(January 22, 2013) — Infrastructure has long been a buzzword for investors seeking income-generating, stable investments–but one academic concept shows that this asset class may slowly be losing appeal.
That theory is known as the peak car theory, a hypothesis that the number of cars globally has reached a tipping point. With greater communication possible via social media and cell phones, among other technologies, there may increasingly be less of a need to travel, the theory states.
The peak car theory also considers a social change: some economists say society increasingly perceives cars as functional objects as opposed to status symbols with sex appeal, which should be accounted for in assessing risk.
Toll roads, for instance, may eventually not be as important as they were in the past, says Jack Gray, one academic from the University of Technology’s Centre for Capital Market Dysfunctionality in Sydney. He notes that as the infrastructure landscape evolves globally, urban planners will be forced to rethink infrastructure and investors must be aware of the changing demands for travel to profit from it.
According to one 2010 academic paper by Lee Schipper and Adam Millard-Ball of the University of California, total passenger kilometers in motorized modes has slowed its growth relative to GDP and even declined in per capita terms in some countries, representing a marked change after robust increases in the 1970s and earlier. The paper concludes that travel activity has reached a plateau in all eight countries in the analysis, namely the United States, Canada, Australia, Sweden, the United Kingdom, France, Japan, and Germany. “The reduced rate of infrastructure expansion in the countries studied would also help account for the plateau,” the authors explain in the paper.
“Unless travel speeds increase, the fixed number of hours in a day and the consistent average of 1.1 hours per day that people devote to travel preclude ever-rising travel activity,” according to the research. “But even if travel speeds do increase, declining marginal utility to new destinations implies that there exists some saturation point for travel demand. While in the past, higher speeds from infrastructure improvements have been used to access more distant destinations rather than reduce aggregate travel times, this relationship may no longer hold.”
The peak car theory is most applicable to the developed world. Yet, in the next two to three decades, when the emerging world catches up to the developed economies in terms of income, those countries are likely to also level off in terms of traffic growth, Millard-Ball, the paper’s author, tells aiCIO. “The point is, emerging market growth won’t last forever,” he says.
In the near-term, however, investors may profit from rapid growth in infrastructure among emerging markets, such as China, India and, eventually, Sub-Saharan Africa. “Even if the peak car theory is true, there are still other types of infrastructure that will be required to manage the flow of people around the world, such as airports, railways, and energy distribution,” says Ashby Monk, a geographic economist at Stanford University. He adds that infrastructure upgrades will be needed since existing roads are not going to last forever. “This will require private capital, which will create plenty of opportunities for infrastructure investors. In short, constrained budgets suggests that existing infrastructure will eventually lead to lots of investment opportunities,” Monk tells aiCIO.
Duncan Hale, a senior investment consultant at Towers Watson, agrees. “Yes, airports generally have had ups and downs over time but have largely performed quite well. I think generally though there are a number of areas where infrastructure will continue to be important, such as roads, gas, and water utilities in both developed and developing markets.” Responding to predictions that toll roads will lose their appeal as the peak car theory materializes, Hale notes that like all investments, simply building a toll road is not necessarily a success. “Investors should identify where there is a need and build something to meet that need. Toll roads can be good investments if you look at them on a case-by-case basis,” he says.
Despite some dire academic predictions for new infrastructure projects, investment in the asset class among institutional investors have continued to climb, even during the financial crisis, with success stories largely centering on Australia and Canada. “I think there was an earlier acceptance of the investment merit there, with both regions characterized by more immature liability structures, so infrastructure is growing more steeply,” Hale adds.
The peak car theory should not completely impede investors from targeting infrastructure, but it does give some insight into the asset class’ future. And while the concept has implications for the amount of new infrastructure created, in terms of highway and railway expansion, it fails to account for the need for capital to invest in existing infrastructure.
“It’s inconceivable that the public purse will be able to handle the cost of all the upgrades,” Monk says.
Institutional investors, take note.
Related article:Infrastructure—or Imprudent?