Market Views: Equities

Outlook 2019: Global cities

Global cities look set to benefit from a technological revolution in 2019 as investors place a higher value on knowledge than manufacturing.

12/11/2018

Hugo Machin

Hugo Machin

Co-Head of Global Real Estate Securities

Tom Walker

Tom Walker

Co-Head of Global Real Estate Securities

Contributes to
Unstructured Learning Time

CPD Accredited
  • Fundamental shifts in demand will impact how we use land and buildings in global cities.
  • The demand shift is already evident in retail, with surging demand for well-located warehouses.
  • Locations in strong cities close to great transport links have enduring value and will benefit from the disruption revolution, as people cluster together to monetise new ideas.

Disruption revolution

In our view, 2018 will go down as a ‘Goldilocks’ year; not too hot and not too cold. While there have been world events that, fleetingly, seem important, we see fundamental shifts in demand as having a greater long-term impact on markets.

Our outlook for 2019 is influenced more by these demand shifts, than by headlines.

The industrial revolution was an inflection point where technological advancement fundamentally changed people’s lives. Western economies moved in Victorian times from being agrarian-based to manufacturing-based. We think the current rate of technological advancement is similar.

The ability of technology to disrupt and disintermediate means today’s economy is moving from being manufacturing-based to knowledge-based. Simply put, higher value is in idea monetisation; lower value is in manufacturing, which is increasingly automated.

Ideas trump manufacturing

This is great for cities. Idea monetisation is what cities do best; human proximity leads to greater idea generation and sharing. This is why cities are becoming so important and why certain cities, given their scale, cultural and educational reach, are pre-eminent.

We see demand as shifting in two ways. First, to cities where the highest value economies are; and second, to certain land uses in those cities. If we take the importance of cities as given, it is the changing demand for land use in cities, reflecting broader disruptive trends.

Land is an economic instrument and land use is shaped by economic demand. The demand shift in land use has transformed areas of the market, leaving clear winners and clear losers.

The most obvious example is the disruption to the retail market, leaving shopfronts boarded up but huge demand for warehouses close to cities.

Image: The high street of the future

E-commerce has shifted demand, irreversibly in our view, from the High Street to the home. There are, however, pockets of optimism and we wrote about them in a recent blog about the reinvention of the high street. Nonetheless, technology has wrought structural change on the market.

This demand shift will have a profound impact on the most important global cities. Areas that we see demand increasing are in warehouses, data centres, student accommodation and flexible office space.

We see demand continuing to wane in retail as commoditised offerings, particularly apparel, move almost entirely online. Even the white hope of the leisure segment – cinemas and restaurants – are struggling, as streaming giants take market share and oversupply of "casual dining" impacts restaurateurs' profitability.

What does this mean for investment markets?

The "disruption revolution" is changing the way we use land, just as it is changing way we shop, socialise, travel and work. 

There is no facet of our lives that technology is not impacting. Real assets - buildings and land - reflect that. We see certain cities and certain land uses in those cities becoming more important. This means well-located land will continue to benefit from economic demand, despite the changing pattern of that demand.

As demand shifts, there are still some enduring truths in investment markets when it come to real assets. The first is that the knowledge economy is thriving in cities where there is already critical mass. The second notion is that investing in land located close to transport may provide more attractive opportunities than is currently understood. This is why we worked with our DIU team to develop a transport score.

As we peer into 2019 through the news cycle of Brexit, mid-term elections and Trumpian trade wars, enduring “truths” of global cities and well-located land can prevail, regardless of how disruptive technology changes the face of economic demand.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

This is the eleventh article in our Outlook 2019 series, please check back for more over the coming days and weeks. The first ten in the series can be found here:

Global economy

Global bonds

Global equities

UK equities

European equities

Japanese equities

Income

Sustainability

Asian ex Japan equities

European commercial real estate