Industry Voice: Ivo Weinoehrl, Senior Investment Manager at Pictet Asset Management, explains how smart technology and sustainability trends are turning cities into a compelling investment opportunity
Urbanisation is putting pressure on infrastructure and the environment. To thrive, cities need to get smarter and work more closely with the private sector.
Cities may occupy just 2 per cent of the earth's land surface, but they are home to more than half of the world's population and generate 80 per cent of all economic output.1 And their dominance is growing: by 2045, an extra 2 billion people will live in urban areas. The expansion of urban centres is sure to put pressure on infrastructure, resources and the environment.
Encouragingly, those responsible for planning and building the cities of the future are up to the challenge. Worldwide, authorities are working ever more closely with the private sector in an effort to make our cities safer, more sustainable and better connected.
Number of urban settlements globally
That's good news for the planet.
It's also good news for investors. That's because the emergence of smart cities should promise to create important business opportunities for a wide range of companies that contribute to urban development.
Indeed, while the world economy is expanding by just 3 per cent a year, there is the potential for urbanisation-related firms to grow their revenues by more than 15 per cent per annum2.
Policy is also increasingly supportive of the move to smart cities. For example, the development of "smart cities" is central to the United Nations' Sustainable Development Goals (SDGs). Under SDG 11, the United Nations specifically calls for additional urban investments through to 2030 to "make cities inclusive, safe, resilient and sustainable"3.
According to Citigroup, that alone would necessitate some USD2.1 trillion of annual investment across infrastructure, housing, education, health, recreation and buildings4.
It is in response to these trends that Pictet Asset Management developed SmartCity, a strategy with the objective of investing in companies which we believe will ride the wave of urbanisation.
The investment opportunities we see emerging can be split across three broad areas of activity: building the city, running the city and living in the city.
Building the city
More people need more buildings: houses, offices, schools, leisure centres. The challenge is to design, plan, construct and finance these buildings in an efficient and sustainable fashion.
China and India alone require up to 2.8 billion square metres of new residential and commercial space a year5. Although there are efforts underway to build higher to save space and reduce urban sprawl, conventional skyscrapers tend to be environmentally unfriendly in construction and operation - which ultimately also makes them expensive.
What people want from buildings will also evolve as technology and demographics change. For example, the rise of the "Internet of Things" - with the number of connected devices forecast to reach 25 billion globally by 20206 - will fuel demand for high powered internet. Equally, as the world population ages and urban density rises, lifts and other accessible features will come into higher demand - the elevator market is forecast to grow to USD125 billion by 2021 from USD89 billion in 20157.
Running the city
Sixty per cent of cities' economic growth is coming from a growing population, and 40 per cent from improving labour productivity8. To run efficiently, urban areas need better transport, water, energy and waste management infrastructure, logistics facilities and public services from healthcare to education. Combatting poor air quality is also a priority for metropolises - especially in China - while waste disposal and treatment is becoming a bigger problem as population sizes grow.
Businesses that help cities run smoothly and sustainably, therefore, should do well.
Of the USD81 billion that will be spent on smart city technology this year, nearly a quarter will go into fixed visual surveillance, smart outdoor lighting and advanced public transit, according to the International Data Corporation9.
At their smartest, cities will combine what is good for the planet with what is good for the economy.
Eventually, this is likely to mean high speed trains and driverless cars. Consultancy McKinsey forecasts that up to 15 per cent of passenger vehicles sold globally in 2030 will be fully autonomous, while revenues in the automotive sector could nearly double to USD6.7 trillion thanks to shared mobility (car-sharing, e-hailing) and data connectivity services (including apps and car software upgrades)10.
Changing consumer tastes are also calling for new types of infrastructure. Today's city dwellers, for example, increasingly shop online and expect ever faster delivery times. To meet their needs, modern urban areas need the support of last-minute distribution centres, backed by out-of-town warehouses.
At their smartest, cities will combine what is good for the planet with what is good for the economy. A recent report by the Global Commission on the Economy and Climate found that investing in lower-emission public transport, using more renewable energy and increasing efficiency in commercial buildings and waste management in cities could cut energy costs by about USD17 trillion worldwide by 2050, as well as cut commuting times and improve general liveability11.
Los Angeles, for example, has already cut its energy use by 63 per cent, saving USD10 million on electricity bills and maintenance fees per year, by installing 173,000 LED units12.
Living in the city
Finally, as well as creating more efficient cities, we need to find new and better ways to live and work in them, not least in making people's lives more flexible using innovative technology.
We believe that healthier convenience food represents a significant opportunity linked to urban living as city dwellers have less time or inclination to cook. In the US alone, households spend USD730 billion on takeaways and eating out - 43 per cent of their total food budget13.
Flexible offices are another growth industry. Globally, the number of people using co-working spaces has tripled over two years to 1.74 million, and is forecast to reach 5.1 million by 202214.
Demographic developments are also shaping the demands of city dwellers. A growing number are single, for example, creating appetite for a wider variety of housing options for residential living (e.g. smaller apartments and shared flats). Because of the tendency of urban housing to be smaller, a market for self-storage facilities, bicycle parking and various sharing economy initiatives is emerging. With more parents working, meanwhile, there is a greater need for childcare.
All of this is good news for companies that provide such services.
Smart and sustainable
Many of these innovations already exist. McKinsey estimates that adopting a smart city concept can improve key quality-of-life indicators, such as health, safety and environmental quality, by 10 to 30 per cent. We think that Eembracing it - and continuing to innovate - is crucial for the future of our increasingly urban world, where efficiency and sustainability go hand-in-hand.
There clearly should be is, therefore, a sizeable investment opportunity with superior growth prospects. Investors can benefit from it by helping to shape the smart cities of the future.
Click here to find out how the Pictet-SmartCity fund aims to capture the strong growth potential of companies finding smarter solutions to the urbanisation challenge.
[1]World Bank, "Urban development overview", June 2018
[2] Arthur D Little, "Smart cities - turning challenge into opportunity", 2016
[3] UN, 2015
[4] Citigroup, 2018
[5] McKinsey, "Urban world: mapping the economic power of cities", 2011
[6] Gartner, February 2017
[7] Statista, 2018
[8] World Economic Forum, "Migration and its impact on cities", October 2017
[9] IDC, "Worldwide semi-annual smart cities spending guide", July 2018
[10] McKinsey, " Automotive revolution - perspective towards 2030", January 2016
[11] The Global Commission on the Economy and Climate, "Accelerating low-carbon development in the world's cities", September 2015
[12] The Climate Group, "Driving energy efficiency and city renovation", March 2017
[13] US Department of Agriculture Economic Research Service, 2014 data (latest available data)
[14] Global Coworking Unconference Conference, December 2017
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