BPF Futures' recent Policy Congress on Emerging Sectors: the Investment Case hosted by Newmark UK at their West-End office produced an informative and topical panel discussion.

The panel comprising John Howells, Lottie Outen, James Lass and Vikki Town discussed four real estate investment classes that are fast emerging and growing: energy; single family housing; self storage; and healthcare. 

I and my colleagues, Edward Bird and Alex Watkins were particularly interested to hear John Howells, Head of Energy and Infrastructure at Newmark UK, handle questions on:

Overview of energy and infrastructure:

The usual assets seen in the market for energy are offshore wind, onshore wind, solar, nuclear, hydrogen, carbon capture and data centres. Within each of these sub-sectors, the investment market is still within its infancy but is growing. 

The energy sector is working against the backdrop of the goal of net zero emissions by 2050, which is expected to require £50bn a year of investment between now and 2050 to bring UK energy consumption from 60 GW to 150 GW by 2050. 

The investment market remains in its infancy given that the majority of clean energy projects remain unbuilt, in construction or not operational yet, so investment opportunities are still limited. 

Data centres are more interesting from the investment-side and generally fall under the umbrella of energy and infrastructure. Currently, data centres boast £500m per year in investment but the main focus remains development over investment. 

General overview of specific investors and stakeholders in energy and infrastructure:

1. The traditional plc energy company:

This category includes companies such as EDF, British Gas, and SSE. Overall, these companies are large and substantial in the market but are not agile.

2. Strategic land players:

These are small and agile companies that work with target land assets to make grid connections, taking energy off the grid. Through a combination of planning permission, grid connections and the land itself, these companies aim to sell the land as ready-to-go developments for energy assets such as sub-stations. 

3. Institutional capital:

There is institutional capital from asset managers and investment funds, particularly through project finance (offshore being a favourite). Examples include Brookfield, Schroders and Blackrock. Structures include taking minority stakes in the project companies, breaking up the shareholding across various investors. 

Perspective on global capital in energy markets:

Global capital is the core of the future of power and infrastructure assets; it is inherently cross-border. Data centres are generally more global in nature with the US and Australia being ahead of the curve compared to the UK, albeit behind on the energy transition side following, for example, new shale gas contracts in the US.

Political nature of energy as a real estate asset class:

From the industry’s perspective, the main role of the government is to provide policy stability for the market that they are operating in. Generally, the energy sector is large and established enough to not rely on government subsidies in order to be viable. 

However, to ensure innovation continues in the market, subsidies are required in some of the newer spaces. For example, the new “floating windfarms” tethered in areas too deep for traditional wind farms will be more dependent on government subsidies and promotion.

Greatest challenges facing the energy sector:

There are two main challenges to the energy sector: grid connections and supply chain disruption.

Justify investing in the energy sector:

Unlike many sectors, the energy sector’s growth is not simply predicated on supply and demand; rather it is principally dictated by structural forces. A key current trend at the moment is the electrification of the economy. There is expected to be a 230% increase in energy consumption by 2050 and ultimately the energy market underpins everything people can do. 

Potential challenges (and opportunities) include a lack of cable manufacturing (especially in the UK) and a lack of transformers both from an operational perspective and a manufacturing perspective, with an average lead time of 4 years required per transformer; and the UK's lack of of rare earth minerals.