Directors' valuation of the Investments portfolio

The Directors’ valuation increased 2% to £1,086 million (2019: £1,068 million), primarily as a result of the unwind of discount in the year. The number of projects in the portfolio decreased to 67 (2019: 69).

The Group invested £46 million (2019: £64 million) in new and existing projects. The two new assets were both multifamily housing projects in the US: a 260-unit site at Chenal Point in Little Rock, Arkansas; and a 135-unit site named Moretti at Vulcan Park in Birmingham, Alabama. Material investment in existing projects included student accommodation projects at Sussex University in the UK and the University of Dallas, Texas.

Four projects that were all previously included at nil value in the Directors’ valuation have now been removed from the project count. Two of these projects have been at preferred bidder stage for several years without progressing further and are no longer expected to reach financial close. The other two projects are no longer expected to generate a return and have accordingly been removed.

Cash yield from distributions amounted to £72 million (2019: £65 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. Unwind of discount at £83 million (2019: £87 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. Negative foreign exchange movements were consistent with prior year at £19 million (2019: £19 million) whilst operational performance movements resulted in a £20 million decrease (2019: £86 million decrease).

The methodology used for the Directors’ valuation is unchanged, producing a valuation that reflects market value and which 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 and which also factor in secondary market assumptions. These cash flows are then discounted using different discount rates based on the risk and maturity of individual projects and reflecting 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 10.5% depending on project risk and maturity. The implied weighted average discount rate for the UK portfolio is 8.0% (2019: 8.3%). Discount rates applied to the North American portfolio range between 7.5% and 10.6%. The implied weighted average discount rate is 8.4% (2019: 8.3%).

Consistent with other infrastructure funds, Balfour Beatty’s 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 £51 million. A 1% change in the discount rate would change the value of the North American portfolio by approximately £72 million.

Movement in value 2019 to 2020

£m

2019

Equity invested

Distributions received

Sales proceeds

Unwind of discount

Operational performance

 

Forex movements

2020

 

UK

514

24

(33)

38

(29)

514

North America

554

22

(39)

45

9

(19)

572

Total

1,1068

46

(72)

83

(20)

(19)

1,068

Portfolio valuation December 2020
Value by sector

Sector

2020

No. projects

2019

No. projects

2020

£m

2019  

£m

Roads

13

13

188

206

Healthcare

3

3

114

112

Student accommodation 4 4 88 59
OFTOs 3 3 44 53
Waste and biomass 2 4 51 60
Other 4 4 29 24
UK total 29 31 514 514
US military housing 21 21 446

453

Healthcare and other PPP 2 2 21 17
Student accommodation 3 5 52 40
Residential housing 12 10 53 44

North America total

38

38

572

554

Total

67

69

1,068

1,068

Value by phase

Phase

2020

No. projects

2019

No. projects

2020

£m

2019 

£m

Operations

65

62

1,037

954

Construction

2

5

49

114

Preferred bidder 0 2

Total

67

69

1,068

1,068

Value by income type ​

Income type 

2020

No. projects

2019

No. projects

2020

£m

2019  

£m

Availability based 

22

22

371

389

Demand - operationally proven (2+ years)

39

38

519

517

Demand - early stage (less than 2 years) 6 9 196 162

Total

67

69

1,086

1,068