Why are cities important when it comes to investment?

The United Nations is predicting that by 2035, 70% of the population (9 billion people), will live in cities. Cities are critical in terms of knowledge transfer and this is where the “gig” economy, or the knowledge economy, is currently living. These cities are very different from the post-industrial and the post-manufacturing cities.

The Schroders Global Cities team ranks highly the cities that are thriving because of factors like transport and infrastructure. On the other side of the equation some cities are in terminal decline as their industries have been depleted by the automation in manufacturing.

Key factors in ranking cities’ investment potential

Five key real estate drivers are used to rank the investment potential of cities around the globe:

  • Population: The scale of a city’s population reflects the potential demand for goods and services. Businesses are attracted to this opportunity. The Global Cities Index measures the total population aged 15 and over as this cohort is more likely to earn and spend money. Scale can also create production efficiencies and therefore higher economic growth.
  • Retail sales: This factor represents goods sold to the public for household consumption and includes internet sales in a city where the primary business is retail. Retail sales contribute to economic growth and employment in a city.
  • Income: Median household income is an indicator of affluence and therefore ability to pay rent and acquire real estate. This demand measure is positively correlated to real estate rents in some sectors.
  • Gross Domestic Product: GDP represents the economic output of a city. It is measured as the sum of the final uses of goods and services in purchaser prices, less the value of imported goods and services. The more productive a city, the greater demand for real estate.
  • University ranking: High quality educational institutions promote innovation and generate jobs in a city. Skilled graduates entering the local workforce attract corporations and may launch their own businesses. The resulting wages and wealth generation fuel real estate demand.

Global cities leading the way

As you might expect, US and Chinese cities lead the way with Los Angeles currently topping the ranking. This is due to a combination of large scale and excellent economic growth which makes LA a compelling location to work and live.

The top ten in Schroders’ list comprises six US cities, Shanghai, Beijing, Hong Kong but only one European city. London ranks highly on a number of the key metrics. Its scale, GPD growth, the quality of universities, its cultural offering and broad-based economy, make it one of those key cities that, despite all the uncertainty over the impact of Brexit, is seen as a key place for future investment.

Schroders is the fund manager for a number of Friends Provident International’s unit linked funds. Please seek advice from a professional financial adviser when making investing choices.

Steve Weston - CEO FPI

Steve Weston – CEO FPI

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