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Picking winning cities for real estate investment

Alice Breheny
— 1 minute read

Too much economic and real estate advice is given at country level, meaning interesting locations can get missed due to perceived national level risk, and vice versa, writes TH Real Estate’s Alice Breheny. 

Complex market dynamics and evolving investor requirements have led investors to increasingly look at longer term drivers of real estate performance. 

Five megatrends — urbanisation, rising middle classes, ageing population, technology and the shift of economic power from the West — are having a major impact on the built environment, and will have significant implications for demand on real estate in the future. 

As we have explored these megatrends, it has become apparent that their impact will be much more notable, for better or worse, at the city level, as opposed to nationally.

Thinking in terms of cities rather than countries is consistent with the way occupiers think about their requirements and representation. It means that compelling opportunities do not get missed due to negative country-level perception, and vice versa. 

Identifying cities that are defensive in light of these megatrends, for core strategies at least, is key to constructing a sustainable portfolio.

Winning cities do share some same attributes. 

Real estate is about the interaction of people and places. Winning cities will be those that can attract and retain people, grow their population and improve their wealth. Successful cities will be productive, generating better-than-average output or retail sales per capita. 

From a global perspective, although the cities poised for the most growth in each region are impacted by varying dynamics, a central theme emerges for each:

  • In the US, cities that reflect increasing innovation and job growth potential are likely to thrive;
  • In Europe, cultural centers that attract both talent and tourism to keep economies humming provide investment opportunities; and
  • In Asia, large cities that are likely to continue to grow, increasing their dominance as global economic epicenters, will benefit.

However, every city has a unique personality 

What drives a city to success is not necessarily clear. In some cases it is about scale and the depth of employment opportunities, where new urbanites are prepared to sacrifice space and air quality for the associated financial gain.

In other cities, it is the quality of life or climate that attracts and retains people – some cities have a unique ability to attract talent owing to their rich history and heritage.

So, the strategy for investing in each of them also need to be unique. 

The attraction of some cities for investors lies in their burgeoning middle classes and therefore focusing on the retail sector will help capitalise on that growth.

In ‘rollercoaster capitals’ or ‘cyclical cities’ (such as Boston, London and Perth), investors need to be agile enough to take advantage of fluctuations in pricing and focus on highly-liquid offices.

‘Culture capitals’ (such as Amsterdam and Barcelona) attract different people compared to ‘technology trailblazers’ (such as Austin, Hangzhou and Auckland), and so need a different approach to investment.

Investing in tomorrow’s world cities 

We have identified a significant number of cities, globally, that may not be obvious targets for core investors today, but whose long-term demand story cannot be ignored. 

The largest cities will offer the greatest breadth of opportunities and have liquidity in their favour, but it is the demographic and genetic make-up of a city that makes it great.

We favour young, resilient, growing cities that have the infrastructure and political framework in place to successfully absorb all the people that want to live there. 

Emerging cities, particularly in Asia, are often top targets for occupiers who are looking to take advantage of their rapidly-growing middle class or cheap, highly-educated labour, and naturally opportunities will exist for investors and developers to satisfy their real estate requirement. 

Asian cities typically dwarf their European peers, and few US metros can compete in terms of population. Asia will see its share of global output and retail sales increase markedly over the next couple of decades. 

  • Beijing is expected to overtake San Francisco as soon as 2020, in terms of total financial and business services output, while Shanghai is predicted to overtake Boston in 2026;
  • Asia already accounts for six of the top 10 retail markets globally; and
  • By 2030, China alone will make up 11 of the top 20 cities; others include Jakarta, Buenos Aires and Istanbul.

So, while institutional investment markets in Asia are comparatively small, they should start to close the gap on the consumer and economic opportunities that exist.

Growth cities tend to offer greater diversification benefits to real estate investors, taking them into new geographies, and being underpinned by structural rather than cyclical drivers of growth.

They should also enhance returns through better-than-average growth, but also through a structural re-pricing as they become more liquid and transparent.

Alice Breheny is the global head of research at TH Real Estate

 

Picking winning cities for real estate investment
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