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How to invest for the cities of the future

How to invest for the cities of the future

We have all seen the movies, the mock ups and the presentations for the cities of the future, with flying cars and sustainable buildings.

Although not yet at the flying car stage, the rising population in urban areas is driving companies to begin thinking of how to contribute to the smart, sustainable and economical cities of the future.

So how can fund managers get involved and profit?

In the early 1990s, there were just 10 megacities, which had over 10 million people living in them. Today, that number has risen to 33 and by 2030 this is expected to reach 43. According to the population division of the UN Department of Economic and Social Affairs, 68% of the world’s population will live in urban areas by 2050, up from 55% currently.

Looking at these figures, investors have realised that they need to turn their attention to how they can invest in ‘next-gen’ cities.

‘We are not making any more cities, but with more and more people moving into the cities, this is creating all kinds of environmental and infrastructure issues,’ said Jim Lydotes, manager of The Boston Company Asset Management’s Global High Yield Equity Infrastructure fund.

 

Water

For Lydotes, it is more a question of how to retrofit existing cities t0o accommodate all the people, and access to water is one of the main issues.

‘Water is the most precious resource in the world. What is unique about water is that water is not a scalable resource. Every human being needs two litres of water every day and 100 human beings need 200 litres of water – so there is no operational leverage there.’

In light of this, Lydotes has recently bought two unnamed UK water companies, arguing that the country provides the right environment for such companies to thrive. 

‘One of the things they are trying to do is change the environmental policies around pollution.
One of the companies we are invested is incentivising farmers.’

This is because farming creates water pollution due to the amount of chemicals and pesticides that are used. By incentivising farmers to plant winter wheat crops, which are less water intensive, the level of pollution can be reduced.

This, in turn, helps to make it cheaper and faster for companies to provide the necessary amount of water to growing populations.

 

Demographic change

Due to the closer proximity to healthcare, an ever larger part of the population moving into the cities are those over the age of 65.

Lydotes said that over the last 10 years, New York has seen a 10% increase in its population, but a 20% rise in the number of people over the age of 65. Aside from the world class hospitals, the ease of access to the arts is also a driver, he argues.

‘With ageing demographics today there is an increasingly huge cohort of people looking to move into the city,’ he said.

He has found the investment opportunity from such a change in a healthcare real estate company that is building age-adjusted care facilities in New York.

Alex Araujo, manager of the M&G Global Listed Infrastructure fund, is also following this trend for potential opportunities.

‘Demographic pressures are so important. You have an ageing population moving in from the suburbs. When you think about social care, and perhaps even retirement homes, these are becoming increasingly urban rather than suburban, so that people can stay close to their families.’

 

 

5G and motorways

Araujo highlights transportation as an area of focus for next-gen cities as well, suggesting that ‘people do not quite realise what future motorways actually bring’.

He sees the opportunity in building communication infrastructure across motorway networks to allow for connected vehicles, and eventually autonomous vehicles.

‘There is a huge amount of data that needs to be transferred back and forth, and that is typically only made possible by 5G. The range of 5G is quite short and requires different fibre-optic cable. The motorway companies actually control the rights of way for that.’

The fifth generation of mobile communication networks will change the way people not only get around cities, but also how they interact with their cities, through the internet of things and consumer product experiences.

Among Araujo’s holdings to take advantage of such trends, is Crown Castle International, a US-based mobile operator company focusing on providing infrastructure. He also invests in Spanish multinational company Ferrovial which is involved in the design, construction, financing and maintenance of transport, urban and services infrastructure.

Elsewhere, Martin Todd, co-manager of the Hermes European Alpha fund, is tapping into this theme through a name that many would not immediately associate with the cutting edge of cellular technology: Nokia.

‘Network margins at the end of 2017 were lower compared to the third quarter, as Nokia began to trial 5G networks with clients. We view this development as positive and a signal the implementation phase of 5G roll out has begun.’

Humberto Medina, research analyst at Cohen & Steers, however, sees cell towers as the place to benefit from this rollout.  

‘We believe tower companies, which lease the space on tower structures to tenants – including wireless carriers, government agencies and broadband data providers – could be key beneficiaries of the upcoming wave of 5G investments.’ 

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