Invest in the next global megacities
Cities in Southeast Asia are fast becoming some of the most modern in the world. Investors should buy into this exciting development now, says Lars Henriksson. Here, he explains how.
On my way back from a meeting in Bangkok, I hopped onto the Skytrain and caught up on some reading. I am reading Triumph of the City by Ed Glaeser, a professor at Harvard University. I came across a quote that really got me thinking: "Cities are gateways between cultures and the future way of living".
I only had to look out the window to understand what Glaeser was talking about. The roads of Bangkok used to be jammed with bright pink taxis and fierce tuk tuk drivers. The skytrain and metro system have made getting around Bangkok a whole lot easier and much more peaceful, for that matter!
Bangkok has invested plenty of money improving connectivity around the city. And not just in transport. After years of waiting, Bangkokians can finally look forward to a reliable 3G mobile service from 2013. People will at last have access to a decent internet connection on the go, which means companies can exploit a lot of untapped consumer demand in the Mekong region.
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This is one of the main areas I concentrate on in my new report. I saw first-hand the popular take up of mobile phones and the internet in Bangkok. And now I am seeing the benefits it's delivering to the locals here. And there is one company making massive gains. You can read more about that here. This is a very exciting time for this company.
Asian cities are taking off
It is not just Bangkok which is busy improving its connectivity and economic presence in the new world. There is a tilt towards emerging-market cities where the majority of people will live. And more importantly where most of the future economic growth will be generated. That's why I want to focus on the importance of growing Asian cities in today's New World - and I'llexplain two ways you can profit from this boom...
Investors need to get used to the idea of buying cities and clusters rather than countries. That's the standard approach by investment banks and brokers.
Let me start off with just one example of the rapid expansion happening in Asian cities. Transport infrastructure gives you declining marginal benefits', in the economics jargon. That means that the first investment you make say in a new motorway to link the capital and the second city gives you more economic benefit than the last mile of road, linking villages and homes. In Southeast Asia today, they're still making the early investments. They're picking the low-hanging fruit', and boosting their economy significantly with each investment.
Last week, it was revealed that a new high-speed rail line would link Singapore and Kuala Lumpur, and would be completed by 2020. Spanning a distance of 310-350km, the travel time will be cut by more than two thirds, from five hours to 90 minutes. Although there are no details about specific stops yet, there are likely to be significant benefits to these destinations. The estimated cost is reported to be RM20-30bn ($4-6bn) and will be doneon a public/private partnership basis with infrastructure provided by Malaysia.
This will mean a much easier commute for many Malaysians now working in Singapore. And could also lead to a rise in the talent pool as more Malaysian professionals are able to work in this area thanks to the reduced travel time. Other benefits may include a rise in tourism and a boost to Singaporean wage levels.
These two countries have close economic ties. Malaysia was Singapore's biggest trading partner in 2012, with a total value of S$113.4b (11.5% of total trade). And Malaysia was the second biggest recipient of foreign direct investment from Singapore in 2011, with a total value of S$34bn in stocks. Singapore is also the second largest investor in Iskandar, the property project in Johor Bahru that I talked about back in December.
The Asian connectivity boom
The two rail deals between Singapore and Kuala Lumpur are part of an estimated RM160bn ($51.6bn) in railway projects planned by Malaysia until 2020.
Kuala Lumpur is planning to build a three-line 150km mass rapid transit (MRT) system, consisting of two northwest-southwest radial lines and one circle line looping aroundthe city. Costing an estimated RM60bn, the MRT is expected to be ready by 2017.
The three lines will almost triple capacity for greater Kuala Lumpur's rapid rail network from 15km per million people to 40km per million once completed. The project estimates a five-fold increase in rail passengers.
Other Asian cities are also experiencing a similar railway connectivity boom.
Bangkokaims to triple mass itstransit networks operating in the capital from 80km as of end 2011 to 249km by 2017. Thailand also has plans to upgrade 873km from single to dual track at an estimated cost of $3bn.
Jakarta is planning an MRT, where the first phase consisting of 15.2km is expected to be completed by theend of 2016. A second phase, 8.1km, is expected to follow in 2018. While in thepre-feasibility stage, the MRT will also encompass two east-west lines, slated for completion in 2027. The total length is estimated to be 110.8km, 23.8km for the north-south line and 87km for the east-west lines with an estimated cost of Rp1trn per km of track.
Beijing is pushing to almost double the length of itsunderground tracks from 1,688km in 2011 to 3,000km by 2015. A long-term national plan for urbanisation (2011-2020) is expected to be revealed around the National People's Congress, due to start on 5 March. The plan is guided by three main principles of "fairness and equality... intensive and effective development" and "sustainability".
China's urbanisation rate, which hit 51% in 2011, will jump to 60% by 2020, equivalent to roughly 150 million people moving from rural to urban areas over the next seven years.
Interestingly, China has a new planning approach focused on developing 20 strategic city clusters, which is hoped to bring more coordinated development of medium-sized and small cities and towns in proximity to more established big cities.
Asian cities will triumph
Ed Glaeser says 243 million Americans live in 3% of the country. At the moment the top 25 cities in the world account for 50% or more of our global wealth.
And the gravity is shifting towards emerging-market cities, The McKinsey Global Institute believes that by 2025, one third of all developed market cities will lose their place in the top 600 global cities for economic output. By 2025, nine of the world's top 25 cities ranked by GDP will be located in Asia, up from two in 2007. During this period, MGI research suggests that three cities in North America and four in Western Europe will drop off this ranking. Shanghai and Beijing will outrank Los Angeles and Paris, and Delhi and Bangkok will surpass Detroit and Barcelona.
Two ways you can play theAsian city boom
I think the ongoing investment drive in improving connectivity will make new world cities' in Asia, the equivalent to London, New York or Paris.
The optimal investment strategy is, in my view, to focus on cities and clusters, or how different cities can benefit from improved connectivity. And I think a good way to play the Asian city boom is in property; by investing in landowners or companies involved in construction.
With regards to property, there are two ways to get exposure. One way to get in on this theme is by buying physical property. A friend of mine likes small, low-end condominiums located close to an existing or future MRT station, the perfect location for young professionals. He rents them out and awaits appreciation of the units. But there are risks to this play; as many Asian markets have restrictionson foreigners owning properties, change property regulation when the markets overheat, and require a lot of capital.
The other way is to buy listed property developers with good land banks and/or good cash conversion cycle of projects. For me the best opportunities here are the convergence plays, where there is a large price gap between two adjacent areas. I discuss that in more detail in my Gateway Play #1 in my new report. This stretch of land in Iskandar is poised to become the new Hong Kong.It is a play that could leave many handsomely rewarded.
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Lars is an emerging-markets expert, with many years of 'on the ground' experience hunting down profit opportunities in Asia. Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund. In short, Lars has real knowledge of where the opportunities in Asia are.