CITY: A COMMERCIAL ENTITY
‘New world’ cities have been growing as a consequence of inward migration: from rural to urban areas. In the ‘old world’, cities seem to be experiencing inward migration because populations have returned to formerly depopulated urban areas. We see that, for some key commercial and residential users, the city itself has become a commercial entity, capable of adding more value to an enterprise than a single building or business park.
In global markets and industries where access to human capital is more important than access to monetary capital, the value of location is more about what a place is than where it is. Homogenous, out-of-town business parks do not attract the most creative, skilled and in-demand workers. If the success of an enterprise depends on creating intellectual property, then cities that allow for chance meetings, imaginative encounters and the exchange of ideas are likely to be more productive than segregated work environments.
The benefits of agglomeration in world cities are the mixing and gathering of people from around the globe. The best cities combine arts, entertainment and culture with a benign business environment and wide range of finance, consultancy, administrative, legal and other support structures. In the short term, competition for assets has suppressed yields, but economic and rental growth should still provide returns for investors. Longer-term growth depends on the sustainability of these cities and their capability to continue attracting a talented workforce.
Threats to a city’s magnetism might be characterised as anything that starts to drive people out. Factors could be environmental: poor living conditions, pollution or uninspiring surroundings; they could be cultural or economic: job loss, brain drain or over-zealous immigration policies. Real estate costs themselves may start discouraging people from settling and could enable cheaper cities to outcompete for talent.
PRIZES FOR SECOND PLACE
Quantitative easing since 2009 has led to yield compression and a consequent surge in real estate prices, resulting in competition for opportunities in conventional asset classes in key cities. Private and sovereign wealth, as well as new Asian funds, joined the melee and demand for readily investable assets has soared – against a background of recessionary development inactivity and consequently limited supply. Yields are back to record lows in many first-tier cities.
We anticipate the rise of second-tier, second sector and secondary property as buyers seek out less heavily-invested cities showing good economic growth where returns can be achieved. Higher yields are available in secondary markets, even in first-tier cities where some prime to secondary spreads have rarely been greater.
Even the more conventional institutions will have to venture outside their comfort zones simply to become fully invested, competing with private wealth, private companies and sovereign wealth. On this basis, we like asset classes that have been less fashionable lately: main street retail in good US centres, secondary industrial estates with longer-term potential in key expansion locations, other potential change-of-use buildings and land, mixed-use development on intense urban sites, student housing in Europe, distribution warehousing and resort developments in global regions where leisured middle classes are burgeoning.