City resilience - a key concern for long-term investors

Kate Brown, Grosvenor Group Sustainability Director, looks at city resilience, a key concern for long-term investors in the urban environment.

19th May 2015

City resilience is a key concern for long-term investors in the urban environment. It is also a concern for individual cities seeking to remain competitive, attract capital, and provide a decent living and working environment for their populations. How do you go about evaluating a city’s resilience as an investor entering a market or comparing a number of markets with different characteristics? How is creating sustainable, resilient, and live-able cities becoming part of investment strategies? And what can cities do to encourage and retain international investment?

There are some key principles that investors and governments should bear in mind when trying to answer these questions.

Key Principles For Investors
1. Quantify the risk systematically
Traditionally, real estate investors have been concerned with economic factors such as rising interest rates. But there are plenty of other concerns—rising sea levels, earthquakes, overpopulation, social inequity, pollution, crime, and poorly functioning government.

These risks and trends of globalisation, climate change, and aging populations are creating dramatic changes at the country, city, and neighbourhood levels, meaning that the traditional methods of assessing real estate investment risk—such as standard deviation of returns, projected vacancy rate, and forecast rental growth—are insufficient.

2. Be mindful of your likely length of investment
Systematic evaluation of city resilience has clear implications and opportunities for organisations with a fiduciary duty to guard the value of their investments over the long term—including pension funds, insurance companies, sovereign wealth funds, trusts, and others.

The insights provided can also help long-term investors create portfolios that optimise returns to minimum vulnerability scores or maximum adaptive capacity. Investors deploying capital into more resilient cities can be confident that if they take a knock, they will bounce back in a relatively short time and are likely to provide safe havens in a rapidly changing global environment.

However, for those investors with a shorter time horizon (seven years or less), it can be more challenging. For these short-term investors, a portfolio of resilient cities will not necessarily be less volatile. In some cases there could be greater opportunities, especially where a city has demonstrated its commitment to improving its adaptive capacity.

Resilience is a dynamic process, and the risks will change over time. If emerging cities follow the principles set out below, it is possible that they will attract key infrastructure investment, meaning that in 5 to 10 years, they could become more resilient.

Key Principles For City Governments
1. Importance of a municipal vision
Key to a well-planned and governed city is a central municipal vision, illustrated most recently in New York City’s ‘PlanNYC’ long-term city vision. Having a co-ordinated response has enabled city leadership to make strategic investments in the public realm, making the city more livable. The plan specifically addresses climate resilience with many mitigation and adaptation strategies. It was put into practice in the wake of Hurricane Sandy, enabling the city to get back to business quickly.

In emerging cities, this clarity is often lacking and is greatly needed. A clear city-wide plan with transparency about what is trying to be achieved provides certainty to investors and filters into the regulatory system through planning and building regulations.

A clear vision also enables cities to prioritise strategic investment. Cities that invest in public infrastructure, planning systems, and support for employment growth can increase their resilience significantly, thus improving long-term investment prospects.

2. Establishing a framework to ensure institutional quality
Certainty is critical to attracting and retaining international investment in infrastructure. There has to be a clean system that cannot be arbitrarily changed and in which foreign investors will have confidence.

To establish this, institutions are needed at the city level, such as a government agency that holds the municipal vision and a program that drives its delivery.

This central organisational role is key, as it leads to an image of cleanliness and competence, from which grow security, trust, and transparency – which are all key elements to attracting and retaining investment.

By undertaking a resilience assessment, government authorities can judge their own performance, assess future risks, and improve their capability to adapt to adverse events in an increasingly uncertain world.

Following these key principles can allow developed and developing cities alike to attract and retain capital, remain competitive and create sustainable, resilient and liveable communities alongside long-term investment strategies.

Kate Brown is Group Director for
Sustainability at Grosvenor

In 2014 Grosvenor released Resilient Cities: A Grosvenor Research report, which ranked 50 of the world’s cities according to the overall resilience, a combination of their vulnerability and adaptive capacity. Read the report here.

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