Designing the city of the future

Is the pandemic an opportunity to reshape our cities by investing in smart infrastructure?

By 2050 over two-thirds of human-life will exist in concentrated urban environments. Europe is ahead of the curve, with almost three quarters of the continental population living in sprawling cities. [1]

But urban areas have borne the brunt of the Covid-19 pandemic, both economically and in terms of human life. New questions around how best to manage such a concentration of human life are unlikely to slow the march of urbanisation, but they should frame progress. As we face these challenges, investors have an opportunity to put their capital to work in financing solutions.

Smart city solutions

As urbanisation has intensified, cities have increasingly turned to technology to solve their problems and manage future growth. The concept of “smart cities” has gained ground, with developers implementing technology-enabled initiatives to promote greener, safer urban environments with more efficient public services.

Initiatives can cover a range of areas, but a few stand out as opportunities for investors to help shape the cities of the future.

Renewable energy was the most active sector in infrastructure investing last year, accounting for more than 50% of transactions[2]. By 2050, renewables such as wind, solar and hydro are predicted to produce two-thirds of the world’s electricity, and electricity is expected to be the world’s main way of consuming energy – from today’s 19% share of energy demand to 45% by 2040[3]. Using renewable energy on this scale will require wide-ranging changes across the electricity value chain, which present opportunities for investors with both financial and sustainability objectives.

Transport is a major driver of economic growth and competitiveness, and investment in this space can be prudent. The IMF estimates that for every dollar of investment in transport infrastructure, output increases by nearly three. Better public transport networks are necessary to meet the European Union’s target to reduce greenhouse gas emissions from transport by 60% by 2050, but also to improve the quality of life for urban-dwellers. 

Connectivity is the key word in most smart cities initiatives. Smart energy and transport networks are connected by technologies like the Internet of Things (IoT), enabling them to communicate, respond to and shape demand. And these technologies require digital infrastructure like 5G to work. The telecommunications sector thus offers a significant investment opportunity.

Investing in infrastructure

Since the Global Financial Crisis constrained cities with austerity, private capital has been touted as the answer to fund infrastructure development, and Covid-19 has only increased cities’ financial need. So far, most investment has been the preserve of institutional investors; infrastructure has needed large-scale, sophisticated investors, and institutional investors like infrastructure as it can match their long-term liabilities and provide the yield they need.

For non-institutional investors, infrastructure traditionally has been included in ‘alternatives’ for asset allocation, but due to the varying risk profiles of infrastructure assets, a more nuanced approach should be adopted. Infrastructure debt can offer both investment-grade and high-yield income opportunities, while further up the risk/return spectrum, infrastructure equity can provide higher-growth opportunities. Generally, operating infrastructure will be a less risky investment, but due to rising valuations, development- or construction-stage assets may now have a better risk-return profile.

For all investors, financial returns may not be the only objective. Smart city investments offer the chance to help shape the cities of the future, and investors can align their investments to their priority objectives such as fighting climate change or improving income inequality.

Time for a rethink

While there may have been short-term delays to some infrastructure projects in the construction phase due to supply chain and labour disruptions, the pandemic has not slowed the demand for most smart city infrastructure. Transportation has taken a temporary hit as workers stayed home, and some question whether demand will ever return to pre-Covid levels. But with overall population growth, even with more people remote working, there will still be demand. What needs to be re-evaluated is what type of transport. Many cities have used the pause of Covid to work on changing the mix of their transport, such as growing and improving their cycling and footpath networks.

This type of rethink demonstrates the new strategies cities are developing to deal with problems that have always been issues in cities – such as affordability, cleanliness, quality of life – but which Covid-19 has brought into stark relief.  There have therefore been growing calls for a ‘green economic recovery’, using the crisis as a chance to make cities not only more climate friendly but resilient. Rather than being an existential threat to cities, the pandemic could lead to healthier, happier and more inclusive urbanism. Investors in infrastructure have the opportunity to shape that future.

Produced by (E) BrandConnect, a commercial division of The Economist Group, which operates separately from the editorial staffs of The Economist and The Economist Intelligence Unit. Neither (E) BrandConnect nor its affiliates accept any responsibility or liability for reliance by any party on this content.

[1] UN, 68% of the world population projected to live in urban areas by 2050, says UN, May 2018
[2] BlackRock, Renewables are proving resilient, May 2020
[3] BlackRock, Renewables are proving resilient, May 2020