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Emerging Markets

Singapore's new taste for infrastructure funds

Its latest bid to serve as a conduit for regional infrastructure financing is drawing much interest. But the city-state must beware yield-hungry institutional investors

In keeping with its posture as an innovative, global financial centre, Singapore is always on the lookout for new opportunities to lure foreign capital – and lately, the city-state has trained its sights on infrastructure. Kola Luu, executive director of financial markets strategy at the Monetary Authority of Singapore (MAS), has no doubt about the sector’s potential or Singapore’s capacity to act as a regional hub for infrastructure investors.

 

“We envisage infrastructure to be the next area where Singapore can act as a conduit through which regional and global investors access opportunities ... due to our developed financial markets, strong and progressive regulatory framework and existing pool of liquidity in the wealth management industry,” he tells Emerging Markets.


The city-state has been tapping into resurgent investor demand and has developed financial and regulatory incentives for infrastructure funds. In 2004, MAS introduced the Business Trust Act, which “allows businesses to structure themselves as trusts rather than corporates. Such vehicles can make distributions out of cash flows rather than operating profits, making the business trust structure suitable for the securitization of assets, with stable cash flows such as infrastructure and shipping,” explains Luu.


Nick Merritt, senior Asia infrastructure specialist at law firm Norton Rose, believes such reforms have made it easier for both institutional and retail investors to pool money to finance such projects. “Singapore is now the hub of infrastructure financing, and its regulations are so developed, it is leveraging risk allocation akin to developed markets.”


Indeed, these incentives have already drawn significant infrastructure finance vehicles to Singapore. In 2005, Macquarie International Infrastructure Fund, Asia’s first listed infrastructure fund, was launched on the Singapore stock exchange. In the same year, SP AusNet, an infrastructure trust and energy company, used the Business Trust structure to securitize Australian assets in a pioneer dual listing on the Australian and Singaporean stock exchanges.


Against this backdrop, a community of specialized fund managers and investors is evolving in Singapore. For example, since the start of this year alone, two global leaders in the real estate and infrastructure funds management – Babcock & Brown and AMP Capital, have formally opened their Singapore offices to service the Asian region.


Moreover, publicly listed structures are attracting a lot of attention. In February, Singapore saw the listing of CitySpring Infrastructure Trust, the wholly-owned subsidiary of Temasek Holdings, which has S$129 billion in assets. CitySpring is Temasek’s main vehicle for infrastructure investments, and the trust’s attractive dividend yield and acquisition potential prompted inflows that drove its shares as much as 70% higher after their debut.

 

But such a rapid climb suggests the risk of a speculative bubble driven by alpha-hungry international investors. Consequently, a supportive and transparent regulatory environment is not the only lesson from Singapore’s success that will need to be learned elsewhere in Asia. Perhaps as important is the emergence of a relatively deep and stable domestic bid, for example through developing local pensions and insurance industries, to avoid long-term infrastructure projects being undermined by short-term market volatility.

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