Global cities - Superior real estate returns in the top cities
10 May 2016
Why are ‘global cities’ crucial to real estate investors?
Global cities are major centres of job creation; this is a critical ingredient for real estate investment.
Without employment growth there is unlikely to be any extra demand for the various types of real estate (offices, shops etc.).
When employment numbers increase, landlords have a better chance of charging their tenants a higher rent.
This will lead to a higher income return for investors and in time a higher capital value.
What is the pull of ‘global cities’?
Global cities also offer a wide range of amenities.
Abraham Maslow’s Hierarchy of Needs psychological theory suggests that once people achieve a certain level of prosperity they stop worrying about material possessions and become more focused on their own personal development, their experiences and relationships.
Consequently, they are attracted to big cities because there are more like-minded people with similar interests and more bars, restaurants, sporting venues, theatres and museums.
This may help to explain why young professionals in Amsterdam, Berlin, Hamburg, London and New York are increasingly choosing to live in inner city areas rather than in the suburbs.
Why are ‘global cities’ a hotbed for fast-growing industries?
Today, the fastest-growing sectors are knowledge-based industries such as IT, media and professional services and they tend to cluster in big cities.
Why this happens is a matter for debate, but big cities clearly have scale; they have more people, more world-class universities, more good schools and hence more ideas.
Big cities also tend to have a more cosmopolitan culture which attracts skilled migrants and encourages collaboration and they also have a healthy mix of large companies and start-ups which helps to disseminate expertise.
Moreover, success in one field can spill over into another.
For example, London’s role as a centre for international law is in part due to the large amount of work generated by investment banks and hedge funds and the city is now also emerging as a base for start-ups in the fin-tech sector.
These spill-over effects may explain why people in big cities tend to be more productive and hence have a higher per-capita income than inhabitants of smaller cities.
Benefitting from the rapidly urbanising world
We believe the ‘pull’ of global cities will increase, the world is rapidly urbanising:
- The proportion of the world’s population living in towns and cities is forecast to increase from just over half today to two thirds by 2050 (source United Nations).
- In absolute numbers, the world’s urban population is projected to grow by 60%, from 3.9 billion in 2014 to 6.3 billion by the middle of the century.
The statistics are staggering and the projected economic growth will be just as impressive.
A long-term approach gives investors the best chance of continued capital and income growth through economic cycles.
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