Can digital nomads cause cities to become less relevant?
Many SMSF members are familiar with the notion that investment risks are presented by fossil fuel companies having ‘stranded assets’ – assets that are written-off and never sold – in their balance sheets as economies transition to a lower carbon world. The question is if this risk also applies to cities?
Article by David Allen, Global Head of Equities, Matt Hoult, Co-Head Global Listed Real Estate and James Maydew, Co-Head Global Listed Real Estate at AMP Capital
Does the world still need cities when technological advancements and demographics are changing how we live?
Here we present a ‘for’ and ‘against’ case looking into whether cities could become the next stranded asset.
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.
Arguments for the affirmative
It’s important to note that in the case of fossil fuels, not every asset is at risk of being stranded. Similarly, we are not arguing every city will be stranded; some will be more at risk than others.
First, what is the definition of a city? Some argue that a minimum population of 500,000 people is required and, with that in mind, we make the following observations.
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 eighth largest city in the US to a population of less than 250,000 people today) and Detroit (from the fifth largest in the United States in 1950 to a population of less than one million today) among others.
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.
In short, some cities will no longer serve a need. But the question needs to be reframed away from whether cities meet the needs of the population to whether cities meet the wants of the population.
Demographic shifts in Australia during the past five years show that one in five baby boomers have made a sea change or tree change.
Arguments for the negative
From this perspective, cities are the future of the planet. 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, according to United nations projections.
People favour urban areas because we value connectivity. Connectivity is the glue; it’s how we optimise resources, ideas and people. Knowledge-intensive industries such as technology and finance thrive on the clustering of workers who share ideas and expertise. Silicon Valley and the large financial hubs of the world are examples of connectivity working to great effect.
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%. Staggeringly, 80% of global GDP is generated in cities.
There is 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.
In summary, we see the key goal for the planet in the 21st century is to achieve sustainable urbanisation for a population that will reach nine billion people. It’s not a nice to have, it’s a must have.
1. Knight Frank, Global Cities 2016 Report