By Richard Barkham
Real estate investors often worry that their portfolios might be pummeled by economic factors such as rising interest rates. But there are plenty of other concerns—rising sea levels, earthquakes, overpopulation, social inequity, pollution, crime, and poorly functioning government. Globalization, climate change, and aging populations are creating dramatic changes at the country, city, and neighborhood level. These changes, in turn, are likely to have a profound impact on the built environment.
The traditional methods of assessing real estate investment risk—such as standard deviation of returns, projected vacancy rate, and forecast rental growth—fall short in a world in which the basic patterns of the last two centuries are undergoing drastic transformation.
Global property group Grosvenor has long realized that its future success is tied to the sustainable growth of the cities where it has a presence. The company, like other long-term global investors, has a vested interest in helping create and manage vibrant, viable cities. At the same time, the firm and its investors seek to preserve real estate capital values and generate sustainable rental income.
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In order to better plan and manage its global portfolio, Grosvenor undertook a three-year study, titled Resilient Cities, seeking new ways of measuring cities’ long-term resilience and identifying the world’s most resilient cities. “Resilience” is defined as the ability of cities to continue to function as centers of production, human habitation, and cultural development despite the challenges posed by climate change, population growth, declining resource supply, and other paradigm shifts.
The study examined and ranked 50 of the world’s most important cities. Although these cities account for only 7 percent of the world’s population, they represent the major focus of most global real estate investment and consume the lion’s share of the world’s resources. Thus, the fact that so many struggle to meet basic levels of resilience indicates how unprepared the rest of the world is to face the next century’s major challenges.
In the context of this study, vulnerability is not the same as susceptibility. Some societies are better prepared for adverse events and are more adept at bouncing back: witness New York City’s rapid recovery from the impacts of 9/11 and, more recently, Hurricane Sandy. At the opposite end of the spectrum is the devastation wrought in the Philippines by Typhoon Haiyan this past November.
To recognize this ability, the study weighs “adaptive capacity” equally with vulnerability in order to assess overall resilience. A city’s resilience is a negative function of its vulnerability and a positive function of its adaptive capacity. The results can be counterintuitive. For example, investors tend to shun cities with high taxes and regulatory burdens; however, cities that invest tax revenue in public infrastructure, planning systems, and support for employment growth can increase their resilience significantly, thus improving long-term investment prospects.
On Top of the World
Results from the study indicate that Canadian cities are the world’s most resilient, taking the three top positions, with Toronto having the highest score, followed by Vancouver and Calgary. Two inland U.S. cities, Chicago and Pittsburgh, come in next. The top ten most resilient cities are in North America and northern Europe, and the ten least resilient—including Mexico City, São Paulo, and Mumbai—are in emerging markets. Scores for North American cities range from 100 (the top score) for Toronto to 87 for Houston. Scores for European cities range from 94 for Stockholm to 60 for Moscow. There is a greater range for Asian cities, from Tokyo’s score of 85 to just 57 for Guangzhou.
But the sand shifts when the cities are ranked purely in terms of adaptive capacity, with U.S. cities taking six of the seven highest positions. New York City leads the pack, followed by Toronto, Los Angeles, Washington, D.C., Chicago, San Francisco, and Houston. The reason for this disparity is that U.S. cities have well-established response, planning, and funding systems in place—either at the local or national level—allowing them to effectively cope with threats and disasters. In contrast, Europe has strong planning systems but loses points due to higher energy costs and a relatively old population. Asian cities have relatively weak planning systems and are vulnerable to environmental degradation.
Crunching the Numbers
To create these rankings, the research team studied more than 160 data sets covering a two-year period—2012 and 2013—from robust, industry-accepted sources such as the World Bank; the International Monetary Fund; the United Nations Educational, Scientific, and Cultural Organization (UNESCO); the Economist Intelligence Unit, and others. The model examined indicators in five main thematic areas for both vulnerability and adaptive capacity.
To assess vulnerability, the five main themes were:
- climate—vulnerability to rising sea levels, storms, temperature change, drought, or extreme events such as earthquakes, tsunamis, or even volcanic eruptions;
- environment—measurements of all types of pollution, as well as urban sprawl;
- resources—vulnerability to potential shortages of water, food, fuel, and other critical resources, and the ability of the population to access such resources;
- infrastructure—the quality and accessibility of transportation, resource provision by utilities, and high-quality housing; and
- community—the expected impacts of changing demographics, livability, crime, health, education, affordability, inequality, culture, and even corruption.
The five major themes analyzed to assess adaptive capacity were:
- governance—whether the city is governed in a democratic and transparent manner, with citizen participation;
- institutions—whether government and nongovernmental organizations have the capacity to deliver services effectively;
- technology—whether the city can draw on technical expertise from local universities and other groups that foster innovation, and whether it has national monitoring systems in place;
- planning systems—whether the city has risk-based land management, disaster management plans, and well-rehearsed emergency procedures; and
- funding structures—whether the city has sufficient funding, including the ability to issue debt, to cope with disasters and strengthen infrastructure.
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