Directors' valuation of the Investments portfolio

The Directors’ valuation increased 2% to £1,106 million (2020: £1,086 million). With more investment in the US and more disposals from the UK the portfolio is now 57% weighted towards the US (2020: 53%). The number of projects in the portfolio decreased to 64 (2020: 67).

The value of the UK portfolio is positively correlated with inflation. The US portfolio is also positively correlated with inflation, although indirectly through the link to rental inflation.

Balfour Beatty invested £19 million (2020: £46 million) in new and existing projects. During the year, the Group added four new assets with two student accommodation projects (Vanderbilt University and Royal Holloway) and two US multi-family housing projects in Houston, Texas and San Mateo, Florida.

Cash yield from distributions amounted to £62 million (2020: £72 million) as the portfolio continued to generate cash flow to the Group, net of investment. The continuing yield during COVID-19 demonstrates the essential nature of the Infrastructure Investments portfolio.

Balfour Beatty recommenced disposals in the year with proceeds of £81 million (2020: £nil). This included: £48 million from the sale of its stakes in a portfolio of three assets in the UK (Aberdeen Western Peripheral Route, Woodland View Hospital and North West Fire and Rescue); £20 million from the sale of its 70% stake in BC Children’s and BC Women’s hospitals in Vancouver; and £12 million from the sale of two multifamily projects in Alabama and Florida.

Unwind of discount at £83 million (2020: £83 million) is a function of moving the valuation date forward by one year with the result that future cash flows are discounted by twelve months less. Operational performance movements resulted in a £27 million increase (2020: £20 million decrease) whilst Other (which includes foreign exchange, gains on disposals and new wins) amounted to £34 million (2020: £19 million decrease).

The operational performance movements in the UK were primarily due to the increase in future corporation tax rates. In the US, the operational performance movements were primarily due to higher military housing rents agreed for 2022, as well as rent increases realised in student accommodation and residential housing within the year.

The methodology used for the Directors’ valuation is unchanged, producing an asset by asset valuation that reflects market value and therefore changes with movements in the market. Cash flows for each project are forecast based on historical and present performance, future risks and macroeconomic forecasts. They also factor in secondary market assumptions. These cash flows are then discounted using different discount rates, which are based on the risk and maturity of individual projects and also reflect secondary market transaction experience. As in previous periods, the  Directors’ valuation may differ significantly from the accounting book value of investments shown in the financial statements, which are produced in accordance with International Financial Reporting Standards (IFRS) rather than using

a discounted cash flow approach. A full reconciliation is provided in section i) of the Measuring Our Financial Performance section.

Discount rates applied to the UK portfolio range between 7% and 9.5% depending on project risk and maturity. The implied weighted average discount rate for the UK portfolio is 8.1% (2020 8.0%). Discount rates applied to the North American portfolio range between 7.5% and 10.6%. The implied weighted average discount rate is 8.3% (2020: 8.4%). Consistent with other infrastructure funds, Balfour Beattys experience is that there is limited correlation between the discount rates used to value PPP and similar infrastructure investments, and long-term interest rates. In the event that interest rates increase in response to rising inflation, the impact of any increase in discount rates would be mitigated by the positive correlation between the value of the UK portfolio and changes in inflation. A 1% change in the discount rate would change the value of the UK portfolio by approximately £50 million. A 1% change in the discount rate would change the value of the North American portfolio by approximately £74 million.

Movement in value 2020 to 2021

£m

2020

Equity invested

Distributions received

Sales proceeds

Unwind of discount

Operational performance

 

Other, including FX

2021

 

UK

514

2

(21)

(49)

38

(24)

14

474

North America

572

17

(41)

(32)

45

51

20

632*

Total

1,068

19

(62)

(81)

83

27

34

1,106

* US valuation includes future estimated costs of monitorship of the military housing business but excludes the resolution payment to the DoJ.

Portfolio valuation December 2021
Value by sector

Sector

2021

No. projects

2020

No. projects

2021

£m

2020  

£m

Roads

12

13

158

188

Healthcare

2

3

108

114

Student accommodation 5 4 95 88
OFTOs 3 3 44 44
Waste and biomass 2 2 46 51
Other 3 4 23 29
UK total 27 29 474 514
US military housing 21 21 491

446

Student accommodation and other PPP 4 5 72 73
Residential housing 12 12 69 53

North America total

37

38

632

572

Total

64

67

1,106

1,086

Value by phase

Phase

2021

No. projects

2020

No. projects

2021

£m

2020 

£m

Operations

60

65

1,070

1,037

Construction

3

2

34

49

Preferred bidder 1

2

Total

64

67

1,106

1,086

Value by income type ​

Income type 

2021

No. projects

2020

No. projects

2021

£m

2020  

£m

Availability based 

17

22

311

371

Demand - operationally proven (2+ years)

39

39

580

519

Demand - early stage (less than 2 years) 8 6 215 196

Total

64

67

1,106

1,086