Sustainable infrastructure in APAC offers potential for attractive financial returns
03 / 01 / 23 - 7 minute read
Megatrends, such as decarbonisation, digitalisation and demographic changes, are transforming the world of APAC infrastructure, adding more complexity while attracting specialist investors, writes Saji Anantakrishnan, PATRIZIA Head of Infrastructure - Australia and Asia.
Traditionally, infrastructure has appealed to long-term investors due to its relatively stable cashflows. However, governments, investors and other stakeholders now face uncertainty as the industry strives to secure funding to build, renovate or replace infrastructure in order to hit net-zero carbon targets.
Hitting these targets, of course, won’t be easy. But every challenge presents an opportunity for change. Climate action can provide the necessary progress towards the low-carbon economy that the world so urgently needs, while also offering opportunities to generate attractive financial returns.
PATRIZIA sees particular potential for growth in the Asia-Pacific (APAC) region, which is blessed by strong economic tailwinds, such as world-leading GDP growth. APAC is set to represent around 60% of global urbanisation over the medium term. Moreover, APAC’s middle class is set to rise to 65% between 2020 and 2030 from its current level of 54%. This ongoing urbanisation and increase in disposable incomes will lead to a greater overall demand for infrastructure.
In contrast with the ageing populations and diminishing workforces seen in many other parts of the developed world, APAC has a relatively larger labour force. Emerging economies in the region are expected to employ more than 400 million people in the next 20 years, which will drive GDP growth and enhance economic integration. Recently, the Association of Southeast Asian Nations (ASEAN) became China’s largest trading partner for the first time, overtaking the EU.
All the above factors add up to unparalleled, enviable economic growth in the Asia-Pacific region, which is set to reach 4% in 2022 and 4.3% in 2023, following 6.5% growth in 2021.
Finding green solutions for high demand
While demand for infrastructure in APAC is expected to soar, the problem is further complicated by meeting this growing demand sustainably. The region uses fossil fuels intensively and is responsible for more than half of global carbon emissions. Additionally, its high population, environmental degradation and large coastal areas expose the region to extreme weather events and make it vulnerable to rising sea levels.
Significantly, APAC is also behind in terms of decarbonisation. However, there are signs this may change. By 2025, an additional 35-40GW in renewable energy capacity is set to be introduced. Different countries are pursuing different goals. Taiwan, for instance, has set ambitious targets to increase wind capacity by 2035, Japan aims to reduce its 2013 greenhouse gas emissions by 46% in 2030 and Australia has enshrined its net-zero aim for 2050 in legislation. Other nations, meanwhile, have pledged to end their investment in coal power generation.
These commitments are inarguably positive. Nevertheless, they can’t bypass the significant shortcomings in the region’s energy infrastructure. For example, grid infrastructure in many countries is poorly designed for variable outputs, already congested near major demand centres, and requires significant upgrades for additional load.
While there are solutions to these challenges, the remedies don’t come cheap. For APAC to reach net-zero emissions by 2050, annual capital expenditure needs to increase by around $1 trillion to reach $3.1 trillion. This sum inevitably exceeds nations’ available spending power – a situation exacerbated by high government debt and compounded by the Covid-19 pandemic.
Private investment can bridge the funding gap
Private sector investment is one way forward to provide the necessary means to bridge the funding gap. Japan, for example, is pushing for privatisation of its airport infrastructure, having already privatised railways, the space industry and a large swathe of its technology output. It also succeeded in raising significant private capital for its renewable program after the Fukushima nuclear disaster.
This long-held institutional investor preference for North America and Europe and a significant shortfall in funding enables APAC to generate more attractive risk-adjusted returns relative to traditional markets, as well as strong demand for investment in renewable infrastructure.
Admittedly, some challenges lie ahead, including a vast myriad of legal and regulatory requirements. These will become more evident as the sector moves away from fossil fuels and towards wind, solar, hydro and biomass generation. Electricity grid networks will have to be reinforced to service renewable energy and solutions to store new types of energy, such as batteries, will therefore be introduced.
Thankfully, PATRIZIA is already ahead of the curve in recognising the region’s potential. For example, in 2013, PATRIZIA acquired an offshore wind farm under development near Miaoli in the Taiwan Straits before exiting the investment at a favourable internal rate of return in 2020. You can be sure that further investments in APAC infrastructure will catch PATRIZIA’s eye in the near future.
PATRIZIA sees particular potential for growth in the Asia-Pacific (APAC) region, which is blessed by strong economic tailwinds, such as world-leading GDP growth. APAC is set to represent around 60% of global urbanisation over the medium term. Moreover, APAC’s middle class is set to rise to 65% between 2020 and 2030 from its current level of 54%. This ongoing urbanisation and increase in disposable incomes will lead to a greater overall demand for infrastructure.
In contrast with the ageing populations and diminishing workforces seen in many other parts of the developed world, APAC has a relatively larger labour force. Emerging economies in the region are expected to employ more than 400 million people in the next 20 years, which will drive GDP growth and enhance economic integration. Recently, the Association of Southeast Asian Nations (ASEAN) became China’s largest trading partner for the first time, overtaking the EU.
All the above factors add up to unparalleled, enviable economic growth in the Asia-Pacific region, which is set to reach 4% in 2022 and 4.3% in 2023, following 6.5% growth in 2021.
Finding green solutions for high demand
While demand for infrastructure in APAC is expected to soar, the problem is further complicated by meeting this growing demand sustainably. The region uses fossil fuels intensively and is responsible for more than half of global carbon emissions. Additionally, its high population, environmental degradation and large coastal areas expose the region to extreme weather events and make it vulnerable to rising sea levels.
Significantly, APAC is also behind in terms of decarbonisation. However, there are signs this may change. By 2025, an additional 35-40GW in renewable energy capacity is set to be introduced. Different countries are pursuing different goals. Taiwan, for instance, has set ambitious targets to increase wind capacity by 2035, Japan aims to reduce its 2013 greenhouse gas emissions by 46% in 2030 and Australia has enshrined its net-zero aim for 2050 in legislation. Other nations, meanwhile, have pledged to end their investment in coal power generation.
These commitments are inarguably positive. Nevertheless, they can’t bypass the significant shortcomings in the region’s energy infrastructure. For example, grid infrastructure in many countries is poorly designed for variable outputs, already congested near major demand centres, and requires significant upgrades for additional load.
While there are solutions to these challenges, the remedies don’t come cheap. For APAC to reach net-zero emissions by 2050, annual capital expenditure needs to increase by around $1 trillion to reach $3.1 trillion. This sum inevitably exceeds nations’ available spending power – a situation exacerbated by high government debt and compounded by the Covid-19 pandemic.
Private investment can bridge the funding gap
Private sector investment is one way forward to provide the necessary means to bridge the funding gap. Japan, for example, is pushing for privatisation of its airport infrastructure, having already privatised railways, the space industry and a large swathe of its technology output. It also succeeded in raising significant private capital for its renewable program after the Fukushima nuclear disaster.
This long-held institutional investor preference for North America and Europe and a significant shortfall in funding enables APAC to generate more attractive risk-adjusted returns relative to traditional markets, as well as strong demand for investment in renewable infrastructure.
Admittedly, some challenges lie ahead, including a vast myriad of legal and regulatory requirements. These will become more evident as the sector moves away from fossil fuels and towards wind, solar, hydro and biomass generation. Electricity grid networks will have to be reinforced to service renewable energy and solutions to store new types of energy, such as batteries, will therefore be introduced.
Thankfully, PATRIZIA is already ahead of the curve in recognising the region’s potential. For example, in 2013, PATRIZIA acquired an offshore wind farm under development near Miaoli in the Taiwan Straits before exiting the investment at a favourable internal rate of return in 2020. You can be sure that further investments in APAC infrastructure will catch PATRIZIA’s eye in the near future.
