At AMP Capital’s recent equity forum, members of our Global Equity team rolled up their sleeves to debate, in a traditional ‘for’ and ‘against’ format, whether cities were in peril of becoming the next stranded asset. Colleagues and clients were invited to cast their vote for the most compelling argument to determine the winning side. We summarise the key points made by each speaker and note that while both sides contributed lively, pragmatic and thought-provoking insights, there could only be one winner. The result of the audience vote follows the summary.
There is a very long-term trend of people moving to cities, ever since the first city was founded almost 10,000 years ago in Mesopotamia. Today, more than half of the population of the world lives in cities and there are around 1,400 cities with populations exceeding 500,000 people. While urbanisation is a global trend, urbanisation rates vary across regions. For example, 80% of people in North America live in cities while in Africa, only 40% live in cities. Key considerations to this debate are demographic changes and technological advancements.
Arguments for the affirmative
Cities do die: History has shown us that once thriving cities can die owing to calamity or because they no longer serve a need. Historic examples of dead cities include Babylon, Pompeii, Easter Island, Carthage, Macchu Picchu and Taxkorgani. Modern examples of cities that died after they stopped supporting a need include Buffalo (from the 8th largest city in the United States to a population of less than 250,000 people today) and Detroit (from the 5th largest in the United States in 1950 to a population of less than one million today) amongst others.
Why cities grow: Historically, cities have grown to meet the changing needs of the population. At first, this need was for agricultural storage, which sparked the need for defence, trade and finance. Then came the industrial revolution, and most recently, the e-revolution.
Cities are less relevant today: Changing economics has meant that the historic purposes for a city are less relevant today. For instance, traditional defence is defunct given the advent of strategic bombing and asymmetric warfare, trade is global, finance is global, manufacturing has relocated, unskilled labour is being replaced by automation while healthcare and education can be more easily distributed through technology.
The rise of the digital nomad: In 2035, the global population is forecast to be 9 billion and 6 billion of those people will be working. 50% of those working will be freelancers. That’s 3 billion freelancers, and 1 in 3 of those are expected to be a fully remote worker or what’s known as a digital nomad. This could be an Indian IT developer in Jaipur or could be a hipster working in a café in Bali. By 2035, most of the one billion digital nomads will originate from emerging market economies.
Innovation in emerging market economies: As these economies develop, there may be less of a need for high-density city living. For instance, Africa overall has the fastest uptake of mobile phones in the world and is leading in key-emerging communications, mobile banking, robotic drones, renewable energy technologies and telemedicine to improve healthcare. Telehealth is the delivery of health-related services and information via chat bots and phone and is already the main source of advice and treatment for minor health issues in Africa. Because of these technologies Africa will not be building the same density of infrastructure as China. It doesn’t have the capacity or the need.
Arguments for the negative
Population pressures: The world’s population is growing and cities are expected to experience an increase in population by 380 million people during the next five years1. The planet will need to build the equivalent of five cities the size of Los Angeles every year between now and 2020 to accommodate these population pressures. Over the longer term, the trend towards city living is expected to continue. According to the World Resources Institute, approximately 54% of the world’s population lives in cities today and this is projected to increase to 70% in 2050.
Cities are the economic engines of countries: There are countless examples of cities outperforming their national economy on a GDP per capita basis: Madrid outperforms by Spain 30%, New York outperforms the United States by 36%, London outperforms the UK by 72% and Paris outperforms France by 67%2. Staggeringly, 80% of global GDP is generated in cities.
Quality of life: There are numerous pull and push factors driving the population growth of cities but these can all be associated with the desire of people to improve the quality of their life. The world’s best universities are located in cities and, typically, so are the best hospitals. Similarly, people favour cities for the culture, lifestyle and amenities they can readily access. Even in Australia, a country that is already heavily urbanised, we are seeing continued increases in urbanisation.
The rise of the millennial: Demographic shifts will see cities continue to prosper as millenials strongly favour urban areas, with 77% wanting to live in the urban core. Importantly, by 2020, 40% of the working population will be millennials. Stranded assets might make sense for fossil fuels but not for cities.
Cities are still growing: Claims that technology and demographics will kill cities flies in the face of 35,000 years of urbanisation and every reputable forecast. Mega cities of the world such as Jakarta, Mumbai, Shenzhen and Lagos are continuing to grow. Lagos is forecast to have a population of more than 30 million by 2050. Urbanisation in Australia will be less explosive but population growth will take place in the major cities.
There are four global mega trends that will accelerate urbanisation and allow cities to function more efficiently:
- Aging populations – Medical treatments are likely to be clustered in cities rather than spread across a country. Cities that offer the best holistic health care will be the cities that attract population.
- Asian ascendancy - Asia will continue to be an increasingly important player in the world economy and Asian cities will continue to get bigger. For example, Greater Beijing is expected to grow to 130 million people by 2030.
- Energy revolution and climate change - The revolution in solar and batteries encourages clustering of customers. The denser the city, the smaller the carbon footprint.
- Technology will drive productivity lower. Increasingly sophisticated technology and automation will allow us to move more easily around our increasingly congested cities and connect remotely more easily. This will increase productivity of infrastructure through increasing road and public transport utilisation. However, technology, robotics and automation will also continue to reduce productivity and accelerate deflation, making economic growth more difficult.
Perhaps reflecting the inherent bias of the audience, city slickers, the audience supported the arguments against cities becoming the next stranded asset.
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1 Knight Frank, Global Cities 2016 Report 2 Knight Frank, Global Cities 2015 Report
David Allen, Global Head of Equities
Matt Hoult, Co-Head Global Listed Real Estate
Andy Gardener, Portfolio Manager, Global Equities
James Maydew, Co-Head Global Listed Real Estate
Peter Harris, Senior analyst, Global Equities
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