City size doesn’t matter

Roxane McMeeken finds that real estate in European cities is valued more if there are good connections. What have Alexandria in the year AD1, Cordoba in AD1000 and New York in AD2000 got in common? All three were the leading world cities and all three boasted four critical success factors: technology, trade, tolerance and talent. According to Robin Goodchild, European director of real estate investment house Jones Lang LaSalle, these factors ensured the cities were well governed and open to new ideas. He argues that traditional notions about what makes a city successful are shifting and – importantly – they do not necessarily make for a good location for property investment. Emerging definitions of success are being based not on size but on connectivity to the rest of the world, not on hierarchies but networks, and less on wealth and more on environment, quality of life, culture, city governance and marketing, says Mr Goodchild. “The typical world city growth models are being challenged by technology and new thinking on what will constitute the winning dynamic in the 21st century”. Celtic tiger thrives Mr Goodchild’s research on worldwide growth over the past 10 years has found that the strongest growth has been from smaller metropolitan areas with fewer than two million inhabitants. For example, Dublin was found to be “probably the most successful city economy and real estate market for the past decade”. The so-called “Celtic Tiger” has seen strong employment growth of 4.1 per cent a year and strong population growth (by European standards) of 0.7 per cent a year. This has translated into a “very dynamic office market, characterised by high levels of take-up and high construction activity”, with the occupied office stock doubling during the decade. Dublin also recorded the strongest rental growth of 100 cities analysed by LaSalle at 6.1 per cent per annum. Mr Goodchild puts the city’s success down to the booming Irish national economy, which makes it a top European business environment. While he admits that external subsidies have been a factor, the economy’s success is built largely on private investment. Dublin has attracted the lion’s share of Ireland’s foreign direct investment thanks to a favourable tax regime, low regulation, labour market flexibility and a well-educated labour force. Another of the world’s most successful cities, according to LaSalle, is Dubai. The United Arab Emirates city-state holds the leading position for population growth and employment growth, at 5.8 per cent and 8.3 per cent respectively. Dubai has become the “economic and trading hub of the Gulf”, according to Mr Goodchild. Dubai has been promoting itself successfully on the international stage as a centre for business, investment and tourism. However, Mr Goodchild warns, “the real estate market is still immature and the building boom of recent years has translated into oversupply of office space”. 24-hour global cities Simon Foxley, fund manager of the European enhanced value fund at Lendlease, prefers a simpler approach to identifying the top cities for property investment. “We like the 24-hour global cities, such as London, New York, Paris and Hong Kong.” These cities, he says, “are all cyclical, so you would not want to invest if they were at the top of their cycle, but over the long term they will always have opportunities”. He adds that investors should be wary of the less mainstream cities that might currently look appealing – such as Dublin. “New cities coming up usually develop for specific reasons. Dublin, for instance, has become a zone for specialist finance. But its subsidies are coming to an end so you have to question how much growth there will be over the long term.”

Cities one-two-three LaSalle’s top three winning world cities of the past decade:

• Dubai, United Arab Emirates – in top place worldwide for population and employment growth
• Dublin, Ireland – the only city to score consistently well on all performance measures, including workforce, leisure, branding and business
• Las Vegas, USA – head and shoulders above other North American cities on most counts