Investing In Cities of the Future

[Music] so we're seeing all your name up in lights there so everybody know who is who um Bob I'm going to start with you first because we've got a really big title there investing in the cities of the future we're talking about smart cities but what do they actually look like to you well thank you for having us here today Sarah uh before I get into what we think a smart City looks like I think it would be helpful to understand that the demand drivers for office have really changed dramatically uh technology accelerated by Co has really had a profound shift in how professionals work it's given them mobility and we've seen tremendous migration Trends so as was uh mentioned in the prior panel uh you don't have to be in Silicon Valley to work for Silicon Valley you don't have to be on Wall Street to work for Wall Street and so uh the demand drivers have changed it's not just about geography and the factors that are Paramount today include safety quality of life uh cost of living Schools transportation and so on so happiness quality of life is really driving decisions on where companies and where professionals want to locate so in the states uh a great migration has uh begun large Urban cities such as New York York La Chicago San Francisco are seeing significant out migration and job losses uh they are not competing well because uh of these quality of life and cost issues for example New York City has a 20% vacancy rate and more importantly and a harbinger of the future the utilization rate of the existing space is only 50% obviously remote work has had a tremendous impact and I'm going to come back to that in a minute because that thought on the secondary cities and that shift from where we're seeing the investment has been quite marked so we'll come back to that on a more sort of broad scale Professor lar if I can bring you in on this because in the title there we're talking about the challenges and covid has definitely been one of them and the shifts that Bob was talking about there but at the IMD Smart City Observatory in your latest report what are you seeing as the main drivers of those challenges at the moment well the um we rank uh some 130 cities around the world so we can't pretend to be totally exhaustive there are much more many cities than that but we try to have some of them in each part of the world and the big messages we get is that first there is urgency to address Municipal issues uh by the end of the century three more billion people will be added to the planet and most of them if not all of them will live in cities We have basically three billion people to accommodate in cities and this is both good news and bad news um it is bad news because the structures are not sufficient today to accommodate them but it is good news because there are major challenges and hence major opportunities for investment we have to make those cities not just livable but sustainable from an environmental point of view and less unequal which is one of the diff difficulties faced by large metropolises uh that we we've just heard heard about um so the um key issues as we measure them are number one cost of living this is what comes first uh by far in all parts of the the world for locals for expatriates for investors the second one is access to basic services that is if you want your talent to move to a specific City you should not be concerned just about giving them the right type of salaries or incentives you may want them to move with their families with their partners because you want them to take roots to contribute to local GDP and not just to uh the benefits of your your company so that creates new challenges which are only faced by a few cities around the world technology is part of the equation but looking at what cities can do with technology is also important and just to point at what why does all I all of that matters for investors I think that we see cities taking roles that used to be those of nation states more and more and if that is the case and that is confirmed in the future as we believe it will then it requires higher degree of granularity from the point of view of investors and we'll come back and discuss that in a little bit more depth but chinua if I could go back to that sustainability thread that we'll carry on throughout many many conversations this afternoon and of course with cop 28 beginning tomorrow carbon emissions 40% from the built environment and uh the demand on resources and services obviously massive given this expansion that we've talked about we've talked about the challenges so of course we'll talk about that but they're also opportunity in challenge so where do you see that opportunity for people to be looking at investing within Prof yeah thank you uh you right I think uh the cities of the future you're going to see a lot and a lot more people moving to the city the trend of urbanization will not be stopped uh I think there are a couple of things that are important uh building sustainable cities looking at energy looking at Green energy how do we reduce the carbon emission uh these are all very important uh factors uh water is also you know you know all these are all very critical uh resources uh and uh not forgetting connectivity so we always talk about smart cities smart cities by themselves are not sufficient cities have to be connected and more and more so even in today's environment where you have geopolitics uh it is very important for cities to be connected through fiber optics Etc so for Caple we are solutions provider and uh we provide solutions for energy transition uh we're very involved uh in the city state of Singapore Singapore is a very small uh city state smart but we also building it as a digital uh Hub we are building a subc cable linking the United States to directly to Singapore so part of the geopolitics we are bypassing the uh South China Sea so this is something that is uh a trend in the new world uh and at the same time we are very involved in uh developing hydrogen as a future source of uh uh energy and of course uh importing renewable energy all of these requires Solutions which actually create these solutions that we create are in a way real assets that uh investors want to invest in Beyond just real estate uh with specifically within real estate we also believe that it's not just about building green buildings but looking at the existing build environment how can we turn older buildings green how do we extend the life so that the embodied carbon is not released so these are some of the things that we are doing and I believe that there's a great uh B investment opportunity for investors that you can be green and you can be profitable and often as you say those two things have been pushed apart where maybe they shouldn't have been Drew Global head of estate at Adia is sitting on top of all of this with a bird's eye view how do you see the repurposing of these cities and these trends that that we're talking about here thank you Sarah you know the World Bank talks about places that are being left behind and I think looking at those places um which have significant infrastructure housing but cities for some reason people have um left and left in droves I think we're going to be repurposing those cities because so much of that infrastructure already exists and as more and more people move into cities with over 80% of the world's GDP uh produced in cities currently and that will just grow I think whether it's the three billion more people who will be on this planet you can't just create new cities from scratch but you have to look to the Past in order to get to the Future and I think we're going to see a lot more of that so in the US that might be cities in the Rust Belt that used to be manufacturing cities for the automotive industry or for other types of manufacturing and I think those cities are the ones that will be repurposed into the cities of the future and professor professor L I want to bring you in on that because traditionally way back when um you used to think oh the bigger a city the better it's more Cosmopolitan uh that it attracts more people in but that's there's becoming an anony anony there between uh the size of a city what what do you see the advantag and disadvantage of that given the sheer weight of people coming into them well the this goes back to uh the point that Robert was making at the very beginning of our conversation that is uh we see that there is in an interconnected world postco where you can work basically from wherever you want especially if you are a higher rent type of talent you know intellectual potential you can deliver online you're looking for quality of life so whether you can do it from a large city like New York City or Aspen in Colorado or a small village in the middle of Montana depends on the quality of your connectivity so that already evens out competition in terms of location what we see in our index is that what we call the second tier cities all the one which are showing more agility in their strategies to attract talent to attract investment and they do it in very clever ways just to quote one example among many uh Bilbao in Spain in the bass country not the first not as big as Barcelona or or Madrid but they' they attracted investors in a very clever way they say we want to be a carbon free City so we give priority to whoever can come as an investor to build any kind of facility that would be carbon neutral or even carbon negative the this gave them an advantage to attract talent because younger people have been attracted by that strategy it has created a whole different Dynamics so this idea of repurposing uh I like the word very much cities is clearly at the core of these strategies bil BAU is one example where the older part industrial part of the Cities called tabacaria Etc has been rebuilt repurposed for venture capitalist for startups and it's it's a marvelous environment to see now so Bob let's dig down on that earlier point that you starting to talk about because as you said the serious money used to go to La New York and you know the rents are still pretty high from what I can see but investors are starting to look at those other secondary cities as they were Atlanta Denver and you said even even further up into the ski resorts and basic places where people want to live how are you seeing that investment landscape between those two and the flow of money between those assets well uh first of all we would refer to them as emerging cities as opposed to secondary cities and they are where people want to live and they are experiencing population growth uh job creation and uh in in cities like that uh uh the best way to in invest uh besides investing in office is in uh the infrastructure as was mentioned earlier uh and that could include uh multifam uh retail the various uh strategies to enhance connectivity but I get back to the demand drivers which is quality of life schools um cost of living and if you have that uh then uh virtually all the property types that support uh in migration and job creation ation are essential and and they're uh very profitable and the air that we breathe increasingly important people are looking at that in terms of sustainability the ESG and air quality um chinua sustainable sustainability a big Focus for what you're up to what are some of the gamechanging solutions you kind of gave us a tease about green hydrogen and various other things what are the major trends that you're seeing again that people can look to in in cities and see to potentially invest in right I think uh there's no one Silver Bullet so uh everyone is kind of looking at different uh Solutions uh first and foremost uh you know you got to look at how to green your grid so like in Singapore uh 95% of our grid uh is our our grid is actually powered by natural gas uh natural gas is clean it's a transition fuel uh but it's still fossil fuel so the Singapore government is actively looking to uh import uh up to about uh 30% of our power requirement from renewable sources from the region unfortunately Singapore is very small so we can't have enough place to put solar panels and wind uh so Capal is very involved in looking at how we can import energy in now medium to longer term I think uh hydrogen is uh as I mentioned earlier is is a real uh game Cher so we are looking at uh working at the moment working with the uh Queensland Authority uh government to uh on their hydrogen project to manufacture green hydrogen as well as green ammonia which can potentially be exported to countries like Japan and Singapore we also working in India with a company called Green Co that Aria has invested in uh to look at potentially importing green armonia to Singapore as well for us we are planting the first uh hydrogen radi power plant uh this is something that is quite important because again as we talk about energy transition we also worry about what we call stranded assets so if you start planting like coal plants today well not that you can but if you did that would be the chances of it being a stranded asset is very high so even for uh combined cycle gas turbine plant we are looking to the future we are planting uh turbines that can run potentially on hydrogen so as the price of green hydrogen comes down as technology improves uh this is where I think uh where we are all going now last but not least it's not just about the the Grid it's also about extending the life of the buildings that we have uh it's it's uh in the Far East it's very common when a building reaches about less than 15 years of life we will knock it down but you look at Great cities like New York Boston and other places you got beautiful cities that have lasted for many many years and I think that's the way to go but keeping the buildings as it is is not good enough in the past what we would do is do up the lobbies do up the toilets stick a Starbucks on the ground floor and we're done but nowadays it's not enough you got to make the building energy efficient you got to make it smart you got to make connected so this is something that we are also very interested in because the addressable Market is huge so there's a great investment opportunities uh for a lot of the investors out there to be part of the green movement but at the same time we are creating investment solutions that are profitable that brings me perfectly on to Drew's question actually because this ESG targets the brown to Green retrofitting obviously something that's a big theme as well how much is it going to be that versus new bills you think going forward in some of the uh major cities that you overlook look I don't I don't think you can knock down all the buildings that don't meet the requirements I think you're going to have to retrofit quite a bit there but I think the other thing building upon what Bob had mentioned is that you know certainly in the US and I also think in Europe you've had a period of time where people didn't knock down buildings and you have buildings from the early 19 00s you have buildings from the mid 1900s that in normal Cycles would have been knocked down and more efficient buildings would have been built in their place and so given the oversupply of office for instance given the undersupply of housing I think there is going to have to be some level of taking things down to then build back up but what you build how you build it with with what materials how you actually push uh the energy through those buildings I think that's what's very exciting and then you know realistically you're going to have hundreds of billions of dollars of retrofits that are going to have to happen to existing buildings because cities like New York and London are starting to fine landlords and owners who don't hit certain carbon neutrality targets uh by certain time periods while I think those time periods will get pushed out a bit because they're a bit aggressive um it's going to force people people aren't going to be able to knock them down and they're not going to be able to afford the fine so they're going to have to find some way to do retrofits so hopefully Innovation will bring the cost down on some of that as well as we go further forward which has been a little bit of a handbreak at certain points in the cycle Bob we all know the saying location location location uh I guess the location may be changing but if you had to put your hand in your pocket now and start investing in certain property assets what would they be what what kind of areas would you be looking at sure well before I answer that I just want to add to to what uh uh the panel has been saying I think in in uh places like New York city that has a lot of obsolete office space the parallel is to retail where e-commerce 10 years ago uh caused a a retail disaster and it took 10 years in the United States to uh take care of the obsolete re re retail space that e-commerce created we have the same challenge in large urban areas uh there are whole swaths of New York City that are obsolete New York City and these other urban areas will reinvent themselves they will deal with these issues the repurposing of properties but it's going to take a decade just like it did in in retail so to us in answer to your question um we would be investing in the lucky and smart cities so these are the emerging cities in the states it would be in the Sun Belt it would be Abu Dhabi that has uh all the attributes job growth vibrant economy lots of investment uh great place to live and so look for those emerging cities that that have uh you know uh great school systems safety job creation growth uh that's where you want to invest because you you're investing with a strong tailwind and also grocery anchored retail and offices which is a bit unusual sometimes people are thinking you know everything going online grocery a little bit maybe not to invest in but you're still a big favorite of that sector what excites us about retail whether it's in the states or or anywhere is uh the retail apocalypse for bricks and mortar retail is largely behind us and uh they've dealt with that and retail underperformed for 10 years and now supply and demand is in better shape and it's essential and the returns uh look great especially compared to some of the property types that have been hot for 10 years like industrial and data centers so we like retail Sarah I would just say you know I'm very Bish on India and Indian residential um I think the the the population growth the education levels of the people who are graduating University and I mean it is definitely an economy on the upswing and they are lacking in residential options so approachable residential not luxury not upper middle class but kind of that middle class lower middle class I think there is huge opportunity for people to invest and and we do that quite actively and it's interesting you're all talking about housing at at the moment and I expected you all to talk about tech and all of those kind of Investments as well Drew and then maybe chinua talk us through the investments in in in that space within uh in property uh on the tech side is I mean you know given the explosion of the use of data uh AI it has it has been something that I don't think anyone would have anticipated and I think if you look back a couple of years you would have seen Dynamics within the data center um space that weren't particularly positive where you had you know higher vacancies where the tenants really had control over rents and um and uh development yields and that has been completely flipped around in the last 12 months and it's an area that I I personally think is very interesting I think this hyperscale development for the top 10 or 20 um Prov providers and users of this data um creates a unique point in time but you know and I think that will only continue to grow one thing that I do think that we as an industry need to think about is what's ultimately the takeout for that because we as investors don't hold assets forever so when you're done with your investment cycle if you've built one of these very large facilities who ultimately is the buyer of that is it Pension funds it's not public companies cuz they're really only a couple of them left in the world because most of them have been privatized but it's an exciting time I can hear I see chin nodding away on that you've gone from an industrial conglomerate through to that Asset Management H how is that affecting your picks well I think uh it puts us in a very strong position because we look at the uh the real assets that we manage from uh with very deep domain knowledge so for instance on data centers we have been building and operating data centers for over 20 years uh uh and we are not just a uh shell and call Builder we actually know how to equip and operate the data centers we operate about 33 data centers globally uh and what Drew is saying you know with the uh Ai and hypers scale is that data centers are getting bigger and bigger there's always a huge debate is it infrastructure is it real estate but actually at the end of the day if it makes money it doesn't matter but the key Point here is that data centers are now uh is necessary because you want a connected world you want you have high uh technology AI but it's also a ban because it creates a lot of carbon so increasingly it's about how do you supply green power to these data centers and this is where Capal uh stands on its own because I believe we are the only data center Builder and operator that actively goes Upstream to look for the green electrons and then lastly to the point that Drew make about uh uh who is going to own it uh we actually have a trust uh in Singapore that oh the First Trust in Asia that owns uh uh data centers globally uh my CIO is also the chairman sitting in the audience Christina one more Point ID like to make on offices I think office sector as a whole as we know is quite UNL at the moment because of all the problems that we've seen but I think it's often very easy to taint every everything with a brush and I like to highlight that in some markets in Asia such as in Japan Singapore and soou actually the office Market is functioning very well uh we are seeing good rental growths people are coming back to work so it's not it's not like everything is what and I can understand the us being the largest office Market people tend to look at it as representative of the office sector as a whole and I just want to kind of draw that distinction I think it's a good point and we're certainly anything very strong uh office space prices here in in the region as well I wanted to give the last point to Professor Lama and also maybe a bit more philosophical because we've talked about the investment Trends there and they all make sense and really to a point that you made earlier and and you've written several books on it the fact that cities are taking on new responsibilities maybe those traditionally that were taken by a government and given what we've heard on the panel how do you see that playing out in the next 5 to 10 years well the co has showed us how this was possible so we've seen countries around the world I will not name any where the central leadership really failed they did not take action on covid but cities did they stepped up to the plate uh we're going to see more of that and going back to the point that um Tima was making before that cities need to be interconnected if cities are going to play This Global role I expect them to play interconnection will be critically important one element and I'd like to finish on that uh that should not be overseen or forgotten is leadership when investors look at investing in countries they look at the leadership in these countries when Venture capitalists look at investing in the company they look at the leadership who is the founder who is the CEO what is their Vision the same thing is going to happen with cities and we need to build up the leadership in cities um we Business Schools like I MD will try to do our our best in that area but I expect that other major business school universities will also carve a niche somewhere to train the leadership of cities well thank you so much gentlemen and talking about my old IMD they're back in Switzerland haven't been back for a couple of years now but lovely to hear about that road map for people to invest in and also that idea of governments for the future so gentlemen so much thank you so much for your panel and your contributions today