Big city development subdued

Real estate investors have a natural affinity for big cities in Europe and North America.

Most big cities are forecast to see relatively strong economic and population growth over the next decade and they also have deep and relatively liquid investment markets.

In the past the main risk for investors has been that big cities have also seen a lot of speculative development.

However, that is less of a concern following the financial crisis because banks are far more reluctant to fund new projects.

Instead, we think the main risk at present is the low level of prime yields in many central business districts and we generally see greater value in mixed use areas which border the CBD, or in smaller cities with dynamic economies.

Finally, cross border investors need to think carefully about portfolio construction and not accidently double their bets by focusing on big cities which are all plugged into the same part of the global economy.

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 Nations1).

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.

Most of this urbanisation will be in Africa and Asia, as people raise their living standards by moving from subsistence agriculture to paid employment in manufacturing and services.

The UN estimates that by 2030 there will be 41 cities with a population exceeding 10 million, including seven mega-cities in Asia with a population of more than 25 million.

Four of those mega-cities will be in the Indian sub-continent – Delhi, Dhaka, Karachi and Mumbai. The other three will be Beijing, Shanghai and Tokyo.

Urbanisation at the cost or ruralisation?

While urbanisation in high income countries (e.g. Australia, Japan, North America, Western Europe) is much more advanced, it would be wrong to assume that the process is complete.

The UN expects North America’s urban population to grow by another 100 million between 2014 and 2050, or by 34% and Europe’s urban population to increase by 35 million (7%).

Overall, the percentage of people in high income countries living in towns and cities is expected to grow from 80% today, to 87% by 2050.

The flipside is that the rural population in high income countries is projected to fall not only in relative terms, but also in absolute terms by around 70 million, or -28%.

Rural de-population is likely to be particularly acute in countries like Germany (-40%) whose total population is expected to decline by around 10% over the next 35 years, following a sharp fall in the birth rates in the 1970s.

1 World Urbanisation Prospects, United Nations, 2014.