Investing sustainably in cities to cool the ‘growing cauldron of disparity’

We need to build cities that are smart, connected, inclusive, affordable and sustainable.

Earlier this year, the $200bn Dutch pensions manager, PGGM, indicated its willingness to increase sustainable investment allocations if the regulator (DNB) deemed the investments less risky.
These regulatory changes in The Netherlands could increase allocations private equity, infrastructure and real estate and bring much-needed capital into cities as a bulwark for long-term social stability and prosperity.
Why now?
Environmental risks stand out over all other highly impactful and likely risks in the World Economic Forum’s annual survey. However these risks, and many social risks, are not necessarily being recognised in market prices. In CalPERS’s Investment Committee Meeting held on April 17, populism and the ‘growing cauldron of disparity’ were noted as huge tail risks that are not yet factored into asset valuation and pricing. Income inequality is driving populist reactions across the world as people who are less connected to the economic hubs of cities – the unemployed and disenfranchised – start to express their sense of powerlessness through polarised nationalist choices. History teaches us that this does not end well. Europe, and Southern Europe in particular, were brutally hit by the Global Financial Crisis. A slow recovery is under way in countries such as Spain and Portugal. But communities damaged by economic decline are slow to heal and repair. A more systematic and future oriented outlook is needed.
The urban-rural divide
The divide between urban and rural citizens is shaping international politics from Brexit to the rise of Donald Trump. Cities are where most infrastructure investment and services go, where laws are made, and to rural Americans, and possibly rural Britons alike, taxes are sometimes perceived as going to making city residents live better. The gap between the big cities and the heartland, which exists in most countries, is also about the kinds of social identities: one traditional and patriotic; the other more open, tolerant and pluralist.Cities, big ones in particular, are characterised by diversity and multiplicity of ethnicities and are therefore more likely to question authority as well as tradition. In the wake of non-voluntary migratory pressures, they offer the opportunity to heal populist divides. Cities stand for the antidote to social disconnect: they are the answer.
The affordability crisis
In leading European and Australian cities the affordability crisis is breaking new grounds. The latter are highly popular with investors in the Asia Pacific region because of their liquidity, transparency and prospects. However, Australia, once built on the dream of plenty and opportunity, now has an unprecedented household debt burden, and an investor buying frenzy is likely to deny a whole generation the benefits and security of owning a good home near work. With debt-to-income ratios around the current levels of 190 %, the whole economy is vulnerable to a painful financial reckoning. This is where savvy governments can make or break the future of a country. Along the same line, this is where investors with foresight can make a true difference.
Invest in build-to-rent and affordable housing
As home ownership has become more unaffordable in Australia with house prices in Sydney and Melbourne double since the global financial crisis in 2009, the country’s build-to-rent market is likely to emerge in the next 12 to 24 months. While the build-to-rent industry is thriving in the US and Europe, it is virtually non-existent in Australia. Markets tend to shift slowly and institutional investors are therefore well positioned to enter a safe market that is poised for the growth of ‘multi-family’ or ‘private rental’ whereby apartment blocks are built with the purpose to be leased on a long-term basis. The Netherlands, Germany and Denmark offer leases in perpetuity while, in the US, with multi-family rental housing, apartment leases can be up to five years. This would be an improvement in
Australia where leases can be as short as six months and the rental experience can be miserable as the whole industry is set up to serve the owner, not the tenant.
On May 9th, the Australian government announced that a new National Housing Finance and Investment Corporation will be established on the 1st of July 2018 to provide long-term low cost finance to community housing providers for affordable housing projects. Despite the regulatory adjustments still required by these types of investments, large Australian pension funds are interested. Cbus Property (Cbus Super) is looking at the sector and Australian Super also has a multi-family mandate, though in the US due to a more favourable market. These investments would not only stimulate affordability per se but have the beneficial outcome to ease price pressures for people who are out of the property market. Huge opportunities are opening to long-term investors who are interested in tangible social outcomes. Ensuring affordability marries affordable and sustainable living conditions – homes that are energy efficient, high performing, surrounded active and open green spaces- would mean that environmental outcomes can also be achieved by investors integrating both environmental and social metrics in their mandates.
Pluralist cities and migrants as wealth creators
Cities can become sanctuaries for pluralism and diversity.When master planning and building new neighbourhoods or renewing urban areas, mixed-use and diversity can be strong drivers of social cohesion. A 2013 study by the University of Southampton, the London School of Economics and the University of Surrey, found that living in ethnically diverse neighbourhoods leads to higher levels of community cohesion than those that are less diverse areas (the study accounted for levels of economic deprivation and segregation). A sound response to today’s waves of migration can happen if our cities are redesigned for strong social cohesion, low populism and an appreciation of diversity that includes migrants and refugees. A recent Australian report by think tank Centre for Policy Development (CPD) indicated that, on the available evidence, 17% of humanitarian migrants are in paid work after being in the country for 18 months. In the literature, there is considerable evidence that refugees are more entrepreneurial than other migrants and that over time they can catch up with others in the job market. Migration can actually keep some countries technically out of recession as more people mean more economic activity. This brings us to the consideration that responsible and long-term investors are better off leveraging market gaps, filling new needs, and influencing the very drivers for inclusive, sustainable and ultimately liveable urban communities.

Désirée Lucchese is a Sustainability Consultant
She worked on the Green Cities project in Australia: Link to report