Published by the CIPS Network of the National Association of REALTORS®
Third Quarter 2004
The International Matrix: A New Perspective of the Real Estate Marketplace
By Steven P. Laposa
This article first appeared in the Fall 2003 issue of PricewaterhouseCoopers Global Real Estate Now magazine. Reprinted with permission.
New York, London and Tokyo are generally considered international cities by multinationals, governments and institutional investors. The international label also covers Paris, Rio de Janeiro, and Sydney. As the 21st century unfolds, more cities will claim the international label due to economic growth, increased population and technological advances. Cities compete against other cities for investment dollars, tourists, corporate relocations, and sporting events such as the Olympics. Most local economic development brochures include facts supporting the international status of the city. The plethora of books on globalization, the emergence of new democracies, and the impact of advanced communications on the death of distancei support such predications. Will our understanding of what makes a city "international" change in the coming years? Is "international" restricted to the major financial, telecom, government, or trade-related cities-or will the court of world opinion equally confer the mantle on smaller cities?
Growth of Urbanization
Rapid rise of urbanization has increased the nature and stature of citites globally. People are leaving the rural for the urban, creating new mega-cities with populations of 10 million or greater. According to the United Nations (see exhibit - Urban Population as % of Total Population), the concentration of population in urban areas throughout the world is expected to climb through 2015, especially in less developed and developing countries. In 1950, New York was the only city in the world with a population of 10 million or more. By 2001, the number of cities with populations of 10 million or greater increased to 17, with 21 cities forecasted by 2015 (see table - International Growth of Megacities).
The growth of cities all across spectrums of economic development stages provides opportunties and challenges to domestic and foreign real estate firms, both now and in the future. As cities grow, they need more housing, retail, warehouses, manufacturing, office and hotel facilities. A one percent annual population growth in the U.S. equates to building a new San Diego each year, with all its housing, commercial real estate, public facilities, and infrastructures. Who will build, finance, own and operate the increasing capital stock of properties as cities grow - governments, domestic companies, or foreign firms? Sociologists and economists claim we live and exist in a global community, where goods and services are continually traded internationally. But goods and services don't trade equally from City A to City B. Imbalances exist in our world. Are somecities considered more international than others? Why is a city's international status important to real estate investors, owners, tenants and lenders? Is it possible that real estate has its own international classifications and rankings?
Hierarchy of Cities?
There is, perhaps, a hierarchy of global cities ranked by various benchmarks and used by many in the real estate industry. The informal nature of the international hierarchy of cities is heard and visible in boardrooms, real estate investment committees, press releases, and in the media. A portfolio manager or a CEO with a publicly-traded real estate firm announcing a new office investment in London will get a different response if the office building is located in Nairobi. In this example, London outranks Nairobi. But what if a South African firm manages a real estate investment fund and targets Nairobi for real estate investments? Or what if the specific Nairobi office park is managed by an international brokerage company and includes only multinational tenants? Given these assumptions, is it possible to overlook the international status of Nairobi and place more emphasis on the international stature of the office park?
Source: United Nations, Human Development Report 2000
Domestic investors typically take their initial steps into the foreign investment markets by targeting 'safe' international destinations-cities that are close geographically or culturally. U.S. pension funds have invested in Europe and Asia, German funds in the U.S., and pan-European real estate investment funds have significantly increased with the maturity of the European Union. However, real estate investors focusing on emerging markets, transitional economies, or less developed markets expect healthy scepticism from potential shareholders, fund participants, or the industry at large. Increased risks associated with atypical foreign investments may offer higher returns than domestic ventures, but may also include higher downside risks. Additionally, the options for real estate ownership, equity versus debt structures, public versus private real estate capital market maturity, and repatriation of profits changes quickly across international borders.
Significant differences between cities, in terms of economic growth drivers, income and education levels, political freedoms and property rights are crucial to real estate firms. They create an unseen border that dictates where and how a real estate firm operates and invests. As a city grows, the distribution of property types and location of commercial real estate evolve. That's why suburbs and edge cities exist. Population increases and continued urbanization in Lagos, Beijing, and Los Angeles do not create similar demands for residential and commercial real estate. Public housing and infrastructure improvements may be required in one city than another. In more advanced more economies, new supplies of state-of-the-art office buildings and large-scale retail centers are possible due to increasing foreign and domestic demand. International real estate opportunities are as diverse as local economic and demographic drivers of growth.
The International Real Estate Matrix
Although incomplete, the ranking of global cities is the first glimpse into the international real estate matrix. It's important to collect, analyse, and compare basic economic and demographic data across cities. However, the international matrix for real estate firms evinces a systems oriented view of the world. Understanding the matrix requires multidimensional thinking, a holistic vision of economics, finance, sociology, and urban economics. It takes into consideration that not all cities are homogenous in international characteristics, that even submarkets within cities are not equally international. Ranking cities in simple categories as developed, newly industrialized, or less developed is two-dimensional, usually with a single benchmark or weighting of two or more variables. For example, if banking is a critical benchmark, then ranking international cities by stock market exchange size or multinational banking firms provides a simple ranking criteria solution. If foreign trade is the benchmark, then a similar ranking of the largest exporting and importing cities identifies which city is more international than another.
International Growth of Megacities
Number of Cities by Time Periods & Population (in millions) |
| 1950 - 1 Megacity | 2001 - 17 Megacities | 2015 - 21 Megacities |
| New York (12.3) | Tokyo (26.5)
Sao Paulo (18.3)
Mexico City (18.3)
New York (16.8)
Mumbai (16.5)
Los Angeles (13.3)
Calcutta (13.3)
Dhaka (13.2)
Delhi (13)
Shanghai (12.8)
Buenos Aires (12.1)
Jakarta (11.4)
Osaka (11)
Beijing (10.8)
Rio de Janiero (10.8)
Karachi (10.4)
Manila (10.1) | Tokyo (27.2)
Dhaka (22.8)
Mumbai (22.6)
Sao Paulo (21.2)
Delhi (20.9)
Mexico City (20.4)
New York (17.9)
Jakarta (17.3)
Calcutta (16.7)
Karachi (16.2)
Lagos (16)
Los Angeles (14.5)
Shanghai (13.6)
Buenos Aires (13.2)
Manila (12.6)
Beijing (11.7)
Rio de Janeiro (11.5)
Cairo (11.5)
Istanbul (11.4)
Osaka (11)
Tianjin (10.3) |
Source: United Nations Population Division
Even if a city ranks high internationally by a single benchmark, that does not imply high international status from the perspective of real estate. Real estate is more than location; it includes the rights to that location. Property and legal rights are fundamental and quickly impact city rankings of foreign real estate firms. Limitations on land and building ownership, and the legal process to acquire, dispose and protect property ownership affect a number of foreign and domestic business strategies. Recent research shows a direct correlation between economic growth, per capita income levels, and property ownership rights. If property rights are non-existent for domestic firms and households there is little opportunity for foreigners.
Another dimension of the international real estate matrix is the maturity and sophistication of domestic capital markets, including real estate capital markets. Foreign investors need to know if other foreign investors are in the market, or if foreign demand is prevalent. The growth of public real estate markets, both equity and debt, is another element in the real estate matrix. The presence of large multinationals in a domestic real estate market is a signal for foreign real estate investors. Foreign real estate capital is likely to follow multinationals in a market in the same way that U.S. banking expansion strategies have advanced into foreign markets. Thus, international real estate brokerage firms are generally located in cities with international clients.
Real estate professionals also understand that space matters-that economic activity normally occurs in clusters. The stature of a city is vital, but so too is the location within the city, e.g., submarkets or trade areas. To the degree that economic activity is clustered, so too are the property types that support such activity. Offices, hotels, and high street retail are usual clustered downtown. Foreign and domestic firms locate in the office buildings and retail stores, whereas hotels serve local and non-local demand. The absence or presence of international tenants, or the number of tourists and foreign business people visiting a city is a signal of the international status of a city. For example, which area in London is more international: Central London, the West End, or Southbank?
The international status of a city may eventually include temporal variables that impact the international status of a city. The geographic location of international activity may not necessarily be the place where international ideas are developed. Are cities as small as Jackson Hole, Davos, and Oxford international? A meeting of the World Bank in Jackson Hole, Wyoming can have large-scale impacts on a host of global cities in developing and developed countries. The World Economic Forum in Davos, Switzerland can radically change business strategies of participating corporate executives, and international students at Oxford University represent 25 percent of the student population and originate from 130 countries. In small resort cities, a significant amount of foreign ownership sometimes exists in the residential property sector, e.g., Vail or Aspen.
The international stature of a city may be a matrix to the real estate industry, but it is not chaos. There are clear signals in the various stages of a city's evolution that determine its international stage in the matrix. Several of the signals require segmentation of the major par-ticipants in a real estate market into foreign versus domestic firms. The major participants are: (1) demand drivers, (2) property owners, (3) capital sources, and (4) professional servic-es, such as brokerage firms and property managers. The graphs on this page illustrate three stages of the evolution of the international real estate matrix. In each stage, the roles of the participants, identified by foreign (F) and domestic (D), are symbolized. Each stage is briefly described in the graphs. (See Fall 2003 issue of PricewaterhouseCoopers Global Real Estate Now magazine to download graph.)
The international real estate matrix is dynamic as it is subject to changes over time and space. There is actually order in the apparent disorder and there are signals that can alter the business strategies of real estate firms, foreign or domestic, within a local market or external to a market. Yes, real estate has a unique way to rank international cities and the ability to creatively view the future of cities globally.
i See Frances Cairncross, The Death of Distance: How the Communications Revolution Will Change Our Lives (Boston: Harvard Business School Press, 1997)
For more information
THE WORLD BANK GROUP, URBAN DEVELOPMENT
UNITED NATIONS ENVIRONMENT PROGRAMME
MEGA-CITIES PROJECT
STEVEN P. LAPOSA can be reached via e-mail at: steve.laposa@us.pwc.com
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