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Global Cities

Think: Asia Pacific cities in tomorrow's world

Harry Tan
Head of Research, Real Estate, Asia Pacific
Mall and Crossing in Tokyo

Over the next few decades, the weight of economic power and impact of structural megatrends will lean heavily towards the Asia Pacific region. By 2030, Asia Pacific, led by China, will account for nearly half of the world’s output (Fig.1), more than 50% of the world’s urban population growth (Fig.2) and almost all of the top 50 global cities with the largest forecast change in wealthy households. Therefore, it is still highly compelling for institutional investors to invest in Asia Pacific when building a sizeable core real estate portfolio. This is true in recent years, in light of heightened worldwide uncertainties following the Global Financial Crisis (GFC) in 2008. The region’s sturdy economic, demographic and political landscape provides risk mitigating and diversification benefits and a strong anchor to real asset values over the longer term.

 

Figure 1. Winds of change, anchored by China

 

Figure 2. A real demegraphic dividend, boost from urbanisation

 

An allocation into the Asia Pacific region may allow investors to enhance value to their global portfolio through regional diversification and enjoy additional benefits from variances across cities within the region. While there are many common threads running through some of the most prominent and resilient regional cities, domestic biases are also more pronounced across Asia Pacific than in the United States or Europe. This allows global investors to tap into more diverse opportunities which further improve total portfolio risk-adjusted returns.

It is the smart selection of cities, which are considered secularly resilient and sustainable from an economic and environmental perspective, that may help deliver attractive long‑term and stable core returns. Top urban success stories in tomorrow’s world are likely to come from Asia Pacific cities that are backed by supportive structural megatrends and also encapsulate the right DNA.

Picking the right cities with their own unique DNA, for example ‘lifestyle leaders’, ‘millennial magnets’, or ‘education elitists’, overlaid with an in-depth understanding of local micro-market dynamics, has shown to deliver outperformance in the long run. Our proprietary global cities filtering model that considers a list of both hard and soft factors, provides helpful insights to unlocking winning markets in successful cities both today and in the future.

Beyond the ‘traditional’ core markets, there are also strong merits to allocating and investing into ‘alternatives’ to ‘future-proof’ a broader portfolio. For example, many Chinese cities are not obvious targets for core investors, however these are developing at a rapid pace and should be closely monitored for future investability. After all, growth cities of today are the core cities of tomorrow’s world. Not only do they enhance returns through better-than-average growth, but also through structural repricing as they become more institutional, liquid and transparent. Similar propositions can be made for alternatives sectors, such as student and senior housing, and luxury outlets in some markets in order to ride developed or emerging demographic trends. There is a strong case to be made for a core proposition in Asia Pacific and we believe now is the time to ride the bandwagon.


 

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