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Thematic investing

Smart Cities: insights on a powerful trend 

5 questions for our SmartCity portfolio manager

September 2018

Ivo Weinöhrl, Senior Investment Manager for Pictet's SmartCity strategy, explains how the powerful urbanisation trend is creating compelling investment opportunities.

What constitutes a “smart city”?

In a nutshell, a smart city improves the quality of life of its citizens and ensures that the ongoing urbanisation trend is sustainable. It does so by having the capacity to collect, aggregate and analyse the data generated by our increasingly technological and connected world, and then applying those insights to our day to day lives to solve the challenges human activity generates.

Why is this theme relevant to investors?

In order to manage rapidly growing populations, cities around the world will have to adapt to protect human wellbeing and reduce our environmental impact. For this to happen, we will have to make them more intelligent. These challenges will generate an abundance of investment opportunities across a broad range of sectors. Companies active in mobility and transportation, infrastructure, real estate, sustainable resource management or services catering to urban lifestyles, all have a role to play in supporting this transformation.

And why are “smart cities” the future? Isn’t extensive (and expensive) infrastructure already in place to support cities around the world?

Two words: demographic development. The world population is growing at a rapid pace, and at the same time people are moving to cities to enhance their opportunities or due to changing lifestyles. The momentum is especially powerful in the developing world, where we will see urbanisation rates converge towards those in the developed world over the next 30 years. Traditional infrastructure will simply become insufficient to support this influx of people. Citigroup estimates that investments of USD 2.1tn annually will be needed by 2030 to transition 4 billion human beings to sustainable cities and communities.
People are moving to cities
Urban population in millions per country
SmartCityUrbanReality.png
Source: World Bank, 2016

Where will the funding come from? Aren’t a lot of governments around the world heavily indebted?

Yes, they are, but at the same time, they face significant pressure to act on several fronts. On the one hand, the Sustainable Development Goals set out by the UN in 2015 aim to tackle some of our biggest challenges by 2030, and Goal #11 deals specifically with ensuring cities are inclusive, safe, resilient and sustainable. This will be driving the global policy agenda, and investments, over the coming decade. At the same time people around the world are increasingly demanding better quality of life for themselves and their children – from the air they breathe to access to more efficient healthcare. But given the lack of excess cash on public balance sheets, a large portion of “smart city” investments will have to come from public-private partnerships or directly from the private sector. And this is already happening. We have a great example in New York City, where the transformation of disused phone boxes into a city-wide network of super-fast, free Wi-Fi kiosks, was funded by selling advertisement on screens placed above the kiosks.

How do you translate such a theme into investments?

We see three promising segments of investments for the theme -

  1. Building the city: companies involved in the design, planning and construction of tomorrow’s cities, with a focus on efficiency and sustainability.
  2. Running the city: companies that provide traditional, but essential infrastructure like water supply and waste management, digital infrastructure like 5G communication or payment networks, and new, more efficient mobility solutions;
  3. Living in the city: companies that offer services and solutions for 21st century urban living, including housing, working and recreational activities.

All three of these categories harbour innovative business models whose growth and success will be powered by population expansion and the overarching goal of improving people’s quality of life.