• Real Assets
  • Technology
  • Demographics

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.

Author

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.