The Impact of Rising Interest Rates on UK Infrastructure

With the continuous rise in interest rates, the infrastructure market is set to take a hit. In the past, it has benefited from low interest rates, but this is likely to change in the coming months and years. Since the financial crisis, interest rates have been low; this was done to encourage borrowing and boost spending; but they have slowly been rising. Now, inflation is likely to have the opposite effect. With higher interest rates, comes expensive borrowing and price inflation, which slows down infrastructure growth.

The Infrastructure Market’s Reliance on Low Interest Rates

The infrastructure market has grown a lot in recent years, and this is largely due to low interest rates. It has benefited from lower costs and debt financing, and used these factors to create above market returns for pension funds and investors. It’s not uncommon for an infrastructure project to use up to 75% debt financing but, with higher interest rates, the project will have lower equity returns. This is because the debt becomes much more expensive. This is likely to mean that a lot of projects are no longer financially viable, even though they would have been before.

For project developers, there’s a lot of uncertainty surrounding infrastructure. It’s not easy to overcome rising interest rates and, with raw materials costing more, there is an increase in the cost of projects as a whole. These increases will be more noticeable to projects with higher leverage, which is ironic as these are the projects that banks are most likely to lend to. However, even with banks willing to lend, interest rates make things difficult. Developers are going to have lower fees and lower profits, or higher loan interest rates and higher orientation fees. Either way, it’s likely that developers will think twice about costly projects.

More Competition for Infrastructure MLPs

Master limited partnerships (MLPs) have been popular in the infrastructure industry in recent years, as they provide low risk and high yield investments. Rising interest rates mean that the yield on other investments will also rise, which creates more competition for MLPs when it comes to attracting capital. The higher interest rates are, the weaker MLPs are likely to perform in the infrastructure industry. At the moment, infrastructure remains strong, but investors are becoming aware of the heightened level of risk due to increased interest rates.