The market for buy-to-let investments has changed a great deal over the last few years and a lot of landlords have been struggling to keep up. With the introduction of recent tax and regulatory changes, buy-to-let property has become more difficult and more expensive for investors.
Keeping that in mind, I reckon would-be investors should instead consider an emerging alternative investment class — infrastructure. In a volatile environment where yields are under pressure and capital growth is scarce, infrastructure investments can offer an attractive combination of both dependable income and inflation-linked growth.
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Infrastructure investment trusts have proved extremely popular with investors in recent years, and that attraction has certainly continued into 2018. Market sentiment towards many infrastructure investment trusts has picked up strongly in the second half of the year, following a slight dip in confidence within the sector in the immediate aftermath of Carillion’s collapse.
For example, the HICL Infrastructure Company (LSE: HICL) saw its share price gain by nearly a fifth to 159p a share, from a 52-week low of 133p on 9 April. With the rise, shares in the infrastructure company currently earn investors a prospective dividend yield of 5.0%, on its target dividend per share of 8.05p for the full year.
The company, which invests in a mix of public-private partnership (PPP) infrastructure projects, earns stable cashflows from essential physical assets, such as hospitals, schools, roads and utility facilities.
Carillion’s liquidation had hit HICL harder than most, as the facilities manager and construction contractor was its biggest counterparty, involved in 15 of its 115 PPP projects. The company booked a 2.2% reduction in its net asset value (NAV) earlier this year, but has since made solid progress resolving the consequences of the Carillion’s collapse.
Commercial terms have been agreed with long-term replacement facilities management subcontractors on six projects, with negotiations on a further three projects progressing. Overall indicative pricing on the replacement subcontracts was in line with its expectations and, as such, no further impact to its NAV is expected at this stage.
Meanwhile, shares in HICL are trading at a considerably smaller premium to its NAV than in the past. Although the shares have trended considerably higher over the past few months, its premium to NAV is just 6%, which is just over half its five-year average historical premium of 11%.
Another trust to consider is GCP Infrastructure Investments (LSE: GCP). Unlike HICL, GCP Infra doesn’t invest in equity stakes in infrastructure projects, but instead in the debt issued by infrastructure projects.
As a buyer of debt, as opposed to equity, this investment trust offers a potentially less risky way to get exposure to the infrastructure asset class. Firstly, there’s substantially less operational risk involved, since equity holders, being the residual claimants of a company’s assets, usually take the first hit from any impact on profits. Meanwhile, the income earned from loans-to-infrastructure projects is generally still secured by public sector-backed cash flows. And, where possible, investments are structured to benefit from partial inflation protection.
Trading at a 10% premium to its NAV, GCP Infra currently offers a prospective dividend yield of 6.1%. With that, it’s not trying to shoot the lights out — but just to deliver a steadily increasing dividend, with low risk, some inflation protection, and low correlation against other asset classes.