Why future opportunity lies in Asia-Pacific

A rapidly growing urban middle class is driving demand for more and better infrastructure, says MIRA senior managing director and head of Asia-Pacific Frank Kwok.

This interview first appeared in Infrastructure Investor’s The Future of Infrastructure Report published on 2 December 2020.

What makes Asia-Pacific such an exciting infrastructure investment market for the months and years ahead?

At a high level, it is the phenomenal growth we’re seeing in the region that makes it an extremely exciting market opportunity going forward. Twenty years ago, the region’s share of GDP globally was around 26 percent. Today, that has grown to just over a third and Asia-Pacific is forecast to reach 50 percent of global GDP by 2040. So, within just four decades, the region’s contribution to world GDP will have doubled¹. And this growth is driving the demand for more and better infrastructure.

The demographics of the region are also really important. Right now, half of the total population is living in urban centres. In addition, half of the entire world’s middle class currently resides in Asia-Pacific countries. We see a trend of the middle class, with its high disposable income, that is most influential in demanding better infrastructure. Indeed, we’re seeing these demographic trends play out across multiple sectors, from energy to digital infrastructure. These are global thematics, of course, but because they are starting from ground zero in many parts of the Asia-Pacific region, the demand growth we’re seeing is phenomenal. That’s why we are so excited about this market.

Which geographies will be particularly attractive going forward and which sub sectors within those markets offer most potential?

It’s difficult to point to any particular geography or sector as offering more potential than others. Ultimately, it all depends on local dynamics. However, trends are playing out across this region very differently to other parts of the world. For example, the demand for energy is growing significantly, due to an expanding middle class and growing urbanisation in countries such as India and the Philippines.

Concurrently, we are also seeing a shift towards more sustainable energy. Rising energy demand plus the focus on energy transition has created growth in renewable energy, which has reached exponential levels. While energy transition is a major theme in other regions, the thematics underway in this region make the impact and opportunity even greater.  

We’re seeing similar dynamics in the digital space. If you went to China or India 20 years ago, there was barely a mobile phone to be seen. Penetration levels have now reached a point where there are more mobile phones than people². These markets have gone through that generational change from no fixed lines to ubiquitous smart phones in an extremely short period of time.

Meanwhile, the mobile payments market in China is approximately 300 times the size of the mobile payments market in the US³. So there are a number of thematics consistent across Asia-Pacific markets that we continue to focus on, however there are also differences in individual markets based on government policy, regulation and other dynamics that can present interesting opportunities as well.

How is LP appetite for Asia-Pacific infrastructure evolving?

Investors are definitely becoming more interested in looking at this region. Ten to 15 years ago, infrastructure was just emerging as an asset class. It made sense that institutional investors would look at their own backyard or at more developed markets in Western Europe, North America and Australia.

But over time, we see investors have started to see the benefits of diversifying their portfolios by looking at the Asia-Pacific region. The region can offer the defensive characteristics and strong cash flows that investors in infrastructure look for, but in addition, could provide higher growth potential than other markets.

What impact is that increase in LP appetite likely to have on competition levels in the region?

By definition, more investor interest will mean more competition because there is more capital targeting the region. But another trend we’ve noticed is that this market is starting to mature. Just as with other geographies, there has been a transition from infrastructure being provided by the public sector to gradually more private sector involvement. Competition may be increasing, but so too is the universe of potential deal flow. Having more participants interested in the region is a good thing. It helps demonstrate that this is an important region to have exposure to.

Are there any particular challenges this market is likely to face in the years to come?

The biggest obstacle we see within the Asia-Pacific region is its diversity, which is also one of its benefits. Australia, the Philippines, India, Japan and China are all significant markets, but very different in terms of economic cycles, political drivers and their regulatory environments.

So, for investors and their fund managers, the challenge lies in understanding the local dynamics at play. Infrastructure businesses can’t be moved to another location, so it’s critical to be part of the local community and to work with local stakeholders. That is why we have built a team located right across the region. We have operations in nine different countries in Asia-Pacific, because being present in the markets where you are investing helps you identify the opportunities and manage businesses effectively, once deals are completed.

Equally, political and regulatory stability is critically important and is something that must be taken into account, particularly in some of the less mature markets across the region. Having local teams on the ground makes it easier to understand those dynamics and factor them in, if we believe there is additional risk to be considered.

What impact has covid-19 had on the infrastructure sector?

The definition of infrastructure is providing an essential service and what we’ve learned this year is that our infrastructure must be able to continue to provide those services in the face of a global pandemic. By and large, the sector has managed to do just that. Infrastructure assets have displayed true resilience and, in general, have continued to perform to expectation. Utilities have continued to operate and serve their customers. Even toll roads, which were initially negatively affected, have bounced back strongly, with traffic rebounding to last year’s levels⁴.

The obvious exception has been airports, which have been heavily impacted by government policies and restrictions around the movement of people, which we all understand were necessary.

There are also sectors that have actually benefited from the environment Covid created, with digital infrastructure, such as data centres being a good example, whereby the pandemic has accelerated trends that were already underway. Demand for data center space is being driven by the shift to working from home, studying from home and entertaining from home. Overall, the covid pandemic has demonstrated the resilience of the infrastructure industry, as well as the importance of diversification, by sector and by geography.

What emerging technologies are likely to impact the evolution of infrastructure investment most significantly?

Our technology and innovation team provides the research which assists us in making investment decisions and ensuring we’re managing the businesses we own so that they can continue to provide essential services for many years to come.

One specific example of how we’re beginning to use technology today includes the use of digital twins. In some cases we have digital models of our infrastructure businesses, which enables us to run scenarios and see how those assets will actually be impacted. We have found that significantly reduces the need for site visits and is just one way in which technology is changing the way we work.

What will be the most important trends shaping the Asia-Pacific infrastructure market over the next five to ten years?

Digitalisation is creating opportunities in sectors that didn’t exist a couple of decades ago. Data is now effectively a utility. We all need water. We all need power. Now, we all need data and connectivity as well. That is creating investment opportunities across the world, but we see those opportunities as growing faster in Asia-Pacific than anywhere else. 

At the same time, the demographic changes underway in the region are only going to continue and will result in the need for more and better infrastructure of all types. We are likely to see the need for more energy production, more roads and more airports, as a growing middle class consumes more, buys more and travels more. All this means that we see this as a truly exciting time to be investing in the Asia-Pacific market and the opportunity is only going to grow.