Winning in growth cities

By David Hutchings

Against a backdrop of volatile sentiment and activity in the global property market, major cities have continued to buck the trend by seeing better demand and more stable pricing.

The top 25 cities increased their market share from 53 percent to 56 percent in the year to June, lifting investment volumes, excluding development sites, by 5.9 percent versus a 0.8 percent increase in the market as a whole.

New York was the largest global investment market for the second year running, witnessing volumes rise 18.9 percent to $34.7 billion, 18 percent above its nearest rival, London, which saw 3.8 percent growth.

London, however, is the biggest global office and hotel investment market and the largest for cross-border investors, with a massive 92 percent lead over the second placed city, Paris. New York remains the most prominent multi-family investment market while Los Angeles was top for industrial, Shanghai for development sites and Hong Kong for retail.

Global flows of cross border capital reached $150 billion in the 12 months to the second quarter of 2012, a rise of 4.3 percent on the same period in 2011. London topped the table for the overseas investors for the second year at $19.6 billion, with Paris some way behind and New York in third spot. Tokyo and Hong Kong are the top two Asia Pacific cities slotting for foreign investment, in at fourth and fifth respectively.

Drivers of success

Power lies increasingly with the city, arguably more than the nation state in many instances. However, the hierarchy of cities faces forces which, on one hand, are maintaining the status quo and encouraging agglomeration into a handful of mega cities but, on the other, are ripping power from the established elite and spreading it to new urban centers.

Growth factors are in fact polarized between those demand-side factors favoring convergence and a self-perpetuating focus on the biggest and the best _ such as the clustering of industries and human capital as well the agglomeration benefits that can follow _ and other forces spreading power between a broader group of cities.

This latter force is largely facilitated by supply-side indicators such as technology and urbanization as well as “scale sensitive” issues such as sustainability, security, and changing living and working patterns and the inefficiency of crowded systems.

What is more, while some drivers are persistent _ such as urbanization and growing middle class _ others are changing, such as technology and resource use. The exact importance of each ingredient of success is never completely clear, partly because they are inter-related. Scale is crucial in both creating a market and drawing in resources, but size also makes innovation possible, for example by supporting the cost of developing a high speed rail network.

Although physical and intellectual capitals are also key, softer issues such as culture and history have a growing impact not just on image and quality of life but also on attracting and retaining intellectual resources.

Regional activity

Americas: When looking at this year versus last, it feel like deja vu all over again, as the continued economic and geopolitical uncertainties have resulted in investors behavior biased to the safety of core properties in the very prime markets. As confidence is restored and recovery is felt, even at modest levels, for those not faint of heart, opportunities will abound for those prepared to prudently move of the risk spectrum, both as to acquisitions of quality assets in emerging or secondary cities, as well as to the recapitalizations of undercapitalized prime assets.

EMEA (Europe, Middle East and Africa): Nervousness amongst investors caused by the sovereign debt crisis has focused most activity on the largest and most liquid markets and London has been the standout beneficiary from this. Going forward, however, it is clear that the major German cities will prove particularly attractive both in terms of their defensive qualities and the relative strength of their occupational markets. Although a complex market, Berlin will continue to increase its share of the investment market.

Asia Pacific: The Asia Pacific markets continue to attract significant volumes of global capital and again this year we see a significant concentration of major cities from Asia in the top 25. With lingering concerns over the sovereign debt crisis in other regions we are witnessing higher allocations both to real estate and to the Asia Pacific region in all sectors.

Seoul ranked as the 19th place in the list of world’s total investment volume with $6 billion where has been more active as a target for fashion brands and with more room to grow as free trade agreements attract producers.

Moving toward 2013 these higher allocations will deepen capital pools in core cities but also strengthen volumes seeking opportunities in growth cities. In particular watch the South East Asian major market cities as investors follow the increasing trend of occupiers favoring these markets.