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Cities of the future: Europe

The rising importance of the knowledge-based economy is exerting a considerable influence on European city office markets, says Monika Sujkowska.

2 minute read

A clear trend in the most-developed economies in recent decades has been the shift to a knowledge-based service economy. Globalisation has led to the outsourcing of manufacturing and back-office functions to emerging markets, while the automation of routine tasks has caused the demise of many lower-skilled jobs. In the most successful economies, this loss has been countered by growth in knowledge-intensive service sector roles. These trends are likely to continue, with emerging technologies driving a major new round of job automation1.

Identifying knowledge centres

Knowledge-based economic factors, notably human capital and networking capabilities, are not evenly spread between cities. As a result, not all city office markets are equally likely to benefit from the growth of the knowledge-based economy. For a long-term real estate investor, it is critical to identify markets with the strongest knowledge capital credentials as they are likely to boast higher productivity, higher job growth, stronger demographics and more robust real estate demand.

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 business hub credentials for 50 European cities.

To determine a city’s strength in human capital, we selected the following indicators: [Human capital may be thought of as the stock of knowledge, habits and social attributes found in a population that allows it to produce economic value]:

-        Percentage of the population completing tertiary education;

-        The OECD’s Programme for International Student Assessment (PISA) results;

-        The number of highly-ranked universities;

-        The number of highly-ranked business schools;

-        Spending on research & development as a percentage of city GDP.

To determine a city’s attractiveness as a business hub, we look at:

-        Patent applications and trade mark registrations;

-        Employment in knowledge-intensive industries;

-        Employment in the public sector, less being better;

-        A city’s ranking as a financial centre.

Putting together the human capital and business hub measures allows us to generate rankings of cities’ potential as knowledge capitals. This analysis is part of a broader effort to gauge the relative attractiveness of European cities as investment destinations. Other drivers include each city’s economic outlook, demographics, governance, international links and technology.

North South divide

On the basis of our analysis, a number of cities are attractive. Urban areas with the greatest potential as knowledge centres are concentrated in Northern Europe, with cities in Southern and Eastern Europe tending to rank lower.

Within Northern Europe, Paris stands apart for the sheer scale of its educational and other infrastructure. It boasts continental Europe’s largest number of top-class universities and business schools. It is a major financial centre and a leading hub for a broad range of knowledge-intensive industries. Other high-ranking centres include the Nordic cities, especially capitals, the larger Dutch cities and Dublin. Germany’s major cities present something of a mixed bag with some, notably Munich and Frankfurt, featuring strongly while others score quite poorly.

Southern laggards

In Southern Europe Italy is especially weak, with educational attainment results among the very worst in our sample. Centres on the Iberian Peninsula also fare poorly as a rule. Madrid ranks highest, helped by its position as a regional financial centre, but its overall score is only middling.

Cities in Central and Eastern Europe are also generally in the bottom half of the rankings. Only Warsaw manages to squeeze into the top half. Its growing role as a financial centre and some strength in knowledge-intensive industries allow it to score relatively highly as a business hub, however.

Local knowledge holds the key

Knowledge capitals are appropriate long-term real estate investment targets. However, simply investing in the right cities will not guarantee investment outperformance. Real estate is a local asset class and it is crucial to develop deep local expertise and networks in each city. This will position investors to create value through asset management and source the most attractive buying and selling opportunities.

1 'Rise of the Machines, UK Real Estate in the Computer Age', Aviva Investors Investors’ Journal, November 2014.


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