EY Disruptive trends in the RHC sector: urbanization

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What is urbanization?
Urbanization refers to both the increase in the proportion of people living in urban areas as well as the corresponding displacement of the rural culture with a largely urban-based culture. Urbanization has occurred in a variety of geographies and cultures throughout much of the history of mankind, primarily driven by changes in employment opportunities through advancements in agriculture, manufacturing and technology. Recently, however, it has become a global phenomenon, as developing nations begin to see significant shifts toward urbanization.

Current rate of urbanization
We are presently in the midst of one of the most rapid global urbanization events in history with cities growing in both number and size as rapid urbanization in emerging markets and continued urbanization in mature markets reshape the global landscape. In 1800, only 2% of the world’s population lived in cities; in 1950, that number had increased to one-third of the population. In 2008, a milestone was reached where the majority of the world’s population lived in urban settings. The most recent estimates by the United Nations (UN) predict that by 2050, the proportion of urban residents will increase to 66% through a combination of migration and childbirth.1

Impact of global urbanization
The increase in global urbanization will be one of the most significant trends in reshaping both society and business over the decades to come. The UN has projected that nearly all global population growth from 2016 to 2030 will be absorbed by cities — about 1.1 billion new urbanites over the next 14 years.2 The developing countries in Asia and Africa as well as Middle Eastern and Central American countries will be central players in the global urbanization trend. In Asia, the influx of population to industrial centers is anticipated to drive rapid growth in both production and consumption. Africa will also benefit in a shift from agriculture to manufacturing, and their tremendous population growth will see increases in service related employment as well.

What it means for real estate developers, investors and managers
Global urbanization, whether at a rapid pace as seen in many developing countries, or the more modest pace experienced by most developed nations, presents a multitude of opportunities and challenges for real estate developers, investors and managers.

Developers and city planners are perhaps faced with the most daunting challenge. They must consider resource availability, infrastructure needs (which would include decisions about types of transportation infrastructure, schools, hospitals, and utilities, among other things), livability, long-term utility and environmental impact. Technology advancements, changing demographics and consumer behavior will significantly transform real estate demand, use and design. For example: how will the increased adoption of the Industrial Internet of Things (IIoT) impact real estate as it redefines business models and processes across sectors? How will the increased urbanization of older populations in many western countries redefine “livability” in those locations? Will increased emphasis on sustainability transform design of buildings and developments?

Real estate investors are seeing increased opportunities due to global urbanization, albeit with corresponding increases in risk. The availability in real estate capital will continue to play a critical role in the speed and scale of global urbanization. The required capital for the construction of new and replacement of obsolete infrastructure is staggering, with sovereign wealth and pension funds being major providers. Infrastructure debt funds are still in their infancy but are attracting increasing levels of interest. Competition for prime assets in key markets will remain fierce and likely increase due to new wealth from emerging economies, driving investors to higher risk/reward opportunities in fast-growing cities. This will place even greater emphasis on developing an understanding of the local market, key drivers and players.

Property managers will be challenged with accessing and responding to changing tenant demand, market and industry needs and geopolitical, regulatory and social risks in rapidly growing and extremely dynamic cities. The involvement and use of local resources will be essential for the acquisition of knowledge of the local economic and social landscape.

Rapid global urbanization is well established and unlikely to change course over the next several decades. This trend will undoubtedly have an significant impact on society and business including where and how people live, work, shop and play. Real estate developers, investors and managers will all be presented with opportunities for those who’ve planned and are prepared to embrace the shifting needs, wants and behaviors. 

1 UN Department of Economic and Social Affairs, Population Division notes. un.org/en/development/desa/news/population/world-urbanization-prospects.html

2 Barney Cohen (2015). "Urbanization, City Growth, and the New United Nations Development Agenda."

EY Omni-channel report 2015

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