Cities face major challenges and are competing for growth - Ad J. Buisman, Partner, Head of Real Estate, Ernst and Young

It’s all about cities. Investors in commercial real estate do not invest in countries but in cities. Cities though face major challenges in today’s economy. With falling GDP, austerity measures, difficult financing situations and investors requiring high returns for risk taking, many cities may find difficulties in reaching their investment objectives.

This may not be the case for cities that have true global scale and offer large liquid and mature markets to investors and also not to a limited number of other high value cities, but it certainly does count for many other cities. A significant number of this latter category must reinvent themselves to be able to compete with the large major and other high value cities and/ or to deal with other significant problems they face.

The fact is that many of these cities face significant office vacancies and require improvements to existing infrastructure. That can only be solved with transformation of existing stock, integrated urban planning and collaboration with private investors. European cities and regions are all anxious to fund ballooning deficits. Local and regional government borrowing was expected to reach a historical peak of nearly €1.3 trillion in 2011, according to credit rating agency Standard & Poor’s (S&P).

Regions also face higher borrowing costs and may have to fear for further credit downgrades. At the Basel conference, it appeared financing is a stumbling block for cities. To worsen things even more, the engines of city development, developers of commercial properties, also face funding difficulties and therefore have scaled down significantly. This immediately affects proceeds from land offerings.

The challenges ahead are multiple:

► Cities face the same problems as governments but at a lower level
► Cities must compete for funding and developers; this is a major shift in the center of power
► Cities must deal with demographic changes
► City branding is key to differentiate
► Competition is global
► Livability and sustainability at stake; can we still afford green cities?
► Cities must have excellent infrastructure, including state of the art transportation and quality business services to attract business, investors and talent
► Cities must perform economically well to create sound fundamentals for commercial property and to attract investors
► A unique offering required, especially for cities which cannot compete on scale

In conclusion, as stated in “Cities of tomorrow”, October 2011, cities have to adopt a holistic model of sustainable urban development. One could add that this also requires vision, innovation and an integrated approach whereby the public and private sector must truly collaborate.

Top image credit: Photobank gallery

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