A Real Estate Investment Trust (REIT) is effectively a company which undertakes a high level of property investment activity and whose rental income and capital gains are generally exempt from corporation tax. Since the introduction of REITs in the UK, leading development firms have transformed themselves into REIT structures because of their inherent economic advantages. Today, the global REIT population has a combined market capitalisation of approximately £382 billion.
However, at present REITs predominantly only operate in the residential and commercial sectors. This paper discusses how employing the REIT model for infrastructure assets could significantly increase investment in the UK´s infrastructure network at a time when it is estimated that the UK faces a £500 billion infrastructure crunch. Indeed, it goes on to propose developing a new framework for such investment which we call the Infrastructure Investment Trust (IIT). Such a vehicle could open up the asset class to retail finance and local communities as well as unlocking extra value for investors through tax-efficiency and higher distributions. There could also be potential for infrastructure provider firms to transform themselves into IITs.
With the increasing global focus on the infrastructure asset class and the challenges governments face in funding infrastructure commitments the IIT could be pivotal in providing part of the solution especially as risk appetite returns and the markets look for stable, long-term returns. Furthermore, adopting such a regulatory mechanism in the UK would also signal that the Government is serious about attracting the finance necessary to build the integrated infrastructure systems that the UK needs to compete in the global economy.
The economics of infrastructure
The correlation between infrastructure investment and economic development is well documented and is therefore not the primary focus of this paper. Nonetheless, it is worth reiterating briefly, so we can understand how incentivising extra finance in the infrastructure space creates considerable economic gains at the micro and macro-levels. Essentially, a high quality infrastructure base enhances a country’s national output, competitive advantage and labour market flexibility in addition to improvements to productivity and skills capacity. Moreover, infrastructure spending generates a large multiplier effect across the full economy by creating additional demand for goods and services. Some studies suggest that the economic yield of targeted infrastructure investment can be up to a factor of 10. Therefore, £1 billion spent could add around £10 billion of economic activity.
This paper seeks to go beyond purely economic considerations and add another dimension into the public policy mix; that of the investor and how optimising capital investment using the IIT – structured around the existing REIT wrapper – could increase the attractiveness of infrastructure assets to private finance. This could help to close the gap on the UK´s extensive deficit in transport, energy, utilities and communication spending.