Admiral: Infrastructure Plans & Long-term Value Of Real Estate

One feature of Asian cities is its density. Over the same land area, typically an Asian city will serve a larger population than cities in North America or Europe. A major reason for this development is the favourable precedence created by Japan and the Asian Tigers.

After the Second World War, Japan was the first Asian economy to develop, and it built mega cities that proved the success of the model. Hong Kong and Singapore, being single-city economies, were forced into this development mode and also achieved economic success. This has influenced other countries to follow this model.

For governments, denser cities usually mean that economy-of-scale can deliver the essential services at a lower per-user cost. Denser cities also typically have a smaller carbon footprint per person, as the larger carbon cost for a typical city dweller is transportation.

Knowledge-based industries benefit from more interactions provided by a denser city, and local service industries also have a larger client base. This means that denser cities typically also have a stronger economic base. This is why some western cities have started to increase their density.

A dense city survives because of infrastructure development. Its transportation network, such as roads, rails and rapid transits, determines how many people can regularly transverse the city. Its utility network, including electricity, water, telephone, and nowadays the Internet, dictates the quality of life of the people living in it.

Economic activity is dependent on infrastructure too

Business activities in a city are also dependent on infrastructure. A mall that has access to an MRT station, for example, can draw a much larger crowd than one that does not. A data centre without ample communication connections will be limited in the amount of data that it can store and process.

Thus, current and future infrastructure plans will greatly influence the long-term value of a real estate project.
One real estate investment strategy is to follow infrastructure plans. At the macro level, this means that investors should pay more attention to cities and countries with strong development pipeline.

Australia, for example, currently has the largest announced infrastructure pipeline, by project value, amongst OECD countries, and this is a reflection of the country’s confidence in growing its population and attracting new business.

Obviously, real estate and infrastructure can be overbuilt, but even then, owning an asset with good infrastructure will still be more defensive than an asset without good infrastructure.

Buying assets in advance for excess returns

At the micro level, following infrastructure plans often means buying assets before infrastructure completion. For example, buying real estate on a future MRT stop can often generate an excess return, even if it creates short term inconvenience.

At times, this investment strategy is grouped under other themes. For example, the current up-cycle of Tokyo real estate was partially triggered by the 2020 Olympics. The execution of the Olympic theme usually means that investors target areas that are receiving infrastructure spending because of the Olympics.

At times, reusing infrastructure may be profitable. Multiple cities, including Melbourne and Hong Kong, have redeveloped docklands into high end residential or office areas.

Often these projects include significant cost to clean up the inevitable ground pollution created in the decades when the sites were docks, but developers often come out ahead because these areas typically already had good road connections.

Conclusion

The fact that infrastructure creates land value is the reason why some governments have started to fund public infrastructure via the value capture model. London’s Crossrail, for example, is a new rail line under development to connect London from one end to the other.

The value capture model charges property developers and businesses with interests close to new stations because of the perceived value they will generate from the infrastructure project. Whether this funding model will catch on remains to be seen, but it affirms that real estate projects do benefit from infrastructure projects.