Call of the city - how investors can profit from urbanisation
Europe’s renewed urbanisation and accompanying infrastructure upgrades provide interesting opportunities for real estate investors.
When we think about urbanisation, we often conjure images of newly constructed skyscrapers in Asia or rapidly-growing cities in South America or Africa. Indeed, 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).
Most of this urbanisation is occurring in Africa and Asia, as people raise their living standards by moving from subsistence agriculture to paid employment in manufacturing and services in city locations.
The current process of renewed urbanisation in Europe is an exciting phenomenon which will impact us all and which sits at the heart of our investment philosophy to focus on “winning cities”.
While Europe’s cities have experienced phases of rapid urbanisation since the industrial revolution in the 18th & 19th centuries, the 70s and 80s saw many people leaving cities to escape congestion, pollution and crime. In recent years, this trend has reversed. The “spatial segregation” of "work, life and play" that prevailed in the 70s and 80s is reversing fast.
Increasing numbers are keen to live in central locations where work, life and play coexist. The UN is estimating that urbanisation in Europe will rise from c. 80% now to c. 87% by 2050. While 7% might not sound much, this represents another 35 million people; four additional cities the size of London.
This creates a huge amount of demand for real estate, and opportunities for investors to develop, reposition or refurbish assets - or adapt their current use - in exciting growth locations.
However, the population shift to cities also presents a challenge. Development land is scarce in central locations. Providing additional commercial space, homes, schools, hospitals and transport infrastructure is complex and costly. A number of cities in Europe are responding positively to this, providing real opportunities for real estate investors that are able to identify the winning locations.
New lease of life
A major part of urban restructuring has involved former industrial zones, docks and ship yards.
Whilst London Docklands might be one of the earliest examples of this, a number of Nordic cities have witnessed a similar process. Examples include Fjord City in Oslo, the Osterport/Nordhavn area in Copenhagen, the Kalasatama and Western Harbour in Helsinki, the Royal Sea Port in Stockholm and River City in Gothenburg.
The re-use of these areas to create new, mixed-use urban areas fulfils an important role for these cities, not least as some have amongst the fastest growing populations in Europe. Other examples further south include Hamburg’s HafenCity, Rotterdam’s Kop van Zuid, Amsterdam’s IJ-oevers or Marseille’s Euroméditerranée.
What all of these examples have in common are attractive waterfront locations in central locations. Each offers the potential to create areas with a good quality of life and a range of uses, including offices, retail, residential, leisure and public services.
These inner city areas are of particular importance as many governments have taken a tough stance on greenfield developments on the edge of cities. The European Environment Agency has seen cities expanding by 78% in area in the last 50 years, whereas the population has grown by only 33%. Modern policies are hence focused on increasing densities.
Gentrification is a key feature of such regeneration. Former working-class neighbourhoods are being transformed into more affluent areas. Berlin’s Kreuzberg, Prenzlauer Berg or Friedrichshain areas or London’s Bermondsey, Shoreditch or Bethnal Green are amongst the most prominent examples.
“A great city is not to be confounded with a populous one.”
Of course, urbanisation also puts pressure on infrastructure. As a result, Europe’s cities are seeing a wave of investment into transport infrastructure; both new and existing. Traffic congestion and pollution has a measurable, negative impact on economic growth and well-being. Sustainable and smart mobility is hence a key element of managing further growth.
The majority of infrastructure projects underway principally revolve around increasing mass public transport, predominantly by rail. The largest project by far is the “Grand Paris” project in Greater Paris / Ile-de-France. This will be developed in phases, and upon completion in 2030 will provide over 200km of new track and almost 70 new stations.
The key objective of the project is to connect the various neighbourhoods around Paris directly by rail, ease congestion and better connect central Paris and the suburbs. Real estate investors - including ourselves - are responding to this by investing around the new transport hubs and those areas with greatest growth potential.
No less ambitious is London’s Crossrail, which – in contrast to some other projects – is on track in terms of timing and budget. The new line will run from as far west as Reading to Shenfield in the east and will provide c. 10% additional capacity to public transport in London.
The new North-South metro line in Amsterdam will also have a transformational effect. The areas on the northern bank of the Ij-river at the moment depend very much on ferries and the road tunnels. It is little short of an engineering masterpiece considering the challenges of constructing anything underground in soil conditions such as those found in Amsterdam. The new line will connect the “Station Zuid” at the centre of Amsterdam’s “Zuidas” central business district via the city centre with the northern bank.
The western extension of the Helsinki metro is scheduled for autumn this year. This will provide improved access to the city centre for affluent western suburbs as well as improving access to Aalto University and the Keilaniemi neighbourhood; a popular office submarket with technology and engineering companies. The planners are not stopping there. Having successfully completed rail access to Vantaa airport in 2015 (the “Ring Line”), there are now plans for further light-rail services (“Jokeriline”) and extensions to the tram network as well as a potential rail loop under the city centre.
Elsewhere, cities like Brussels, Barcelona, Stockholm and Copenhagen are also extending their existing metro networks. In Luxembourg, a new tram will hopefully ease road congestion by commuters travelling from the suburbs and neighbouring Germany, France and Belgium by car.
Understanding the changes to Europe’s cities and the city landscape are fundamental for real estate investors. Cities are the centres of economic activity and innovation, and grow much faster then the wider economy. As such, we continue to focus our investment approach on cities, not countries.
Further urbanisation will increase the demand and competition for space. New transport infrastructure will see city geographies change and new submarkets emerge. There is a strong inverse correlation between transport costs and real estate values. This provides opportunity for investors that can anticipate the changes and commit to locations with the right ingredients for long-term growth.
This is the age of the city.
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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.