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Prudential Research & Perspectives Our original research and thought leadership provide vital insights into important issues for our clients, financial professionals, policymakers, and the general public.

THE WEALTH OF CITIES

The Investment Implications of Urban Expansion

Just three decades ago, Shenzhen was a modest fishing village of 30,000 people on the south coast of China. Today, it is a booming metropolis of 10 million inhabitants, boasting modern skyscrapers, packed shopping malls, and a state-of-the-art transportation system. The breathtaking speed at which Shenzhen became one of the world’s largest cities typifies the “prime time” of urbanization that is now upon us. The growth of cities is a well-told story. But never before has the pace of urbanization been so rapid: some 60 to 70 million people will be added to the urban population each year for the next 30 years.

The mega-trend of urban expansion opens up important new opportunities for institutional investors. For starters, the unparalleled pace of urbanization means that by 2030, about 200 cities worldwide are likely to join the ranks of metropolitan areas with at least one million people. As the rate of urbanization ramps up, global infrastructure needs are projected to top $50 trillion through 2030, with heavy spending required in both developed and emerging-market cities. In developed markets around the world, mature cities are being revived and innovation hubs are being established. “Smart cities” that focus on the intelligent use of information and communication technology, energy efficiency, and more productive transportation systems are being cultivated in North America, Europe, and other developed countries. Global middle-class consumption, meanwhile, will shift towards cities in China, India, and other emerging Asian countries, as developed countries see their share decrease. In India, for instance, middle-class spending is projected to reach $1.8 billion annually by 2020, six times the level in 2010. And the world may need to produce about 50% to 70% more food by 2050, thanks in large part to the swelling ranks of middle-class city dwellers.

But many potential opportunities resulting from the urbanization boom are hard for investors to access due to absent or insufficient market mechanisms. With that in mind, we set out to identify investment ideas arising from the trend of urban expansion that could be accessible to institutional investors. Our approach included interviewing a range of investment professionals across PGIM, in addition to industry and topical experts. We believe investors should focus their attention on four major investable themes: urban infrastructure, real estate, consumer goods and services, and the evolving agricultural supply chain. Within these broader themes, we have identified 10 specific investment ideas in both emerging and developed markets across a range of public and private vehicles. Collectively, they offer a spectrum of attractive avenues for benefiting from the “prime time” of urbanization.

One thing is certain: just as the current pace of urban population growth has never been seen before, it will likely never be repeated again. In 30 years’ time, the urban story will still continue, but the rate of change will taper off — as will the investment opportunities resulting from urban expansion. Investors should consider examining the opportunities now arising from this unprecedented population shift.