Invest in Infrastructure Through REITs?

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Includes: MARUY, MFC
by: Brad Case

The commercial real estate information company CoStar Group published an article by Randyl Drummer about the creation of two new REITs focusing on infrastructure projects. Electric Infrastructure Alliance of America will focus on electricity transmission, and Gas Infrastructure Alliance of America will do the same with natural gas transmission.

Unfortunately, these first two infrastructure REITs won't be open to individual investors: they're organizing as private non-traded REITs with an operating partner (Hunt Power, connected with the Texas billionaire Hunt family), and four investing partners: John Hancock Life Insurance, TIAA-CREF, OPTrust Private Markets Group (of Canada), and Marubeni Corp. (OTCPK:MARUY) (of Japan).

But if the two companies prove the concept successfully, it may eventually become possible for individuals to invest in the infrastructure asset class through publicly traded REITs -- and, potentially, just in time to benefit from a coming surge in demand for new infrastructure projects. According to the article,

Some financial analysts say such infrastructure REITs could emerge as a new tool to fund portions of the nation's decaying public works infrastructure using private-sector investment.

The article quotes from a recent research report by Deloitte entitled "REITs and Infrastructure Projects: The Next Investment Frontier?" According to Deloitte, "REITs offer several advantages over the (private equity partnership or) fund model as a way to raise and distribute capital," including liquidity, incremental scalability, capital market access and tax efficiency.

CoStar also quotes an attorney specializing in the electricity and natural gas industries:

The REIT structure is particularly well suited for a company that owns existing transmission assets that can spin off cash. It provides a mechanism for companies to access capital on what I believe to be attractive terms.

I think this is a tremendous development for investors -- for now only big institutional investors, but eventually individuals as well. Publicly traded REITs have shown that they're much more successful than private equity real estate funds at generating investment returns through both income and capital appreciation in commercial real estate generally, and I suspect that they would have just as great an advantage in producing investment returns in the infrastructure asset class.

The question is how quickly this course will lead to publicly traded infrastructure REITs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The author is long Vanguard REIT Index Fund and ING Real Estate Fund

Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.