Water rights are the new investment theme and Australia is a world leader with its National Water Initiative, which values water based on what users will pay.
Tyndall AM head of real assets Richard Lourey said water would become a desirable asset for investors because "the Australian water market is unique in that it allows investors direct exposure to water price risk".
Fidelity Worldwide Investment director Tom Stevenson said "water, 'blue gold', is becoming an increasingly hot 'commodity' that is set to dominate the economic, social and investing landscape of the 21st century".
Tyndall's view was that water assets were long-term, income-generating, real assets, and the returns had low correlations to traditional asset classes, Lourey said.
The costs of providing water are outgrowing public purses, particularly as governments globally pursue balanced or surplus budgets. As private capital fills the funding void, strong protections against public interference are being sought and granted.
Both state and federal governments in Australia were united in their view that when water was used for commercial gain (agricultural or industrial), the allocation mechanism "for this scarce and finite resource should be price and price alone", Lourey said.
Stevenson said while people might think water was "a human right rather than a commercial good, such distinctions are becoming increasingly blurred".
"Water may well be a human right, but providing water is a business that costs money and merits a return on investment," he said.
That disconnect was part of the problem, he said. The high infrastructure costs have been heavily subsidised, leading to consumers' perceptions that water is cheap and abundant.
To reduce shortages and waste, a proper sense of value has to be created.
"Australia is ahead of the game, having faced acute water issues. Under the National Water Initiative, water rights can be transferred between parties, such as irrigators or infrastructure operators," Stevenson said.
"A sophisticated water trading system creates a value based on what a user is prepared to pay. It's a model that may become increasingly widespread."
Lourey said Australian water entitlements were freely traded intra-valley, inter-valley and interstate.
Victorian entitlements could be sold to South Australia to partly satisfy Adelaide's water needs, transferring from areas of low utility value to high value, further underwriting price rises.
Lourey also cited the Chinese-owned Shenhua Coal in the Hunter Valley, New South Wales, and its need to own water to service its mining operations.
Supply was static because, regardless of inflow, a finite amount of water could be diverted from the Murray-Darling Basin as defined by outstanding entitlements (18,500 gigalitres). No more entitlements would be issued because of concerns about the over-allocation or overuse of water.
Lourey's views were endorsed by Colonial First State Global Asset Management Europe infrastructure head Niall Mills, who said water had been "an increasingly attractive investment target for infrastructure funds for the last six or seven years in Europe".
More than half the large water companies in the United Kingdom are now owned by infrastructure funds. Those still listed on the FTSE have a number of large pension plans, insurance companies and asset managers as major shareholders.
"Investors identified that regulated utilities are a source of inflation protection, growth and yield all bundled into one. They are an ideal asset in a pension fund portfolio," Mills said.
However, he cautioned against the "misinformed view that all water companies offer the same attractiveness to investors - this is simply not the case".
"Companies have to perform better than their peers and that means having a top management team and an ownership structure where the investors know how to run these companies," he said.
