International Section

The Wealth Of Cities

Never in history has the pace of urbanization been so rapid: 60 to 70 million people are being added to the urban population each year for the next few decades. This “prime time” of urban expansion creates a wealth of new opportunities for institutional investors, within both emerging and developed markets, across a range of public and private vehicles.

In this insightful discussion, Prudential Investment Management's David Hunt and Taimur Hyat examine the investable implications of urban expansion, focusing on long-term investment opportunities within four key themes: infrastructure, real estate, consumer goods/services for the growing middle class, and the agricultural supply chain. For a detailed read, download the white paper here.

White Paper

The wealth of cities and the opportunities for institutional investors

The growth of cities over the next 15 years will require $50 trillion in global infrastructure investment through 2030. To help institutional investors benefit from this “prime time” of urbanization, we identified a range of specific investment ideas across the major investable themes of this opportune mega-trend.

The prime time of urbanization is upon us

The rise of great new cities first began during the Industrial Revolution, but it took over two hundred years for the number of urban dwellers to surpass their rural counterparts. Today we’ve reached a tipping point:

60-70 million people will be added to urban populations every year for the next 30 years.

The number and size of cities is rising sharply.

The unprecedented scale of urban migration, combined with organic growth within cities, means that by 2030, there will be 660 cities worldwide with a population of at least 1 million.

Asia is driving the urbanization boom.

While North America, Europe, and Latin America began to urbanize decades ago, Africa and, particularly, Asia are driving the ongoing urbanization boom. By 2025, more than half the world’s urban population (about 2.5 billion people) will live in Asian cities.

Urban residents as a percentage of total population
Urban Residents as a Percentage of Total Population

Source: UN – “Urban Millennium,” The Economist (for 1800); UN Department of Economic and Social Affairs – Population Division (for 1950-2050); Fuller, B./ Romer, P., “Urbanization as Opportunity” (for 2100)

Recognizing the cycle of urban wealth development

City formation is not just the accidental by-product of industrial development; it is an integral driver of continued productivity gains and economic growth.

The Virtuous Growth Cycle of Cities Creates Wealth

Source: Glaeser, E., Triumph of the City; Moretti, E., The New Geography of Jobs; The Economist; Interview with Dr. Paul Romer

  • The cycle begins.

    Deep labor markets, encompassing many buyers and sellers, provide a foundation for skilled workers and the specialized companies that serve them.

  • Talent gets more talented.

    With a richer pool of employers, employees move up the career ladder more rapidly and competition drives innovation and skill.

  • Wages go up.

    Companies can now source more specialized talent, and, in turn, skilled individuals can earn the full return on their human capital.

  • So does the tax base.

    More workers and more companies generate more taxes and demand better amenities.

  • Cities can improve themselves.

    With a higher tax base, local governments can invest in infrastructure and public services.

  • And attract more companies.

    The system becomes self-sustaining as better cities attract more companies, who attract better workers, who demand better cities.

Investable ideas for capitalizing on urban expansion

Many potential opportunities resulting from the urbanization boom are hard for institutional investors to access due to the insufficient market mechanisms surrounding them.

Prudential Investment Management has identified 10 specific investment ideas in both emerging and developed markets that could be accessible across a range of public and private vehicles. Collectively, they offer a spectrum of attractive avenues for benefiting from the “prime time” of urbanization across four major themes.

Icon for Urban Infrastructure Urban Infrastructure

Wired Cities | Mega-city Connectivity | Anti-Pollution | Replacing and Improving Old Assets

Global need for infrastructure estimated at over $50 trillion through 2030, much of it in urban areas

Icon for Real Estate Real Estate

Urban Revival | Economical Housing Options | Retail Outlets and Logistics Support

Global stock of institutional-grade real estate to expand from $30 trillion in 2012 to $70 trillion in 2030

Icon for Consumer Goods and Services Consumer Goods & Services

New Consumer Class | Global Luxury

Annual global demand in personal consumption expected to be over $40 trillion by 2020

Icon for Agriculture Supply Chain Agriculture Supply Chain

Industrialized Agriculture

Food demand projected to grow 50-70% by 2050; rural population expected to decline by over one billion by the end of the century

Icon for Urban Infrastructure Urban Infrastructure

Emerging markets need many basic services as they modernize—starting with water and sewerage, followed by electricity and transportation networks. By contrast, in developed markets the investment opportunity is largely about replacing and improving existing aging assets.

Within the broader urban infrastructure theme, we believe four investment opportunities are particularly attractive.

  • Wired Cities

    By 2020, the number of global Internet users is projected to double to four billion, and the number of interconnected devices will reach 26 billion.

    In emerging markets, the investment opportunity arises as cities get hooked into the digital grid, and new infrastructure will be required to support them. In developed markets, it is largely about making access to the Internet faster, more ubiquitous, and cheaper.

  • Mega-city Connectivity

    Major world regions will employ a “hub and spoke” model of connectivity as new cities develop. The “hubs” will be the gateway cities of five million-plus people, of which there will be more than 100 worldwide by 2030.

    To this end, emerging markets such as Indonesia, China, and India are now investing heavily to improve their airports, roads, and high-speed rail to link their major cities together.

  • Anti-Pollution

    As cities grow, controlling pollution escalates from luxury to necessity. Air quality, water treatment, and waste reduction innovations and efforts are becoming the focus of both developing and developed nations.

    Renewable energy, including natural gas and wind power, will also likely present a major infrastructure opportunity for institutional investors in the region.

  • Replacing & Improving Old Assets

    Both developed-market and mature emerging-market cities need to replace degrading infrastructure including transportation, water, energy grid, and public facilities.

    Investable opportunities include the renovation, reconstruction, and expansion of utilities, bridges, toll roads, parking areas, rapid-transit bus and metro-rail lines, and hospitals.

Global Infrastructure Needs

Chart Representing Urban Infrastructure

Real Estate

Real estate investment opportunities will differ based on where a city currently sits in its development trajectory.

In general, the early-stage emerging-market story is largely about economical housing and basic levels of consumer spending, as most city-dwellers are just now amassing enough money to spend on discretionary goods and services. In more developed markets, the real estate opportunity is about the lifestyle trend of living in the urban core.

Across both of these markets, we view three investment opportunities as especially appealing.

  • Urban Revival

    Many developed-market cities in the U.S. and U.K. are now undergoing significant revivals, with people and companies alike increasingly attracted to the urban lifestyle.

    This urban rebirth has created a need for re-purposing downtown real estate into mixed-use development, including residences and commercial space. These can be highly attractive, lower risk investments, with institutional investors being able to readily ascertain the rental income that will be generated.

  • Economical Housing Options

    Multi-family units and rental apartments are particularly needed in emerging-market cities with large middle-income populations, but also in developed markets where this type of housing allows people to live where they work and helps to propel a city along its development trajectory.

    Efficient and durable housing is crucial in supporting a new and fast-growing urban population, and there is a developing trend to aggregate larger amounts of these affordable units together for investment.

  • Retail Outlets & Logistics Support

    Cities will require more shopping malls and retail outlets to cater to the one billion new urban middle-class consumers in emerging markets. Vehicles focused on direct investment opportunities can be geographically diversified, giving exposure to different cities while capitalizing on the overall retail boom.

    This is also a logistics opportunity driven by global e-commerce growth that is forecasted to reach $2.3 trillion by 2017, which will require more warehouses and logistics facilities to store and transport the purchase and sale of goods.

A city’s stage of development helps assess real estate investment opportunities

Chart Representing Real Estate

Icon for Consumer Goods and Services Consumer Goods & Services

Examining the wealth prospects of a city in its entirety can shed insights into the spending level a particular city offers its residents, from basic necessities to luxury items. Within the overall consumer goods and services theme, we believe two investment opportunities are particularly attractive.

  • New Consumer Class

    One billion emerging-market consumers will be joining the middle class by 2025, and as their purchasing power grows, these consumers will have similar needs as their counterparts in the developed world: travel options, durable goods, and consumables.

    All of these provide potentially attractive investment opportunities that can be accessed via public market investments in a diversified suite of consumer-oriented companies that are focused on emerging-market cities.

  • Global Luxury

    The global luxury market is growing at double the rate of the overall global economy and is forecast to reach $325 billion annually by 2015. Individuals living in high-GDP-growth emerging-market cities will increasingly aspire to live and consume like affluent consumers in developed markets.

Consumer Needs May Be Tied To The Wealth Prospects of a Particular City

Chart Representing Consumer Goods & Services

Source: World Bank – Global Consumption Database; McKinsey Global Institute

Icon for Agriculture Supply Chain Agriculture Supply Chain

Given the explosive growth of middle-class consumers around the world, the demand for food—particularly meat and dairy—will escalate sharply over the coming decades.

According to the United Nations Food and Agriculture Organization, the world will need to produce 70% more food by 2050. But urban expansion will potentially reduce the rural population by up to 200 million people over that same time frame and possibly by over one billion people by the end of this century.

The upshot: to achieve sufficient increases in food production, despite a potentially smaller rural workforce, the agricultural sector will need to modernize. Driven by this expected agricultural transformation, we believe one investment thesis is particularly attractive.

  • Industrialized Agriculture

    Because fewer people will be available to farm while food demand will continue to climb, we believe there will be significant investment opportunities in both global and Asian and African companies that focus on providing farming machinery as well as next-generation farming technology.

    Investment opportunities may also exist in large-scale land acquisitions, as well as expanded food supply corridors. The latter may also include direct or indirect investments in processing and storage facilities as well as transportation networks along these new corridors of international food demand.

Chart Representing Agriculture Supply Chain

When, where, and how to invest

While the evaluation of specific investments depends on the unique objectives of each investor, we believe the 10 investable ideas we’ve outlined present attractive opportunities across both emerging and developed markets.

  • Timing is Critical

    In addition to where these ideas may present themselves, there is an equally important time dimension of when an opportunity needs to be examined and evaluated: many of the ideas discussed could be most opportune at specific times in a city’s development cycle or trajectory.

A City's Development Stage, Where to Invest

  • Opportunities are Wide-Ranging.

    The investment ideas could be also accessible across a range of public and private vehicles and asset classes, demonstrating the broad impact of the urban expansion trend.

Investment Themes, Asset Classes

  1. 1 Applicable to Mega-city Connectivity and Anti-pollution

  2. 2 Applicable to Urban Revival and Retail Outlets and Logistics

  3. 3 Applicable to Economical Housing Options

 
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