The Planet of Cities: The new map of urban investment opportunity
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03 July 2020
As you will know by now, July is WBEF’s Build Back Better month. We, like many others, are focused on how the planet can emerge stronger from this ordeal. For my part, I’d like to focus on the funding challenge.
I believe there are three critical, crosscutting considerations that will inform investment decisions as we begin our long journey of recovery. These are not new concerns for investors, but they have risen rapidly up the order of priorities over the course of this year. As with so many of these transitions to “new normal” conditions, Covid-19’s role has not been to reverse the direction of travel, but rather to thrust the accelerator.
The first is the increasing prominence of the ESG agenda.
On the E, 68% of all global carbon emissions come from the built environment, whether in the construction, operation, or decommissioning of built assets. Our familiarity with this fact does little to blunt its lacerating edge: the world cannot avert climate catastrophe without the built environment. But climate sound investment covers just one-third of the overall ESG proposition.
In pursuit of the S, responsible, ethical investors are also looking for the opportunity to “hold the pen” as we rewrite our social contract. Projects are increasingly expected to provide a rate of return for the public – in the form of social benefit and cohesion – as well as financial returns for investors. Places and spaces must be accessible, affordable and inclusive, particularly to marginalised groups. We can see in many cities across the world that this is a key clause in the new ‘license to operate’.
The G for governance is also on the rise. There is also a growing appetite for long-termism at leadership level. The merits of collaboration and bold consensus are championed loudly and frequently these days. They are the hallmarks of modern good governance. Investors seek clarity of intent: cities unable to demonstrate a coherent plan for their future are falling back in the queue for capital.
The second consideration might best be described as agility.
The attraction of adaptable and multi-functional real estate has been underscored by the crisis. Developments which allow for a range of activities in a variety of circumstances will be prioritised. Reconfigurability in response to events, allowing for maximum community value-add – in both good times and bad – is now a bankable attribute. Think of a large corporate space quickly convertible into an overflow medical facility during times of emergency. Such developments may well become the staples of our new blended cities.
“Think of a large corporate space quickly convertible into an overflow medical facility during times of emergency. Such developments may well become the staples of our new blended cities.”
The final consideration is linked to the last. Businesses that have fared best during the lockdown have tended to be digitally mature and unencumbered by rigid connection to a physical place. In demonstrating manoeuvrability during severely disrupted times, they have sketched a blueprint for corporate resilience from which others will seek to borrow. This blueprint essentially regards real estate as an on-demand service, rather than a fixed product or asset. This is not lost on investors, who will seek out real estate opportunities where the transition to this service model is substantially complete, or straightforwardly completable.
There will be three types of candidate location for investors guided by the above considerations.
The first will be existing dense and successful real estate markets, which can be adapted to respond to changing demand patterns. These will be relatively “safe bet” locations: inherently versatile and with a proven history of responsiveness to change. They are those cities and markets that find themselves locked into a virtuous circle: they’re successful because they are adaptable and adaptable because they are successful. They are perennially prosperous, agelessly attractive and, in truth, they are ready for this new chapter.
“The world’s leading cities are locked into a virtuous circle: they’re successful because they are adaptable and adaptable because they are successful.”
Next, there are the secondary locations. These may be less-loved neighbourhoods within Tier 1 cities, or they are Tier 2, 3 and 4 cities as a whole. What they will share is a new demand profile, resulting from Covid-19 adjusted behaviours. They will be the principal beneficiaries of the new distributed urbanisation, which I discussed in my column last month. Populated by those who have swapped the daily commute for weekly, fortnightly or monthly trips to the office, the campus, the central retail hub, of the decision making centre, they will promise a quality of life upgrade for the newly digitised metropolitans. Those that get it right will enjoy a period of densification and an attendant expansion of existing infrastructures and amenities. Significant investment will be necessary, meaning incentives for investors will be commensurately handsome.
The third opportunity will be so called “greenfield” cities under construction in those places where urbanisation is still in a full thrust. Here, we have the chance to take what we’ve learned from historical urbanisation and apply it to places where the future is still to be written. We can replicate what we know to be successful while avoiding any repetition of costly errors. In doing so, we can optimise for urban success. Examples include Masdar City in Abu Dhabi, Songdo in South Korea, and the newly designed NEOM, the 26,500 square-km city that will spill across the borders of Saudi Arabia, Jordan and Egypt. These places, which might previously have been interesting, look increasingly propitious if they can get the mix right. . Increased mobility of both people and employment opportunities has served to remove one of the key obstacles to the realisation of their ambitions.
When emerging investment considerations overlay the new distributed form of urbanisation that will define the second half of the urban century, a clear picture forms. It is that of a new opportunity map for urban investors. Currently, the picture is sketched in outline only. Over the coming cycle, smart money will add the colour.
