What Makes a Winning City?

Coverage of the 2016 Global Investment Conference

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1158290_new_york_cityThere is a strong case for investing in residential real estate in what Elizabeth Bell, investment manager at Aberdeen Asset Management, calls “global winning cities.”

Urbanization is a growing trend. In 2007, the world’s global urban population exceeded the world’s rural population for the first time ever, and by 2050, it’s expected that two-thirds of the world’s population will be living in urban areas. “As people move into these cities, they need places to live, to work, to shop and to store their goods,” she said.

During her presentation, Bell outlined a framework for identifying a winning city. The first part of the framework involves considering country-specific factors such as the legal and regulatory framework, political stability, economic volatility, investment freedom. Once countries pass the screen, Bell looks at which cities within those countries are winning
by analyzing factors, including size, infrastructure provision, quality of life, and population and economic growth.

She then looks specifically at implications for property investing in those cities. “Real estate is such a local business that it is really important to have a narrower subset for comparison of opportunities,” Bell said.

Winning cities cannot be defined based on population growth alone, explained Bell. There are other factors, such as whether a city has a large and highly educated labour force, a high quality of infrastructure and if there are real estate supply constraints.

Bell emphasized the importance of looking at supply constraints. This can be viewed in several ways, such as looking at topography or geography that could limit development, or by considering planning controls or regulations that prohibit development in certain areas.

“We believe cities that have supply constraints should see rents and prices increase over time, while the cities that don’t have these supply constraints may not see that same rental or price growth,” Bell said.

Within these winning cities, she highlighted that residential real estate historically has been the top performer among the major property types (i.e., office, retail and industrial) and believes it is expected to continue to outperform going forward. “Despite being the route of choice for a lot of international investors looking to access these cities for the first time, we found that the office market has been highly volatile, and it has actually underperformed residential over the long term,” she explained.

Residential real estate demand is also more predictable than that of commercial real estate. The two biggest drivers of demand on the residential side are population growth and household formation, both of which are relatively straightforward to forecast. In contrast, the demand for commercial real estate is driven by the performance and health of the economy — that is more difficult to forecast than demographic trends.

Investors can take numerous routes to access these opportunities, Bell suggested. This includes investing in for-rent or for-sale product, developing or acquiring assets, accessing these opportunities via equity or debt. For example, investors can acquire stabilized assets that are income-producing, such as a for-rent apartment building, or they can develop for-sale condo buildings and gain capital appreciation by selling off units. Overall, Bell is excited about the residential sector in global winning cities and believes there will be numerous investment opportunities in the space for several years to come.

Populations in “winning cities” are growing rapidly

(Source: United Nations Population Statistics, 2015)

winning-cities-chart

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