Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 193

The evolution of our cities

In 2008, a major milestone in mankind’s co-habitation occurred. For the first time in human history, there were more humans living in cities than in rural areas. Our cities have been evolving for centuries. Today, the world has 28 mega cities each containing more than 10 million inhabitants, and a total global urban population of 3.9 billion. Tokyo is the largest city by built-up area, with 38 million people. Current estimates predict that the total global urban population will grow to 5 billion by 2030, containing 41 mega cities and a total land area of 1.2 million sq km.

Urban and technological growth presents new challenges

Our cities now contain 54% of the world’s population. Urbanisation is having a profound effect on our societies, with growing populations require more civic infrastructure. As cities expand this becomes more challenging, and as land scarcity increases it becomes much more expensive and more logistically difficult to build out civil amenity. This places a greater social responsibility on commercial landlords and pushes up the value of their land significantly.

Technological advances and labour specialisation continue to develop at a rapid pace, while old-world industry and traditional manufacturing centres are becoming much less labour intensive. As this well-defined trend progresses, traditional businesses are giving way to service, leisure and technology industries, which require greater levels of human engagement. The long-term trend following jobs and wealth is likely to become more pronounced in the future as technology rapidly advances.

However, as computing technology and the internet evolve, and hand-held devices become increasingly common, our cities’ infrastructure is failing to keep pace. The way we spend our leisure time, the way we shop, how we are treated when we’re ill, the way we commute, the way we are educated and way we use space will all be different in the future.

Shopping habits reveal technology’s impact

What does the future look like for our cities? Technological advances are impacting city dwellers in all facets of life, such as our changing shopping habits. As global consumers, many channels are now available to purchase goods and services, from the ancient market place concept to the internet. The internet’s ability to compare the pricing and availability of goods and services has led to increased transparency and a more efficient market place. It’s a major windfall for the consumer. Efficient pricing has had a deflationary effect (this concept is lost on central banks) with increased productivity (acquiring the good and/or service in less time for less effort) freeing up more time for work and leisure.

It is estimated that there are now 3.4 billion internet users globally from a total world population of 7.4 billion, with approximately 2 billion smart phone accounts. Etailing, the purchasing of goods and services over the internet, is now a global phenomenon, and continues to grow at a remarkable rate. According to research firm eMarketer, total global retail sales for 2016 are estimated to be US$22 trillion. eCommerce sales estimates for 2016 are projected at US$1.915 trillion, a year on year (YOY) increase of +23.7% and an 8.7% share of the total. These estimates include Consumer to Consumer (C2C) purchases but exclude services such as travel and restaurants.

Resolving the ‘last mile’ dilemma

As younger generations come through, we will eventually reach the point where most goods and services purchases are made through the internet. This trend faces some major challenges. For example, the logistics of the ‘last mile’ are labour-intensive, inefficient, environmentally unfriendly and costly. The best we have is daytime delivery, with a man and his van ferrying goods from remotely located sorting centres, delivering non-standardised, non-modulated goods via disembarking and walking to the final drop off point.

The rule of thumb is that the ‘last mile’ represents 35% of the total delivery cost. Amazon and Alibaba have toyed with the idea of using drones as a part-solution. Uber is currently trialling the driverless car in the US city of Pittsburgh. Cloud-based total logistics solutions, where the consumer picks up the purchased goods from elockers, will become more common.

Today, omni-channel retailers have a distinct advantage over the pure etailers. With their physical store foot prints, they have existing infrastructure in place which directly interfaces with the consumer. This tactile experience builds brand recognition and offers the added benefit of in-store pick-up. The option of ‘ship from store’ also goes part of the way to solving the ‘last mile’ challenge. While still inefficient, it is a little less costly.

Land redevelopment could increase efficiency

As our cities have evolved, little thought has been given to future technologies, population growth or social change. This puts urban commercial landlords in a position where they control a valuable and scarce resource: strategic land parcels located within densely populated cities. Through redevelopment, they are in the lucrative position of being able to innovate as part of the future logistics solution.

Today, it is estimated that 95% of developed city populations reside within five miles of a shopping centre. As cities densify, land parcels currently being used as shopping centres are well placed to be transformed into hybrid retail shopping and sorting centres. This would eliminate the need for separate sorting centres, materially increasing efficiency. Goods going both to homes and showrooms could then be shipped straight from distribution warehouses to hybrid retail shopping and sorting centres.

The redevelopment and expansion of existing shopping centres is an ongoing activity, as professional landlords adapt their assets. A recent example is an Australian publicly-traded landlord’s redevelopment of the Warriewood shopping centre on Sydney’s northern beaches. The sub-regional shopping centre caters to a primary catchment area of 75,000 people. The centre’s recently completed redevelopment added 9,000 sqm of net lettable area taking the centre size to 29,700 sqm. Major tenants introduced to the centre included Aldi, Kmart, and Cotton On Mega. Decked car parking was also added taking the total to 1,450 spaces. The centre now contains three supermarkets, a discount department store and totals 89 specialty tenants. The specialty tenant sales productivity is expected to be more than $10,000/sqm. The development cost was $87 million generating a day one 7.3% income return on capital deployed with an IRR of +11.0%. The centre valuation increased to $275 million.

An example of the current logistical inefficiencies would be the Woolworths supermarket. The major Woolworths distribution centre is 66 kms away. The next iteration for the centre should include sorting facilities to also provide the logistical infrastructure for the 75,000 local inhabitants that wish to purchase goods via the internet.

Landlords a driving force in wealth creation

Publicly-traded real estate securities are the world’s largest landlords. They are the dominant landlords in our major cities and have a good understanding of land values and its best usage. The amalgamation of sites in urban infill locations is a patient game, but the rewards can be very high. As a finite resource, our cities’ land is already valuable, and it will become increasingly so. This increase in wealth comes with great social responsibility and with innovation, expertise, vision, patience and access to capital, our landlords will be a major driving force in the future evolution of cities. Whatever the future has in store, publicly traded urban landlords are in an enviable position to create true long-term wealth, through their control of a valuable and scarce resource.

 

Stephen Hayes manages the Global Property Securities team at Colonial First State Global Asset Management. The team manages domestic, Asian and global property securities portfolios for a number of funds. This article contains general information and does not consider the needs of any individual.

 

RELATED ARTICLES

Growth and urbanisation create compelling opportunities

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Latest Updates

Superannuation

The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.

Property

RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.

Shares

4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.

Shares

Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.

Shares

Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.

Superannuation

Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.