How does investment in infrastructure impact real estate?

Ruth Bailey
Infrastructure is defined as the basic physical structures essential to the operation of a society. Investment in infrastructure therefore has the potential to impact how we live.

When workers are not able to commute rapidly from the suburbs into dense city centers, the most dynamic labour markets begin to stagnate. Faster commutes will increase the supply of available labor—the less time people spend stuck in traffic, the more hours they have available to work. Improving transportation systems increases a country’s potential for future economic growth. Similar shipping or air freight bottlenecks will impose drags on manufacturers with finished goods not able to reach customers or raw materials to a factory.

Impact on real estate

Unlike other areas of public and private investment, the economic benefits to infrastructure are clear. But not only does investment infrastructure lead to job creation and GDP growth it also acts as a catalyst, having significant knock-on impact to the surrounding real-estate.

City transportation projects, in particular, tend to signal where the next property hot-spot will be. Historically this has been road or rail projects but there is increasing evidence to show that investment in mass public transport represents a higher value investment. There’s growing consensus worldwide that high-quality, high-capacity, safe and affordable public transport is the only way for increasingly congested cities to accommodate sustained and sustainable economic growth.

Transportation systems, strong telecommunications systems (including high-speed internet capability) along with reliable and affordable energy are considered fundamental to most real estate developments, whether that be commercial, residential or industrial.

But the impact is not always obvious or entirely positive. In fact, the influence that infrastructure has on real estate is a complex one.

It’s not just a simple, direct correlation between infrastructure investment and adjacent real estate investment. Different types of infrastructure investment have very different impacts in different geographies and on different real estate sectors. Their impact and value are also perceived differently in different countries and different sections of society.

For some, the value uplift from a transportation project in terms of improving access to business districts, opening up new markets, reducing commute times etc. can be negated by the diminished quality of open spaces, the adverse aesthetic or reduced safety conditions. For example, in Hong Kong, the proximity to public transport, shopping centres and parks have the most significant impact of residential property prices whereas the nature of a neighbourhood was the greatest impact in Australia.

Upgrading ports or airports are considered a significant gain by business communities, particularly the logistics industry, but may adversely impact neighbouring residential areas with additional noise and air pollution, as well as construction traffic, noise, temporary road networks etc. while the works are executed. This is why you have industrial parks, not residential districts next to airports.

The biggest challenge for real-estate investor wanting to benefit from infrastructure is timing. Any announcement relating to new infrastructure development leads to a hot spot. Sometimes this is a highly speculative, short-term market distortion.

All too often there is substantial period of time from announcement to completion, or even the start of construction. Some major infrastructure projects get delayed due to availability of finance, planning approval, public consultations, environmental concerns or changes in governments. This can have a significant knock-on effect to the real estate around it. A recent, high profile example would be the high-speed rail plans for Malaysia.

Even when the investment goes ahead, there is a need for governments to support this with supporting mechanisms such as rezoning, to enable investors to really capitalize on impact of the new infrastructure. For example, increasing the height limit on property development when an old airport is decommissioning or allowing industrial, logistics or data centres to take up space that has been adversely impacted by transportation investment and allowing industrial buildings to be repositioned as data centres or commercial properties when port facilities are moved outside of central city areas.

Although we can agree that the impact of infrastructure on real estate investment is mostly positive, it is also unquestionable that the impact is complex. Since there is no one-size-fits-all solution it is key to evaluate each real estate investment opportunity individually with a unique business case and tailored delivery and executions plans alongside bespoke operations strategy, all focused on maximising value.

As urbanisation rapidly advances, the chance of investing in a real estate development that will be impacted by infrastructure investments increases. Investors need agile and innovative strategies to help them respond to changes in their surroundings or urban regeneration through asset repositioning. A significant example of this in Hong Kong is where industrial building stock increasingly being converted into commercial properties, car showrooms, data centres and even boutique hotels.

For more information on our asset repositioning capabilities please contact Ruth Bailey.

 

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