People, prosperity, urban planning – the P3 booster for transportation infrastructure

In March 2020, listed airports and toll roads shed about 30% of market value¹ in a single month. But as the first lockdowns in Europe started to lift, it became clear that toll road mobility would be quicker to rebound as people felt “safe” in their personal vehicles. Even more robust was logistics-related activity – heavy vehicles transporting goods to satisfy an accelerating e-commerce economy.

Most modes of mobility have begun to pick up since 2020 (see recovery in Figure 1), although concerns remain around the subdued use of mass transit in cities and suburban rail links due to the acceleration of remote work. Aviation, in particular international travel, took the largest hit – global air passenger travel declined by almost 66% in 2020 (Air Travel Association (IATA); revenue passenger kilometres). The short-term outlook remains uncertain with the possibility of ups and downs in the case of new lockdowns. According to IATA, air traffic recovery to pre-pandemic levels is not on the cards before 2023 at the earliest.

Source: U.K. Department of Transport statistics; period March 1, 2020 to October 1, 2021

Conversely, an element that is often overlooked is the negligible financial impact the pandemic had on certain transport infrastructure sectors (for instance, many ports experienced a decline only in Q2 and Q3 2020, see EBITDA, earnings per share (EPS) and dividend per share (DPS) in Figure 2). Overall, the cash flow and financial position of many transportation infrastructure companies proved more intact than their traffic. This is because government support packages were made available in order for transport services such as rail and bus to provide uninterrupted services. To these ends, the European Commission enacted the temporary framework for state aid. Public airports in the US and Canada received direct grants, however regulatory relief for private airports in Europe is still up in the air.

Source: CBRE IM Listed Strategies Investible Universe to October 3,1, 2021; * adjusted for one-off impacts.

In September 2021, a time when traffic volumes were a mere 1% of pre-pandemic levels, the board of Sydney Airport accepted an indicative bid valuing the company at AUD 23.6 billion implying 23.3x (2019 EBITDA) multiple. This is one of Australia’s biggest buyouts and the largest ever cash-bid for an Australian listed company. We can argue that it was mostly driven by accumulated dry powder and the rise of private infrastructure mega-funds. But it is a clear demonstration that the valuations of infrastructure companies operating under long-term concession agreements can weather the impact of transient underperformance. Furthermore, we must also ask ourselves what role did structural factors play, such as the growing Australian population due to migration, increased traffic congestion, and a rate of urbanisation that will be 2.5-3.0x higher than the rest of the developed world by 2050?²

The pandemic has thrown a number of uncertainties into the forecasting mix, but one thing is certain – the baseline of transportation activity will be permanently impaired for years to come. IATA estimates the loss of air traffic equal to two years of growth. The seminal ITF Transport Outlook 2021, a report by an inter-governmental organisation within the OECD, finds that pandemic-adjusted global demand will be slower and less predictable than in previous editions.

Similarly, IATA continues to forecast global air passenger growth of between 1.5% and 3.6% in the next twenty years. What are the factors behind such robust rates of growth?

Source: ITF Transport Outlook 2021.

Most long-term traffic studies use a combination of economic growth and population statistics to arrive at a forecast trendline. It is difficult to “uncouple’ the effects of the two factors, as regions with higher population growth often experience the fastest economic growth. Economic activity per se has a powerful correlation with transport use over a medium-term horizon, but in the short run a lot depends on the state of the labour market or other exogeneous forces (think of rising fuel prices and highway traffic).

In terms of forecasted transport investment flows, two trends stand out. First, transport investments as stated in government plans will slightly outpace the average for the infrastructure sector (see Figure 4). That said, investments in the status quo scenario in almost all sub-sectors will lag both the average growth in population and GDP per capita globally. To meet the needs of the growing population with adequate quality infrastructure, the rate of transport investment will need to accelerate to between 2% and 2.3% annually as per the needs case in Figure 4.

Source: Global Infrastructure Hub, Oxford Economics.

Second, the dichotomy between emerging and advanced economies is widening. We witness above-average population growth and demand for transport services in Asia and emerging economies while in the developed world, transport investments will primarily focus on replacing ageing infrastructure and moving to less carbon-intense transport modes. Furthermore, the rise of the “grey hair” population (aged 64 and over) in the developed world will affect both the amount of spending (less) but also the potential types of travel (more leisure, and travel for health reasons). By 2030, Oxford Economics forecasts that one in five people in the US will be aged 64 or over.

Source: ITF Outlook 2021, OECD database, CBRE IM calculations

According to Brookings Institution, the global middle class – the dominant consumer goods market - is rising faster than global GDP at a rate of 4% in real terms.³ The same study reveals the growing rift between developing and developed countries. By 2030, the Asia Pacific region middle class will account for 3.5 billion people or 65% of the global share, while the growth in consumption by developed middle class markets will stagnate at about 0.5% to 1.0% annually.

This has implications for transportation infrastructure as new entrants into the middle class demand more services such as transport. Higher GDP per capita is associated with a higher propensity to travel for every income group, according to US Transportation Statistics. According to a US survey household spending on transportation increases by about $2,700 with an additional worker in the family.

Source: US Bureau of Labor Statistics.

While growth will slow, the urban population is steadily increasing and forecasted to reach 68% of the world total by 2050, up from 47% in 2000.⁵ A study by the University of Twente found that “transport infrastructure expansion strongly correlates with population growth, spatial expansion and land use change”.⁶ This makes intuitive sense as large swathes of the population migrate to cities and increase demand for mobility. Urban trips by far exceed other modes of transport, according to the ITF Outlook 2021 and the US 2020 Transportation statistics reveal a similar pattern – about 60% of all transport spending is by urban residents.

What is less obvious is the “feedback effect” of transportation infrastructure. As cities grow, more land gets converted into motorways, airports and rail stations, changing the urban spatial outlook.

The headwinds

Remote working	Carbon footprint	Micro- and shared mobility
Greater number of virtual meetings reduces commuting and local trips, but the magnitude of impact is still uncertain.7	In order to achieve the 1.5 Degree Celsius scenario of the Paris agreement, transport emissions need to decline by almost 70% by 2050.8 In the most ambitious policy scenario, long-distance flying will reduce by about 23% by 2030.9	Ridesharing and vehicle sharing could impact existing transport systems. Micro-mobility refers to e-scooters, shared bicycles, and e-bikes. In the US, 84 million tripes were taken in 2018, more than double that of 2017.10

While demographic trends will predominantly shape the landscape for transport infrastructure, our sector outlook considers the twin challenges of the digital acceleration and the drive to net zero. Under all demand scenarios, greener policies result in lower demand for transport across modes, particularly in long-haul aviation (see Reshape and Reshape+ in Chart 3). To achieve the decarbonisation goals set by the Paris Climate agreements, citizens will need to change behavior and cut out unnecessary travel.

Against this background, our investment conviction – sustainable transport, will benefit from the focus on reducing the sector’s carbon emissions which accounted for 27% of 2019 total, according to the International Energy Agency (IEA). It will be underpinned by stronger government commitments to phase out internal combustion engines, coupled with the targeted use of pandemic recovery funds. At the recent COP26 meeting many countries (excluding major auto manufacturers) signed a declaration to transition to zero emissions vehicles by 2035 for leading countries and by 2040 for the rest.

We will see capital shift into the electrification of transport networks, electric vehicle charging infrastructure and energy efficiency.

The potential inclusion of more sectors into the carbon trading regimes will accelerate the switch to low carbon transport modes, such as electric and hydrogen powered rail (passenger and freight), bus and ferry services. This should accelerate the adoption of electric cars which saw 41% increase in 2020, according to the IEA, and hence investment in electric vehicle (EV) charging infrastructure, which has almost doubled since 2019.

On the opposite end, some transport modes such as long-haul shipping and aviation, are hard-to-decarbonise.

While demographic trends will predominantly shape the landscape for transport infrastructure, our sector outlook considers the twin challenges of the digital acceleration and the drive to net zero. Under all demand scenarios, greener policies result in lower demand for transport across modes, particularly in long-haul aviation (see Reshape and Reshape+ in Chart 3). To achieve the decarbonisation goals set by the Paris Climate agreements, citizens will need to change behavior and cut out unnecessary travel.

Against this background, our investment conviction – sustainable transport, will benefit from the focus on reducing the sector’s carbon emissions which accounted for 27% of 2019 total, according to the International Energy Agency (IEA). It will be underpinned by stronger government commitments to phase out internal combustion engines, coupled with the targeted use of pandemic recovery funds. At the recent COP26 meeting many countries (excluding major auto manufacturers) signed a declaration to transition to zero emissions vehicles by 2035 for leading countries and by 2040 for the rest.

We will see capital shift into the electrification of transport networks, electric vehicle charging infrastructure and energy efficiency.

The potential inclusion of more sectors into the carbon trading regimes will accelerate the switch to low carbon transport modes, such as electric and hydrogen powered rail (passenger and freight), bus and ferry services. This should accelerate the adoption of electric cars which saw 41% increase in 2020, according to the IEA, and hence investment in electric vehicle (EV) charging infrastructure, which has almost doubled since 2019.

On the opposite end, some transport modes such as long-haul shipping and aviation, are hard-to-decarbonise.

Despite demand pressure, the economic case for sustainable transport is often enhanced by availability contracts (taking out demand risk) or financial stimulus (for example, grants and subsidies to purchase electric fleets). The upfront investment in new electric fleets can be significant, but maintenance and energy costs are reduced over the useful life of the assets. Electric cars for example are preferred by the ride-sharing companies due to their lower operating costs. According to Bloomberg New Finance (BNEF), e-buses will become cost competitive in a few years and take over 67% of the global bus fleet by 2040.

While the increased penetration of digital technologies will also dampen the demand for travel, it is precisely technology and innovation that promotes the adoption of clean transportation. For example, the costs of batteries (at present lithium-ion) used in electric vehicles have reduced manyfold in the last decade. The decline is almost outpacing the cost revolution we saw with renewable technologies. Furthermore, the on-going roll out of 5G networks and the enhanced component control of electric vehicles will pave the way to self-driving, ultimately reducing labor costs.

Source: World Economic Forum; Lazard; BNEF; Statista

We believe that the universe of investment opportunities in transportation infrastructure is growing and there is more scope for private capital. The deal volumes year to date in the sector are reaching 2019 levels, when it accounted for 25% of the total pie. Public funding accounts for the majority of capital investments, in particular in Asia (95% according to the Asia Development Bank) and the US (65% according to our calculations based on statistics in the US Transportation Annual Report 2020, excluding cars). With government balance sheets squeezed by the pandemic support and the ambitious net zero pledges to decarbonise transport, more opportunities will emerge with privatisations and public-private contracts.

There is also growing acceptance among politicians that transportation infrastructure needs modernisation. As an example, the recently signed c.$1.0 trillion bi-partisan US Infrastructure Bill allocates $350 billion of federal funding for roads and bridges over five years. Coupled with another $200 billion to other surface transportation (incl. $40 billion for transit and $65 billion for passenger and freight rail), this should boost total highway spending by 12% in 2023. However, this comes up short when compared with the $2,490 billion needed for surface transport, as estimated by the American Society of Civil Engineers.¹¹

Source: Infralogic, Global Infrastructure Hub, UBS Global Infrastructure & Utilities linked to FTSE Global Core Infrastructure 50/50 Index, EDHECInfra, MSCI Global Quarterly Private Infrastructure Index.

Footnotes

1 FTSE Global Core Infrastructure 50/50, USD denominated.

2 CBRE IM calculations based on data from United Nations World Urbanization Prospects: The 2018 Revision

3 Homi Kharas (2017), The unprecedented expansion of the global middle class, an update, Brookings.

4 Consumer Expenditure 2015, Annual Transportation Statistics 2020

5 UN World Urbanization Prospects: 2018 Revision

6 Urban Transport XVII, WIT Transactions on the Build Environment, Vol 116

7 What is the future of the office in a post-pandemic world? Global House Vision 2021.

8 ITF Transport Outlook 2021

9 ITF Transport Outlook 2021, CBRE IM calculations.

10 Docked Bikeshare Trips: Larges 6 Systems, bts.gov

11 Failure to Act – Economic Impacts of Status Quo Investment Across Infrastructure Systems, 2020