Sustainable Cities: A New Age For Property

While rapid urbanisation has created greater wealth and economic output, it also has exerted severe pressure on the environment and public health. According to the United Nations, currently 75% of the world’s carbon emissions and 50% of waste come from cities, with at least 40% of the former from properties. As more than half of the world’s human population already lives in urban areas, demand for sustainable housing and work spaces in cities has reached a crucial point. This is not only because of greenhouse gases and how city buildings and their occupiers deal with hotter weather and more frequent natural disasters, but also due to growing social inequality and a massive ageing population. House prices have climbed to levels too unaffordable  for most inner city dwellers and this as well has exacerbated economic segregation and political unrest.

Although momentum to make cities more sustainable has picked up pace, urbanisation and the use of fossil fuels have become the fastest moving trends in history: the United Nations estimates at least 68% of the global population will be living in cities by 2050. A Harvard Business School paper from 2011, “Sustainable Cities: Oxymoron or the Shape of the Future?” highlighted the double dilemma of trying to tackle one problem (climate change) by designing eco-friendly buildings and infrastructure to accommodate another one (masses of city dwellers). “Two trends are likely to define the 21st century: threats to the sustainability of the natural environment and dramatic increases in urbanization.”

Several European cities have come a long way in designing sustainable living and work areas that are less reliant on cars and more pedestrian and bicycle-friendly, green and inclusive. Cities like Copenhagen and Stockholm lead the way. The renowned Danish architect Jan Gehl has worked with city authorities across the globe to design “Cities for People”. He helped recreate Christchurch’s cityscape after the earthquake. He also worked on the redevelopment of Times Square in New York as well as making a large part of London’s Mayfair district more inviting and people-friendly. 

However, there still is not a standard definition of what constitutes a sustainable city and it is difficult to measure in the same way across cities given the complex issues they face. There are lots of different typologies of cities from mature, western cities to denser developing ones in emerging markets. Even cities within the same countries have varying climate and social issues with different disciplines and stakeholders. From urban-planning and transport, infrastructure and places where we “live, work and play”, there are many aspects to consider and so much unstandardised data on them to analyse. There have been hundreds of papers on what metrics to use; the European Commission produced one earlier this year, as part of its “A Sustainable Europe by 2030” initiative, on the myriad of new indicators and which ones to use for different projects.

Forecasting a brave new world

Whilst urban property space is being more and more driven by sustainability, current methodologies to analyse them are losing their relevance in the digital age. Macro-economic based models that look at historical data on GDP, retail sales or other economic indicators and how they are correlated to rental growth over time may not be as applicable in today’s complex world. The problem with using this type of regression analysis is that you need a reliable long time series of high quality data to forecast a specific dependent variable and the volatile, uncertain world that we live in now requires more than historical numbers to assess risk and make forecasts. How do you make portfolios more resilient to climate change effects; for example, how can big city buildings cope with hotter summers? Most buildings are not designed for the warmer temperatures and the cost to cool a property is as much as three times more than it is to heat it. Current methodologies are supposed to take these things into account, but in reality most only consider backward-looking macro data and use just a handful of variables and economic indicators.

Given the profound social, environmental and financial shifts, property research and strategy must include more holistic factors and incorporate a wider range of Environmental, Social and Governance (ESG) analytics in order to effectively forecast income and growth. Data science and new geo-spatial modelling techniques are more forward-looking. Artificial Intelligence can be used to predict factors we have only been able to guess at before, such as extreme weather patterns and climate change effects on the value of buildings and urban infrastructure.  It is also possible to use patterns of human behaviour; for example, model public transport usage with real-time digital data from smartphones and tracking devices. These Internet of Things applications are already being used in the “Smart Cities” realm, e.g. New York and London, to gather real-time data on waste management and lighting, but also could be used to plan things like water accessibility and other infrastructure issues affecting people’s health in emerging market cities, for example. The United Nations says that 95% of urban expansion in the next few decades will take place in developing countries.

Source: the European Commission

Unlocking value

We also are living in an unprecedented era of low yields and low interest rates – investors cannot depend on yield compression anymore to drive returns. In order to unlock value, we therefore must drive income growth and one of the best ways to do that is by ensuring the tenants are happy and engaged. A contented tenant is more likely to extend or renew their lease and be willing to pay a higher rent for a better quality service. Providing an enhanced experience is about focusing on the contents and design within the building, not just its exterior form and location. For example, making sure the building is energy efficient, flexible high-tech and with additional services to promote well-being and productivity, such as yoga classes and gyms. Like the iPhone, a building now should not be perceived as just being about the hardware or exterior as much as it is about the software and apps within it. Companies are under pressure to provide these types of settings in order to attract and retain talented workforce, and landlords need to develop more flexible, modern office spaces to future-proof them for the new world. The hospitality sector has been good at turning urban spaces into pleasant experiences that people are willing to pay more for. In the same way, co-working and flexible space operators are now proving that people will pay for flexibility and better experiences in the workplace.

Other mega-trends, such as ageing populations and the inward migration of young, millennial talent, are also becoming a driving force in urban planning. Cities require more inclusive property developments that cater for people of all ages, different socio-economic backgrounds and disabilities to create a more diverse, vibrant community. Local communities could be more involved in the design of these developments from the start to ensure they are fully engaged and included. This requires some change of mindset from developers and landlords. For example, landlords could offer students cheaper rents for volunteering once a week at a nearby specialist care home for seniors, which we understand a major landlord in London is considering on one of its major mixed-use developments. The sustainability task is monumental, but this kind of forward-thinking is where the future of city planning and redevelopment lies.

Important information

The value of investments may fall as well as rise and investors may not get back the amount invested.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. Please note that while Canada Life Asset Management and Canada Life Limited are regulated as stated below, property management and the provision of commercial mortgages are not regulated activities.

Canada Life Investments is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

CLI01502 Expiry 31/12/2019

Joanna Turner

Joanna Turner

Head of Property Research

LF Canlife UK Property ACS

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