For cities around the world, the sources and systems of investment in real estate, infrastructure, and other hard assets have changed quickly and dramatically. Cities must negotiate this new pattern of investment with different risk and return patterns from the past, and with investment cycles that have changed time frames and dynamics. These changes require them to become more focused on the conditions that will attract investment.
What is an investment-ready city?
Investment-readiness has become an important attribute to ensure flows of investment can achieve wider social and sustainable development goals. Investment-readiness has been defined as:
“The demonstrated capacity of a city to prime itself towards the needs of external investors, by providing a credible and efficient framework and process for external investment, coupled with a development pipeline of bankable propositions and opportunities that meet the specific process, asset, scale, and risk management requirements of the investors”
Investment-ready cities cultivate a reliable supply of opportunities for inbound capital. To accomplish this they prepare the opportunities and assets to meet investor funding demands and risk/scale appetites, and seek to understand how different forms of investment capital need to be structured. It is critical for city leaders to plan ahead and prepare an analytical framework that will help understand the implications of various capital structures and trans-actions structures. Similarly, in public–private partnership transactions, where there is some form of shared ownership stake between public and private entities, it is imperative to understand both investment perspectives, and the meaning of partnership, to structure mutually beneficial arrangements. Working with experienced real estate professionals throughout the planning and partner solicitation phases can streamline the project financing and development phases. Once a city is investment-ready, they then look to maintain conditions to ensure projects are bankable.
Governance framework and transparency
The quest for cities to become ready for investment has invited concern that they are engaged either in a destructive race to the bottom, or in a pursuit of a quick windfall that does not protect business and investor interests over the longer term. There are certainly many instances where cities have inadvertently compromised their ability to compete across whole cycles or multiple cycles by impulsively accepting business investments of all types, in any requested location and at any time.
This raises the question of the right governance framework for cities to be effectively investment-ready. City governments have to be mindful of the investment demands of today’s firms, so that core framework attractiveness can be complement-ed with real channels for capital to find its way into the city. They also need a full understanding of the market and market evolution, and how it can be shaped over whole business cycles.
Investors are responsive and supportive towards coherent city visions that provide a clear and evidence-led pathway for sector and spatial growth. Credible leadership at the city level is almost always a key concern. The experience of cities such as Manchester and Brisbane shows that cities need to have not just a clear plan and vision but also a “chief negotiator” who acts as a high-profile single point of contact and is able to reach a binding agreement with an investor or locator that produces durable benefits on both sides.
For a city to have hard assets that are invest-ment-ready, it tends to need:
- a stable, predictable, transparent, and consistent environment for external investment, with planning that minimizes the risk of oversupply, or firm cannibalization;
- a process for investment characterised by low risks and predictable costs;
- attractive risk-adjusted returns for different classes of investors; and
- the ability to leverage its own assets, including public land and contracts.
Cities cannot achieve all of these outcomes by themselves. The national system remains pivotal for providing the transparency, political stability, and legal predictability to attract rather than deter investment. Any overlap and friction between city-level and national-level policies can create serious regulatory complexity, especially if it is accompanied by governance misalignments. The challenge is for cities to be strategically open for investment while maintaining consistency and coherence among the legal, regulatory, and legislative institutions at the local and national levels. Cities whose governance and institutional frameworks have been rated most highly for business and investment attractiveness include Singapore, Vancouver, and Auckland.
Developing a pipeline of bankable projects
The potential of investors to commit capital hinges on the availability of investible sites and on the regulatory and planning frameworks that support and enable such investment to take place. Many cities have developed an investment framework that identifies and prioritizes a pipeline of commercial and physical projects according to a wider growth strategy and measurable impact. A robust pipeline of financially viable propositions and opportunities is one that meets the specific process, asset, scale, and risk management requirements of investors, including institutional investors (e.g., pension funds). This means that cities need the technical capacity to mount their own programme of development.
How to capitalize on private capital’s interest in diversification
Diversification is widely viewed as a hallmark of a strong investment portfolio. Long-term investments in urban real estate are opportunities to diversify a portfolio of stocks and bonds, and pool risk. This option is also pursued by smaller scale investors who may prefer to invest in real estate investment trusts (REITs), limited partnerships, mutual funds, or exchange-traded funds. Today institutional investors rarely allocate more than 10 per cent of their portfolio to real estate.
Investors also increasingly prefer to diversify their own real estate portfolio. Diversification is achieved by location, property type, tenant, sector, or lease term. This allows different investment strategies to take form whereby capital is deployed accord-ing to different combinations of risk appetite. As this diversification approach takes hold, more cities have an opportunity to benefit from real estate investment.