Infrastructure investments in water and regulated utility assets are providing some of the lowest internal rates of return for investors, according to the latest infrastructure investors survey from Deloitte.

The business advisory firm said investors have cut their target internal rates of return (IRR) with 43% predicting returns of between 10% and 12%, a shift from 2013’s Survey when 41% were expecting returns of between 12% and 14%.

Deloitte surveyed 25 European infrastructure investors in Q1 2016, including infrastructure funds and direct lenders as well as the European arms of global infrastructure investors, together holding over £200 billion in assets and ‘dry powder’, for its 2016 survey, the fourth in its series. 

The 2016 Infrastructure Investors Survey follows similar surveys produced by Deloitte in 2007, 2010 and 2013.

Infrastructure investments have held up over the past five years but political and regulatory risk dominates investors’ lists of concerns.

92% of respondents say their infrastructure investments have proved resilient over the last five years, with 8% saying performance has been mixed.

Water and regulated utility assets among lowest rates of return for investors

IRRs were lowest for PFI/PPP assets, water and regulated utility assets. Returns in the transport sector have proved strongest, with ports, ‘other transport’ assets and rail/metro assets performing well. Infrastructure services and telecoms assets were also among the highest performers. However, returns in all asset classes were lower than those reported in Deloitte’s 2013 survey.

Politics and regulatory risks dominate list of concerns

Political and regulatory risks dominate investors’ list of concerns with 38% citing political risk and 35% citing regulatory risk. Within Europe, investors perceived regulatory risk to be highest in Iberia, Italy and the UK, with much lower perceptions of risk in Benelux, France and Germany.

Overall, 92% say that regulatory risk has increased over the past five years, with 25% saying it has increased significantly. 67% say they expect regulatory risk to further increase over the next five years.

Traditional markets dominate

Investors were asked to rank the level of focus their funds have on global and European markets. Globally, interest is strongest in Western Europe, followed by North America and Australasia. Interest in China has grown significantly from 2013’s survey, but interest in India, the Middle East and Africa remains low.

Within Europe the most attractive locations for investors were the UK, Scandinavia and Germany. Since 2013’s survey, investors’ interest has also increased in Italy, Iberia and France.

Infrastructure investors becoming more active

Infrastructure investors are also stepping up their involvement in investee companies. 95% say they are actively or very actively involved in their investee companies. Investors are most closely involved in strategic business planning, large project financial management and acquisitive growth decisions.

Deloitte says the focus on asset management has also resulted in a significant improvement in corporate governance structures, with over 95% of investors rating the corporate governance of their assets as good or excellent, up from 60% in 2013.

Investors report good access to finance

Investors are confident around the outlook for debt availability. 65% say debt finance will remain steady over the next five years, 15% predict it will increase, while 20% forecast a decrease.

Jason Clatworthy, infrastructure M&A partner at Deloitte, said:

“The infrastructure asset class continues to perform strongly and provide stable, secure returns. We expect this to continue through a period of more steady evolution in the infrastructure investors market over the years to come."

“There is clearly a wall of capital looking to deploy into this space. As such, infrastructure investors remain keen to see an increase in deal pipeline, both via the secondary sale markets but, importantly, also in the greenfield space should regulators of governments facilitate this more readily.”

David Scott, infrastructure M&A partner at Deloitte, added:

“Investors are focusing the majority of their resources in the traditional infrastructure markets of Western Europe, North America and Australasia. But with the increasing focus of direct investors on these markets, funds are now considering other regions for investment."

“Following a significant fall in attractiveness in our 2013 survey, Iberia and Italy have seen a resurgence in attractiveness and are very much seen as ‘open for business.’ The expectation is that the worst is over for these areas and a more stable future lies ahead.”