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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.

 

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