How is Technology Changing the Infrastructure Asset Value?
Many long-term investors, including the most experienced players, have not yet determined how technology advances will affect demand for infrastructure. Here is what they need to know:
Rethinking traditional infrastructure assets
Even if investors have long received reliable returns from traditional infrastructure assets, new technology could upend these expectations. Take parking garages, for example. These structures have typically been a solid investment, but a combination of two trends could reduce their appeal: the growth of ridesharing services and advances in autonomous vehicles.
If fully autonomous cars become a reality within the next 15 to 20 years, ridesharing services might rely on them. After dropping off their passengers, the cars would immediately leave to pick up their next fare, potentially reducing, or even eliminating, the need for parking in some areas.
However, this potential trend does not mean that infrastructure investors should entirely write off parking garages—they need to take a more nuanced view of the risks and opportunities. For instance, infrastructure investors have typically forecast demand for parking garages and other assets based on factors like population size, economic growth, local industrial activity, the number of available parking spaces, and a few other variables.
Now they will need to go much further than a rudimentary supply-and-demand analysis by examining additional variables, including those from new data sources, such as vehicle-tracking data that show the typical routes for local journeys or information about new government policies designed to support the use of autonomous vehicles.
The new algorithms must also account for factors that could be disruptive over the long term, including the projected growth rate for self-driving cars or ride-sharing services on a location-by-location basis.
Investors might also need to consider whether other technology trends could affect demand or revenues. For instance, the rise of parking apps could direct drivers to garages with capacity. Garage owners could potentially see a big jump in margins if they used software programs that allow them to predict demand and adjust prices accordingly.
After their analysis, investors might determine that the demand for parking is so low that their garages should be repurposed or provide a broader set of services. As one example, garages that have off-curb parking could be transformed into service centres for e-commerce package delivery or turned into vertiports for delivery drones.
Evaluating new infrastructure assets
An even more difficult puzzle involves determining how technology trends will increase demand for—or affect the value of—unconventional assets. Consider charging stations for Electric Vehicles (EV).
In an age where most cars use gas, demand for these facilities is relatively low. But EVs are becoming more popular in many major markets, with registration increasing 70 per cent in China and 37 per cent in the United States from 2015 to 2016.
Over the long term, farsighted private-management firms that invested early in charging stations could receive greater returns than those that focused on traditional infrastructure.
With so much uncertainty ahead, investment firms should consider a range of scenarios when estimating the value of unconventional assets. For instance, the market for renewable energy, including wind and solar power, is increasing. But there are still many uncertainties regarding the extent of their growth and the amount and type of infrastructure assets required to support them.
Consider one recent innovation related to renewables—the development of liquid-air storage. Using this technology, energy-storage plants use off-peak or excess energy to clean and chill air until it becomes liquid. It can be stored in large tanks until needed. Such plants might be critical to the success of renewables like solar and wind power, which have supply peaks and troughs.
These facilities are in their early stages, and it is not yet clear how popular they will become or how their infrastructure needs might change as the technology advances. Investors will need to manage these uncertainties by developing scenarios in which technology, market growth, and infrastructure requirements evolve in different ways.