The return of banks into the European infrastructure market is denting insurers’ ability to enhance their investment returns by funding the roads, bridges and wind farms of tomorrow.

European politicians have encouraged insurers to channel more of their 10 trillion euros ($11 trillion) in assets into such projects to stoke growth without raising government debt.

Insurers, hunting for higher rewards in a low interest rate environment, scoured the continent for projects with predictable long-term investment returns that could match payouts promised to policyholders decades into the future.

But their search has been made harder by renewed competition from banks vying for a bigger slice of Europe’s infrastructure pie, that is pushing down rates of return.

“There is more interest than projects — we now see the banks coming back,” said Bart De Smet, chief executive of Belgian insurer Ageas, which has invested around 1.5 billion euros in European infrastructure.

Many banks pulled out of infrastructure lending after the financial crisis as they cleaned up their loan books and faced higher regulatory charges. Their withdrawal cleared the way for insurers to step in.

Ultra-low financing rates caused by quantitative easing in the euro zone and Japan have encouraged banks back.

Infrastructure debt spreads have tightened by 100 basis points over European money market rates in the past year, investors say. Debt in popular markets such as the Netherlands is offering yields of only around 100 basis points over European money market rates.

Infrastructure tends to make up only a few percent of insurers’ investment portfolios but is usually much higher-yielding than sovereign debt.

Japanese and German Role

Big insurers and reinsurers such as Allianz, Munich Re and Legal & General are keen investors in the sector, as a way to offset the negative impact on returns of low sovereign bond yields.

Thomas Bayerl, head of infrastructure debt at Munich Re’s investment arm MEAG, said the firm was “able to compete with banks but not willing to sacrifice relative value compared to other asset classes. For a certain risk, a certain margin has to be paid, otherwise we decline the project.”

Insurers are turning to alternatives such as real estate, the corporate credit market, despite its recent volatility, private equity and the use of derivatives to match their commitments to policyholders.

Japanese and German banks are seen as particularly enthusiastic about infrastructure, as their local government bond yields have turned negative. .

Japanese banks took three of the top five slots in a table of biggest global lenders in the year to end-September, data from Thomson Reuters publication Project Finance International (PFI) shows. Global bank lending for project finance for the 9-month period totaled $200 billion, a 7 percent increase on a year earlier.

Phillip Hall, co-managing director for EMEA structured finance at Japanese bank MUFG, said the bank has increased its focus on infrastructure.

“There are more players active in this market than we have seen for many, many years. All the European banks are back now, clearly helped by QE.”

Bonds VS Loans

The European Union has been pushing investment in infrastructure via a 315 billion euro financing plan launched last year by European Commission President Jean-Claude Juncker, and through plans for a capital markets union.

Banks tend to offer infrastructure loans, which are often shorter term than the bond markets preferred by insurers or other long-term investors such as pension and sovereign wealth funds.

Infrastructure bond issuance has been declining as bank lending has increased.

Bonds made up only 16.6 percent of the global project finance market in 2014, down from 20 percent in 2013, with bank lending making up the rest, according to PFI.

“A lot of companies expected the infrastructure debt market would develop faster than it has,” said Patrick Liedtke, head of BlackRock’s EMEA financial institutions group.

More than 30 European infrastructure debt deals each totaling over $500 million were concluded this year, but only a third were financed by institutional investors, with the rest financed by banks, PFI figures show.

Investors also say there is a lack of projects, with the “Juncker” plan yet to get properly off the ground.

The European Investment Bank, the EU’s development bank, has pre-financed 27 projects so far under the plan, totaling less than 4 billion euros.

Projects favored by governments also tend to involve taking on construction risk, building from the ground up, which is seen as too risky by many insurers but may be preferred by banks.

“We have selectively taken the construction risk, more often than not we don’t,” said David Dahan, who runs real estate and infrastructure fixed income at Aviva Investors.

“We operate at the low-risk end of the spectrum.” ($1 = 0.9203 euros) (Additional reporting by Stefano Berra.)