An unprecedented worldwide urban expansion is poised to create a massive investment opportunity, affecting everything from infrastructure and energy to agriculture as the percentage of the worldwide population living in cities rapidly increases.
The opportunity for investors' portfolios will be far-reaching, according to a soon-to-be-released paper from Prudential Investment Management Inc.
In the next 20 years, more than 1 billion people are estimated to move to cities from the countryside, said Taimur Hyat, Newark, N.J.-based chief strategy officer, Prudential Investment Management, who worked on the report.
That has implications for institutional investors today, in terms of positioning their portfolios to take advantage of the trend, he said.
While Prudential is not the only firm to research the impact of urbanization on investors, much of the earlier work was focused on real estate.
Two-thirds of the world's population will be living in cities by 2050, the United Nations' Department of Economic and Social Affairs estimates, up from 54% now, according to the 2014 revision of the World Urbanization Prospects report issued last year. Only 3% of the world's population lived in cities in 1800 and it took until 2007 for the share of city dwellers to outstrip the number of rural inhabitants, according to the U.N.
Some 90% of the movement to cities will occur in Asia and Africa, which will need more and better infrastructure, housing, energy, employment, education and health care, the U.N. report noted.
But expansion also will occur in developed nations with the continued transformation of now-smaller cities into metropolises of 1 million people or more, and the urbanization of the suburbs, states the Prudential Investment Management report, “The Wealth of Cities.”
This will result in the need for investment of trillions of dollars; more than $50 trillion is estimated to be required to build or refurbish infrastructure by 2030, the U.N. report estimated.
Global middle-class consumption, meanwhile, will shift toward cities in China, India and other emerging Asian countries, while middle-class consumption in developed countries is expected to decrease, the Prudential report notes. For example, middle-class spending in India is expected to grow to $1.8 billion per year by 2020, six times the amount of 2010. Food production worldwide will need to increase by about 70% by 2050, said the Prudential report, citing United Nations Food and Agriculture Organization data. This will open investment opportunities in everything from consumer goods companies and shopping malls to warehouses and industrialized agriculture.
In the developed world, millennials and baby boomers are not only moving into cities but they also are seeking “urbanized” mixed-use areas in the suburbs with convenient access to public transportation and nearby access to work, services and entertainment, the study shows.
This creates enormous pressure to update aging infrastructure and restructure cities to accommodate the expansion, Mr. Hyat said.
At least $57 trillion will be needed to finance infrastructure projects around the world through 2030 across the G20 nations, which represents about 85% of the world's gross domestic product, according to estimates provided at a joint meeting of business leaders known as the B20 Coalition and G20 ministers, governors and heads of key institutions in November in Cannes, France.
Roughly $20 trillion of that is expected to come from traditional sources, mostly governments, leaving $30 trillion that could be funded by private sector capital, said Brett Himbury, CEO of infrastructure money management firm IFM Investors Pty. Ltd., a Melbourne-based firm owned by 30 Australian pension funds. Mr. Himbury participated in the Cannes meeting.
One example of an infrastructure project that also has implications for real estate is the advent of the wired city. By 2020, the number of global Internet users is projected to double to 4 billion people; those people will be tapping away on what is expected to be 26 billion devices, the Prudential Investment Management paper states. This is expected to give rise to a global investment opportunity for both public and direct private investments in information technology infrastructure, broadband, data centers and cell towers.