Investment opportunities likely to emerge can be split across three broad areas of activity: building the city; running the city; and living in the city
Smart cities look well set to power global economy
Abu Dhabi and Dubai rank at the top of a list of cities in Africa and the Middle East with the most developed technology bases published by McKinsey Global Institute earlier this year.
But they still lag behind smart city leaders like New York City, Stockholm and Singapore. With the UAE’s government-led Smart City projects expected to drive regional Smart Citie spend to a record-high of $2.3 billion by 2021, this creates significant opportunity for investors who are informed on the trends driving this growth.
Cities may occupy just 2 per cent of the earth’s land surface but they are home to more than half of the world’s population and generate 80 per cent of all economic output. And their dominance is growing: by 2045, an extra 2 billion people will live in urban areas. This will no doubt place significant pressure on infrastructure, resources and the environment.
Encouragingly, those responsible for planning and building the urban centres of the future are up to the challenge. Worldwide, authorities are working closely with the private sector in an effort to make our cities safer, more sustainable and better connected.
In the development world, “smart cities” remain central to the United Nations’ Sustainable Development Goals (SDGs). Under SDG 11, the United Nations specifically calls for additional urban investments through to 2030 to “make cities inclusive, safe, resilient and sustainable”.
The UAE was an early adopter of the SDG agenda. Government-led strategies like Smart Dubai have made significant progress in using technology to create a more efficient and seamless environment, thanks the introduction of public Wi-Fi and electric car charging stations, as well as smart parking, live traffic monitoring and smart power grids. Last month at Gitex Technology Week, 59 government entities and private-sector companies in the UAE showcased new services related to smart cities - from blockchain business ledgers to billing and consumption services.
It is in response to these trends that Pictet Asset Management developed SmartCity, a strategy with the objective of investing in companies that we believe will ride the wave of urbanisation. The investment opportunities we see emerging can be split across three broad areas of activity: building the city; running the city; and living in the city.
When it comes to building cities, it is clear that more people need more buildings: houses; offices; schools; a and leisure centres. China and India alone require up to 2.8 billion square metres of new residential and commercial space a year.
The challenge is to design, plan, construct and finance these buildings in an efficient and sustainable fashion. Although there are efforts underway to build higher to save space and reduce urban sprawl, conventional towers tend to be very environmentally unfriendly both during construction and operation – which ultimately also makes them expensive.
Added to this, what people want from buildings will also evolve as technology and demographics change. For example, the rise of the “Internet of Things” – with the number of connected devices forecast to reach 25 billion globally by 2020[ – will fuel demand for high-powered internet.
Next comes the running of cities. Sixty per cent of cities’ economic growth is coming from a growing population, and 40 per cent from improving labour productivity. To run efficiently, urban areas need better transport, water, energy and waste management infrastructure, logistics facilities and public services from healthcare to education.
Of the $81 billion that will be spent on smart city technology this year, nearly a quarter will go into fixed visual surveillance, smart outdoor lighting and advanced public transit, according to the International Data Corporation.
Eventually, this is likely to mean high-speed trains and driverless cars. Consultancy McKinsey forecasts that up to 15 per cent of passenger vehicles sold globally in 2030 will be fully autonomous, while revenues in the automotive sector could nearly double to $6.7 trillion thanks to shared mobility and data connectivity services.
At their smartest, cities will combine what is good for the planet with what is good for the economy. A recent report by the Global Commission on the Economy and Climate found that investing in lower-emission public transport, using more renewable energy and increasing efficiency in commercial buildings and waste management in cities could cut energy costs by about $17tn worldwide by 2050, as well as cut commuting times and improve general liveability.
Finally, as well as creating more efficient cities, we need to find new and better ways to live and work in them, not least in making people’s lives more flexible using innovative technology.
Flexible offices are a key growth industry. Globally, the number of people using co-working spaces has tripled over two years to 1.74 million and is forecast to reach 5.1 million by 2022.
McKinsey estimates that adopting a smart city concept can improve key quality-of-life indicators, such as health, safety and environmental quality, by 10 to 30 per cent. We think that embracing it is crucial for the future of our increasingly urban world, where efficiency and sustainability go hand-in-hand. There clearly should be, therefore, a sizeable investment opportunity with superior growth prospects.
Investors can benefit from it by helping to shape the smart cities of the future.
Ivo Weinoehrl is senior investment manager at Pictet Asset Management, in charge of their SmartCity strategy