MIPIM Column: Identifying the cities of the future in Europe

By Paul Norman - Wednesday, March 14, 2018 12:39

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The rise of the knowledge-based economy is exerting a considerable influence on European office markets, writes Monika Sujkowska, Analyst, Aviva Investors Real Estate

Globalisation has led to the outsourcing of manufacturing and back-office functions to emerging markets. In the most successful city economies, this loss has been countered by growth in knowledge-intensive service sector roles. Not all cities are equally able to generate such jobs. For a long-term real estate investor, we believe it is critical to identify areas with the strongest knowledge capital credentials as they are best placed to benefit from higher productivity, stronger demographics and more robust real estate demand.

At Aviva Investors, in order to identify which cities have most potential as knowledge centres, we have selected a range of indicators of strength in human capital and innovation for 50 European city economies.

Human capital is the stock of knowledge, habits and social attributes found in a population, which allows it to produce economic value. In many ways human capital is intangible but it is clear that the educational attainment of a population is crucial to its development, and educational attainment can be measured. Academic evidence finds, for instance, that there is a significant positive correlation between the density of universities in a region and future economic growth in the region³.

A city’s capacity for innovation meanwhile will be heavily influenced by its industrial structure. Cities with greatest potential are likely to be those that already have a large share of activity in knowledge-intensive industries such as IT, financial services, professional and scientific activities. Conversely, cities that are heavily dependent on public sector employment are likely to have below average potential for innovation.

Our research has shown that the continental cities with the greatest potential as knowledge centres are concentrated in Northern Europe, with Paris a standing apart owing to the sheer scale of its education offering and other infrastructure. Nordic Cities, especially the capitals, larger Dutch Cities and Dublin are also very attractive knowledge centres.

Southern European centres tend to sit towards the bottom of the ranking, as do cities in Central & Eastern Europes. Warsaw however is a more positive case owing to its role as a financial centre and its strength in knowledge-intensive industries.

This analysis forms part of a broader effort to gauge the relative attractiveness of cities as office investment targets by looking at other drivers such as economic outlook, size, demographic structure, quality of governance, international links and technology. The purpose of the analysis is to identify where highly-skilled people want to live, work, learn and play. We believe the cities we have identified will generate the most attractive jobs as well as offering the best environment for global talent.

Investment out-performance will not come merely from being in the right cities, however. Real estate is a local asset class meaning that access to information gives investors a competitive advantage. By focusing on the most robust office markets and developing deep expertise, real estate investors can position themselves to make large conviction calls that are required for sustained investment outperformance.

pnorman@costar.co.uk

 

 

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