Water Investment Strategy

Global Water Market

Global Water Prices have not reflected long term economic value of water. With population increases and increasing industrialisation demand for clean water is growing exponentially. In addition to scarcity issues contamination and pollution are adding to the rising value and price of water. Additionally as investors consider the impact of climate change and the need to ensure food security water as the central plank in all these arguments is increasingly being considered as an investable commodity.

There are a number of transfer markets for water with Australia and the United States of America having the most mature, sophisticated, transparent and therefore investable water markets.

Australian Water Market

Australia’s major water resource is the Murray Darling Basin (“MDB”).
The Darling is the longest river in Australia, measuring 2,740 km from its source. The Darling River joins the Murray River at Wentworth in South West NSW.

The Murray is 2,530 km long from its source in the Australian Alps to its mouth on Encounter Bay in South Australia. The Murrumbidgee is 1,545 km long. The Darling, Murray and Murrumbidgee are among the world's longest rivers.

From the source of the Darling to the draining of the Murray into the sea south of Adelaide the system has a length of 3,750 km.

In addition to the Murray, Darling and Murrumbidgee rivers there are an additional 23 rivers in the conjoined system with hundreds of additional tributaries.

The MDB has been securitised into a system of entitlements that provide the owners of the entitlements with an in perpetuity right to divert and use water. The MDB accounts for 14 500 gigalitres* (GL) of the more than 18 500 GL of water entitlements in Australia. The market has a capital value in excess of $20bn.

There has been an increasing demand for water from the MDB. This has been fuelled by population growth, increasing intensity of agricultural, environmental and urban and commercial use demands. As a result of changes to long term rainfall patterns system inflows have been reduced. All of these conditions have created a system where the MDB is overallocated and there is a chronic supply/demand imbalance. This effect of this is being felt in higher permanent and temporary water prices. This situation is expected to persist into the future.

Australian Water Entitlements
There is a chronic supply/demand imbalance for Australian water which will result in higher water prices. Owning Australian Water Entitlements provides investors with direct exposure to water prices.

Australian Water Entitlements have a traceable history of long term capital price appreciation. The owner of the entitlement receives a rent by selling his annual allocation. This provides an average annual cash yield of 7%. In addition to the traditional users of water from the MDB the system is now linked to Melbourne and Adelaide and prices will be further underpinned by the urban/rural interchange of water. With a fixed supply and growing demand the value of water entitlements should rise.

Other factors that investors should consider are that with growing demand from Asia and beyond for our agricultural products demand for water will be driven by onshore and offshore concerns relating to food security. Owning water rights provides a strong general and specific food inflation hedge.

As the Entitlements system and demand for water moves from being supply to demand driven the capital structure of the industry is changing. Third party capital can now play a vital role of providing a permanent water supply to users on an as needs basis through a system of short, medium and long term lease mechanisms whereby the owner of the water right retains exposure to the rising price of water whilst generating a significant income yield.

The Australian Water Entitlements market is transparent and backed by the rule of law. Owners’ rights are defensible and protected. Water Entitlements are registered by Government authorities and are mortageable.

The Causeway Water Fund

The Causeway Water Fund’s investment philosophy is to achieve superior risk adjusted returns from proprietary investment in Australian Water Entitlements with a focus on generating competitive annual income and medium to long term capital appreciation.

The Fund will purchase a diversified portfolio of permanent water entitlements. This diversification will be by State, district, river system, use and users (credit risk), quality of entitlement and allocation history. The will insure that investors are insulated from commodity price, weather event and allocation risk and that the risk is purely related to the water price.

The Fund will lease the majority of its Water Entitlements to a diversified customer base to generate a high quality and sustainable flow of income. The Fund will retain a smaller pool of unencumbered permanent water rights to take advantage of market opportunities in the annual leasing market or arbitrage opportunities in trading permanent water entitlements.

This is an actively managed strategy that calls on the experience of the Causeway team that encompasses specific and general water market knowledge and relationships, credit and structuring skills and a robust governance and compliance culture.

To learn more about Water and the Causeway Water Fund please contact Richard Lourey at richard.lourey@causewayam.com.au or on +613 9655 2301.