kalra, co-founder of Trikona Capital, spoke of the opportunities in India, where his firm has made $1 billion of investment commitments. On the same panel, Brad Nordholm, chief executive of Starwood Energy, an offshoot of Barry Sternlicht’s Starwood Capital, discussed his firm’s deals in North America.

The two markets, of course, are strikingly dissimilar. India is only just embarking on a massive infrastructure investment program as it seeks to accommodate a rapidly expanding economy. The opportunities, therefore, are primarily in development. Kalra told delegates how Trikona’s London-listed company Trinity Capital had taken a strategic shareholding in ITNL, a major highway developer in India. The agreement gives Trinity the rights to develop the real estate along important road networks. It has also invested in a £265 million township development in Mumbai, a £215 million IT park and a shipyard in Gujarat. The firm has also entered into a joint venture with Indian infrastructure firm IL&FS to develop ports, airports and roads.

By contrast, the mature US market is more about the sale of secondary assets. Nordholm explained how Starwood Energy had bought a majority stake in five California power plants in need of an upgrade. But he also spoke of the financing of a 660-megawatt power cable, being laid underwater, that connects Long Island to New Jersey. The power cable is being leased out for a period of around 25 years.

Several of these examples, particularly in India, really muddy the waters when it comes to the boundaries between infrastructure and real estate, and highlighted the question uppermost in the minds of many delegates: When is infrastructure really real estate and vice versa? Over coffee, one real estate investment banker at Bank of America told two fellow delegates that his team had been fielding calls from infrastructure investors, one of which was even interested in buying a restaurant operation.

As the informal debate widened to questions about whether certain deals were infrastructure or real estate, it became clear that there is often no clear answer.

But delegates were left with the impression that, at least in certain cases, there is mileage in analyzing the various elements of a deal separately. Danny Latham, director of RREEF Infrastructure, explained how airports provided the greatest level of risk and return among infrastructure assets precisely because they combine the long-term stability of infrastructure, the complexities of an operating business and the value-added opportunities of a real estate investment, encompassing retail shops, wherehouses, parking lots and hotels. Latham also produced research suggesting that the infrastructure market in Europe alone is worth €4 to €6 trillion, which makes it at least as big, if not bigger, than the total commercial real estate market, which he estimated at €4.5 trillion.

Given the impressive levels of activity seen in the European property markets in recent years, it stands to reason that infrastructure may be poised for a similar growth pattern. With all the funds currently being raised for investment, the asset class is quickly becoming as crowded as the Hauptbahnhof, an impressive piece of infrastructure in its own right. If the attendance at the conference was any indication, investors are clamoring to come aboard.