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Real estate: the rise of the metropoles

The growing importance of megacities, the largest and most productive metropoles, is likely to have significant implications for investors, says Souad Cherfouh.

3 minute read

nighttime skyscrapers

The term ‘metropolisation’ derives from the Greek word metropolis, which in ancient times signified the ‘mother city’ of a colony; the major hub from which settlers ventured forth. For our purposes, the term metropolis signifies an important centre for regional or international commerce and communications, while metropolisation describes the growing importance of the metropoles - the largest and most productive megacities relative to smaller ones.

Two main factors, almost certainly related, have driven the rise of metropoles. Economic growth in many developing economies, especially in Asia and in central and eastern Europe, has outpaced the developed world, while regional economic disparities within developed economies have increased.

These trends have, in turn, been propelled by various developments. The first is economic globalization,1 which has brought the developing world into the global supply chain as manufacturing activity has moved to these economies. It has generated wealth and opportunities for emerging economies through the ‘catch-up effects’ of directing capital to places with untapped potential. But it has also resulted in the demise of long-standing manufacturing activities in many parts of the developed world.

A second driver is the rise of the knowledge-intensive service economy in developed countries. Growth in knowledge-intensive sectors is highly dependent on the depth of human capital and the network effects that allow the sharing of ideas and information. It tends to mean that people and firms will concentrate in certain areas. The ‘agglomeration effects’ of having access to other firms in the same industry and access to larger pools of skilled labour is the key benefit.

A third and related driver is digitalisation – the implementation of digital technologies to change business practices and generate new value-producing opportunities. Digitalisation has exacerbated the shift to knowledge-intensive activities by allowing cities to be connected globally and therefore to develop stronger clusters of talent and innovation.

Metropolisation in Europe and the US

Though overall population growth in Europe has been modest for many years, some interesting trends can be observed. Urbanisation, for example, has continued as people relocate from rural areas. Moreover, not all urban centres are witnessing the same degree of population growth, with larger cities, especially capitals, taking the lion’s share. Between 1995 and 2017, the population living in the top 30 European metropoles is estimated to have risen by 13.2 per cent, compared to 6.7 per cent for Europe as a whole. Unsurprisingly, employment growth has been far more impressive in these bigger centres.

At the same time, major indicators of economic activity are becoming increasingly concentrated in the largest metropoles. According to data from Oxford Economics, the top 30 metropolitan areas in Europe generated around 36 per cent of European GDP, 30 per cent of the continent’s employment and 32 per cent of retail spending in 2017, despite accounting for just 26 per cent of the overall population.

Metropolisation is also evident in the US. Occupier market data suggests that for both office and retail sectors the largest cities in the US have performed best in recent years, with rental growth in the top 30 metropoles strongly outperforming the rest of the market since 2013. By contrast, prior to the Global Financial Crisis, the rest of the US outperformed.

Implications of metropolisation

We believe the major drivers of metropolisation have much further to run and, as such, it is important to look at the implications for real estate investment in developed economies.

The key conclusion is that the geographic focus of investors should be concentrated on the largest and most successful metropoles in order to drive outperformance. Real estate is more local than ever and, instead of a country-level strategy employed by many, it may be more beneficial to focus on developing expertise at the city level.

At a sector level, it is preferable to adopt a multi-sector strategy in a few key centres rather than specialise by sector and then diversify geographically.

In terms of risk appetite, this analysis suggests investors seeking to take more risk should do so by acquiring secondary assets in stronger centres rather than buying in secondary/weaker locations. A focus on emerging sub-markets in the stronger centres may also be a way of taking risk and employing the expertise that can come from a concentrated investment focus.


The setting up of the World Trade Organisation in 1995 was a key globalisation milestone, as was China’s accession to the WTO in 2001. Likewise, the fall of communism in Europe in 1989-90 and the subsequent market reforms in these economies was an important driver of globalisation.


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