Alice Breheny

New report from ULI and TH Real Estate highlights that well-executed densification enables cities to adapt to global imperatives and avoid falling behind competitors

Densification is the key to responding to population growth, economic changes and new lifestyle preferences, according to a new report by the Urban Land Institute (ULI) and TH Real Estate.

The Density Dividend: Solutions for Growing and Shrinking Cities, draws from the experience of six European cities at various stages of population change and makes clear that many cities—especially those in Europe—have little choice but to densify. If they do not, they risk becoming locked into models of development that are inflexible, unattractive, unsustainable, and ultimately uncompetitive. For cities in Europe, density is now the critical tool to realise advantage and to avoid decline.

The report will be launched publicly at a session at EXPO REAL on Monday 5 October and at ULI’s Fall Meeting in San Francisco on Tuesday 6 October.

The report is the second piece of work in ULI’s density initiative, which seeks to increase knowledge of density in the real estate industry and beyond; to address the social, economic, and environmental benefits of investing in density; and to promote density as a priority for public and private leaders.

This report examines current densification in six European cities and the impact of different urban tools and tactics on densification efforts. At the same time, it looks at how density can play a role in building strategies for future cycles.

“By embarking on this project, we wanted to use the principles for good density outlined in our first report, Density: Drivers, Dividends and Debates, to demonstrate how cities in distinctive cycles and with different characteristics were applying them to their city development strategies,” said ULI Europe CEO Lisette van Doorn. “We hope this report develops further lessons for the industry on how density can make cities attractive to people, occupiers, and investors, today and in the future.”

“TH Real Estate advocates a city-level approach to real estate investment, believing that the most successful real estate strategy is likely to be city-based, underpinned by long-term, structural trends,” said Alice Breheny, Global Co-Head of Research at TH Real Estate. “This report helps deepen our own understanding of investment viability within specific cities. Although trends and drivers may point to a specific city as having potential for growth, it’s important to assess whether that city will be able to accommodate that growth via the capacity of its built environment to densify and absorb capital effectively.”

Authored by Prof Greg Clark, ULI Europe Senior Fellow and Dr Tim Moonen, Director of Intelligence at The Business of Cities Ltd., the report highlights what does and doesn’t work in making densification successful and popular, whether in ‘strongly-growing’, ‘bounce-back’ or ‘consolidating’ cities. It is informed by in-depth case studies of six cities: Birmingham, Dresden, Istanbul, London, Stockholm and Warsaw.

The case studies show that cities are moving at different speeds towards better and higher density. Some have 30 years or more of experience with compact city development and urban regeneration, and are on to their second or third cycle of dense re-development within the framework of ambitious city plans. Others are new to urban redevelopment or lack the tools to deliver density in an integrated way, relying instead on ad-hoc initiatives and innovation.

Progress on densification can only be achieved if a city focuses on three distinct elements comprising a new equation for density. When cities get these elements of the equation synchronised, sustained progress tends to happen towards better, higher density:

Get the fundamentals right

In order to increase density successfully, a city first needs leaders to develop a story and vision for its future evolution that can galvanise attention and support from residents, workers and investors alike. It must create a robust growth plan that provides a guiding framework within which development can proceed. These are fundamentals without which progress on density can only be partial and fragmented.

Prioritise execution arrangements

In order to operationalise the vision of a denser city, leaders then need tactics about where and how to densify. They need to achieve a critical mass of redevelopment and to promote a scale of urban adaptation that creates genuinely new dimensions to a city. They also need durable systems of investment and enhanced legal, land-use, and asset management tools to shape development fully.

Build and maintain momentum

In order to maintain momentum across political and economic cycles, cities also need to foster demand for new urban space and focus on the positive psychology of vibrant urban lifestyles and locations.

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Alice Breheny

Australian superannuation funds continue to prioritise exposure to global property, with retail opportunities in particular catching the attention of local institutional investors, according to global real estate heavyweight TIAA Henderson Real Estate (TH Real Estate).

TH Real Estate is one of the world’s largest real estate investment managers and the world’s leading retail investor with AUD$33.7bn* in retail assets under management. This week the firm launched new research – Picking Tomorrow’s World Cities – which advocates a city-level approach to real estate investment.

By adopting a proprietary filter process, TH Real Estate has scored over 200 European cities against individual economic and environmental fundamentals, as well as a global risk model, to identify cities that are ‘future proof’ for investors.

The report is the next instalment of TH Real Estate’s global megatrends research, and follows the release in November last year of The ‘Famous Five’: The five demographic megatrends that real estate cannot ignore.

The latest research examines the economic fundamentals of a range of ‘future proof’ cities, revealing a wide range of findings including:

• Istanbul will be the fastest growing city in terms of GDP growth change between 2010-2030
• London’s retail market will be the largest retail market in Europe by 2030, with retail sales worth US$600bn
• Switzerland’s Basel is the most productive city in terms of GDP per capita, followed by Geneva, Oslo, Zurich and Stockholm

According to TH Real Estate, the impact of megatrends – long-term structural trends – is likely to be much more notable at a city level, than nationally. Therefore the most successful real estate strategy is likely to be city-based, underpinned by structural, long-term trends.

Alice Breheny, Global Co-Head of Research at TH Real Estate said: “Challenging market conditions and evolving investor requirements mean we are increasingly looking at longer-term drivers of real estate performance. A city-based real estate strategy, underpinned by long-term, structural trends – that strikes the right balance of risk and diversification, while taking advantage of short-term pricing opportunities – will be best positioned for above-average portfolio level returns, lower-than-average volatility and modest downside risk, for long-term investors.”

Nick Evans, TH Real Estate Executive Director and Head of Australia said: “Australian institutional investors are showing increasing appetite for international real estate, in particular retail property, due to its low volatility, long lease terms and diversity of tenant base. While a range of opportunities exist across international markets, on the ground expertise is essential to ensuring any investment delivers the appropriate returns.”

For core investment strategies TH Real Estate suggests cities that score well on key fundamentals today (Defensive Cities) and those that score well today and tomorrow (Defensive Growth Cities). These are the cities TH Real Estate expects to capture an even greater share of global output and demand in the future.

Additionally, there are some cities which do not score well in traditional real estate terms today, but whose growth rates cannot be ignored (Growth Cities). With the largest real estate markets typically closely-correlated, driven by financial and business services, these offer a significant diversification benefit and the potential to further enhance returns.

Investors favour retail for stable, long-term income

The European market presents solid opportunities for Australian institutional investors. However, TH Real Estate believes investments should not be made indiscriminately and that understanding of the individual markets, their differing trends and consumer behaviour is essential.

Nick Evans, TH Real Estate Executive Director and Head of Australia, said tailored investment approach can be a compelling solution for large institutional investors looking to make a move in global real estate, providing them with the flexibility, exposure and returns they need.

Click here to view the full report Picking Tomorrow’s World Cities.

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