March 7, 2012
JLL’s city investment compass.
Jones Lang LaSalle revealed to the world leaders gathered in Davos at the World Economic Forum the emerging global geography of city investment. In a highly insightful report which covers both the imperatives for how established cities can continue to be successful in urban investment attraction, and the dynamic growth of cities in fast emerging markets, the authors at JLL reveal both the dynamics and the future map of growth. These are summarised in the JLL report as five major drivers of city investment growth as outlined below.
Firstly, JLL note that 50% percent of global commercial real estate investment is still concentrated in only 30 high-order cities. Despite the increasing choice of maturing cities, the geography of commercial real estate investment is still heavily concentrated in the world’s high-order cities (cities with large concentrations of internationally-focused, high-value business activities). Thirty cities accounted for half of all global direct commercial real estate investment in 2010-2011. The top five cities alone – London, Tokyo, New York, Hong Kong and Paris – were responsible for nearly one-quarter of investment volumes. While a few emerging markets, such as Shanghai, Beijing, Moscow and Sao Paulo, have joined the top ranks, the ‘top 30’ has remained relatively consistent over recent years.
Competition to get into the top 30 is becoming very intense. JLL’s insights reflect two key facts: firstly the ‘flight to quality’ has increased the concentration in the established world cities. Second, the need for scale, and the drive not to miss out on significant opportunities, is driving investors to seek opportunities in the larger emerging world cities in the faster growing economies, rather than looking for smaller cities in established markets. There are big implications here for what both emerging world cities need to do to be seen as core or safe, and what smaller established cities need to do to be seen as interesting for investment. We will cover these issues in future blog posts.
But, JLL also observes, that this will be the ‘decade of change’ as investors widen their horizons across a much broader range of 300+ cities, not only in new emerging markets but also in secondary and tertiary cities in mature economies. Deepening real estate transparency, faster economic growth rates and the improving quality of the real estate stock in emerging and middle-weight cities will act as compelling pull factors, they argue; so too will investors’ active pursuit of major corporate occupiers, who are extending deeper into new geographies. Conversely, the potential decline in the global economic weight of high-order cities – as the digital world erodes the need for physical clustering and their business cycles become increasingly synchronised – could act as a critical push factor and reduce the relative attraction of high-order cities for real estate investors over the longer term. By 2020, the ‘top 30’ is more likely to be the ‘top 50’ as cities such as Mexico City, Delhi and Istanbul join the top echelons of investible cities.
JLL insights here are very helpful in terms of understanding the short, medium, and long term dynamics of urban investment and I would draw the same conclusions. However there are radically different drivers at play here and how they interect is not yet clear. It must be the case that the dynamic growth of corporate presence needs will drive more real estate investment into the larger hub cities in fastest growing economies. However, this need not be a zero sum with investment in other established centres. Much depends on overall urban growth and corporate occupier strategy. At the same time, the impact of the increase in pervasiveness of digital communications is hard to predict. It may be that this will impact more on ‘routinisable’ transactions, impacting more on secondary cities, and have the effect of increasing clustering in the larger cities. For the larger cities, much will depend on the business and sector mix and the extent to which real estate investors have appetite for mixed use or flexible assets.
In addition, JLL argue that U.S. cities will continue to hold considerable real estate weight. While it may be the ‘Asia Pacific Century’, the future strength and weight of U.S. cities should not be underestimated. The major U.S. cities will continue to act as substantial economies and real estate markets of global scale and significance. Eleven U.S. cities are expected to feature among the world’s top 30 largest cities (by GDP) by 2020. There are also notable pockets of dynamism in the U.S., with some of the world’s fastest growing mature cities over the next decade likely to be in the U.S. – such as Austin Texas and Raleigh-Durham –driven by technology, high-value activities and a remarkable capacity for innovation.
This JLL insight is both correct and noteworthy. The fundamentals of US attractiveness have not gone away: excellent business climate and culture, world class talent and immigration attraction, high productivity, and available investment capital remain powerful drivers for US success. In all the benchmarks of cities US cities continue to score very highly on measures of talent attractiveness, and US still has very high consumer spending on any measure. US Metros are also learning fast about how to reach and serve global markets and US sentiment is increasingly aware that globalisations mean more customers for US products and services, rather than just a drain on US jobs. As US cities adjust their strategies they will be more international and more ready to compete.
Equally, JLL observes, China’s cities offer massive potential as they are transformed by unprecedented city building. The BRIC economies will, unsurprisingly, account for a growing proportion of global real estate activity over the next decade, but what is noteworthy is the massive long-term potential of Chinese cities, which outweigh the opportunities in other emerging markets. The world’s 10 fastest growing large cities are all in China. Recognising the potential of Chinese cities, Jones Lang LaSalle has identified 50 secondary and tertiary cities – the ‘China50’ – that are being transformed by an unprecedented programme of city building and modernisation, which is creating significant real estate opportunities.
This is helpful and insightful work by JLL. China combines both scale, dynamism, and stability, and there is effective public investment and planning in more than 300 Chinese cities at this point. This creates a compelling pull for real estate investment and Chinese cities of all sizes are increasingly aware of how to shape and manage such investment.
Finally, the future success of European cities will be determined by innovation and reinvention. In Europe’s low-growth environment, the disparity between its city ‘winners’ and ‘losers’ is likely to be even more marked over the next decade. A capacity for innovation and reinvention will be a key differentiator for European cities. Besides Europe’s four mega cities – London, Paris, Moscow and Istanbul – which offer truly global scale, it will be Europe’s ‘high-value’ cities, such as Munich and Stockholm, with strong fundamentals and commitment to innovation, that will be best enabled to outperform in a low-growth environment.
This observation is timely for MIPIM attendees. Cities in Europe’s second tier with high value economies have to work hard in the current climate to ensure that they stay on the investment map. They have had great experience in attracting investment and are often very well managed cities, but they need to have a clear story about their own futures and they must find means to present opportunities of a scale needed to attract the larger capital suppliers. They must be highly proactive and take more risk to make the case to investors. This will require city leaders who are willing to take global investors seriously and organise to meet their needs, which are different from many of the investors of the past cycles.
The new global investment map that JLL have revealed is underpinned by competition, so there will be winners and losers. But the value of having an increasingly global market with greater integration through inter-continental investors and trade flows, is that the whole market can grow as more capital is potentially allocated both to real estate and to cities. There is not just competition but also room for many more successful cities than the past cycles required.