Property Portfolio Management, Considerations for future investments – Part II

Archival context: The original text, historical figures, and company examples below reflect their original period. The new applications and evaluation framework are contemporary methodological examples, not measured outcomes or current market estimates.

The economic performance of today’s cities and regions could suggest a profitable strategy of investment. Clearly the outcomes of the different effects of globalization on any region or country will depend on the structure and history of the region, the actual scale of the local technological and institutional changes, the existing spatial structure and the extent of urban clustering.

In advanced countries like United Kingdom, urban clustering is associated with the spatial concentration of particular types of high knowledge workers with the peculiarity of increased interregional mobility. In the last years we have seen an unprecedented level of urban growth which is taking place at global scale. The economic tissue of a city or region may suggest the reasons: for small firms the local context is important as a source of both market knowledge and inputs while for large firms the local context serves to improve knowledge of specific inputs and the wider national and global context is the source for market knowledge. We already know that productivity is greater in dominant cities, we can also infer the importance of connectivity (a city is a connection hub for business relations, usually face to face, and a knowledge hub for the networks linking the global economy). Looking at numbers, recent studies suggest that a doubling of city size is associated with a productivity increase of 3-8%; of the world’s 75 highest productivity cities, 29 are small metro areas (<= 3 mln inhabitants) and 32 are medium-large metro areas (between 3 and 7 mln inhabitants). Since economic growth, both national and regional, is driven by rates of return on capital and not by productivity levels it seems that, among all the others, one important feature to determine urban scale, and thus possible growth for the property investment, is connectivity. Keeping in mind that local knowledge is a key factor, we should look at growing cities that expose the features of connectivity and (still increasing) productivity, presence of large firms and high knowledge workers. We can suggest as the main areas of investment infrastructure and retail for the long term and office for the short term, profiting from the relaxation of planning policy to convert residential space into office space.

With investors focusing on the very narrow prime end of the market, we believe opportunities may exist in ‘good secondary’ properties. These properties are typically average quality property in a good location, where growth can be achieved by improving the quality of the income stream or the asset itself [SAV],[RICS], [GPRO],[UBSI].