A tectonic shift is happening beneath our feet without most people noticing: Urbanisation. Rural dwellers around the world are gravitating towards cities in waves that are shifting the ways we live, work, play, and spend — and the investing implications are vast.
It’s hard to overstate the magnitude of the ongoing global shift towards urbanisation. Consider the following numbers from a United Nations report that physicist Geoffrey West references in his groundbreaking new book, Scale:
- 1.5 Million. An average of about 1.5 million people are expected to be urbanised each week between now and 2050. That’s like 52 brand new Adelaides each year.
- 2 Billion. The global urban population is expected to increase by more than 2 billion people by the year 2050, equal to about 430 new Sydneys springing from the ether.
- 2X: The percentage of the world’s citizens who live in urban areas is expected to more than double from around 30% in 1950 to about 66% by the year 2050.
The great migration to cities is enough to captivate our investing attention, however, West’s research in Scale has turbocharged our scrutiny. Here’s what has our interest so piqued and a sample of some ways that we’re seeing potential ways to profit.
The superlinear lives of cities
The big idea of West’s research isn’t that more cities are developing (though they are) or that existing cities are swelling in size (also happening). The big idea is that cities are incredibly durable and exhibit superlinear returns to scale that we investors would call network effects.
Take a stock exchange like the ASX. The buyers go there because that’s where the sellers go, and the sellers go there because that’s where the buyers go. The more buyers and sellers who congregate, the more powerful the appeal to other buyers and sellers who follow suit. As icing on the cake, as the network grows it becomes easier for buyers and sellers to link up, so they trade even more in an ever-growing, self-reinforcing loop.
Cities are much the same way but with curious twists. As West highlights, each of the following grows at a superlinear, accelerating rate on a per capita basis as a city grows, just like trading per participant rises as a stock exchange gets larger: wages, GDP, and wealth. In other words, pound for pound, the average urbanite has more cash to spend as a city scales.
There’s more: the number of restaurants, doctors, lawyers, patents produced, schools, and the number of different kinds of jobs and businesses also grow at accelerating rates as cities scale.
Just as profound as this acceleration of change is that West found the rate of change is similar across countries, continents, and city sizes. It doesn’t matter if you live in Sydney or Seattle or Shanghai: The bigger the city the greater the increasing returns to scale.
Now, all that said, here’s how our team thinks investors might be able to put these tailwinds at their backs.
Ways to play the urban theme
The most basic way to play the urbanisation theme as an investor is via property. But, given that Australia is a country where people sometimes own an investment property despite living in a rental, it’s fair to say the average reader is already across that approach.
Another well-trodden angle is in digging holes in the ground in search of minerals to feed the beast of construction. But, again, I’m guessing you’ve heard about that one, plus West noted in his book that a city’s infrastructure needs to grow at a slower pace than its population. It’s a watered-down way to play the theme, not to mention cyclical.
The twists on the urbanisation theme that pique my interest are more nuanced yet benefit from the same core underlying theme — network dynamics — that make cities and urbanisation such a powerful long-term theme. One better, they’re capital-light businesses that tend to throw off a lot of cash.
One such example is in digital property listing platforms. Odds are good you’re familiar with the value and impressive history of Australian champion, REA Group’s realestate.com.au, but I’m guessing most readers aren’t aware of a similar US-based company that instead focuses on commercial property, CoStar Group. It’s on our watch list.
Do you want fries with that shake?
Another twist is in the realm of food delivery. West found that the number of restaurants per capita increased at a superlinear rate with population growth. In English, that means that restaurants are opening at a faster clip in growing cities than the population. The net effect makes for a wider range of cuisines, more price points, and greater competition within tiers, all of which should drive increased consumption among an increasingly wealthy urban population.
But, wait, there’s more. The increased number of restaurant locations, coupled with increased population density, makes for shrinking delivery times. Shrinking delivery times is a huge win because it gets grub in the bellies of hungry consumers sooner, making them more likely to order in, and expands the universe of cuisines that can be delivered (e.g. French fries and milk shakes).
You might be surprised to know that there are actually companies listed in London, Amsterdam, and Berlin that are direct plays on this theme. One of them is London-based Just Eat, which you may better recognise as the business that swallowed up Australia’s own Menulog in 2015.
Not all of these food delivery platforms will pan out — the business models vary in quality, some are burning cash today, and the runts of the litter will starve as the largest players will win disproportionate share of these ‘winner-take-most’ markets — but the ones that do could create significant, enduring value. We’ve got our eye on the space, plus it’s a great excuse to order in more Thai food. You know, for due diligence.
Do you come here often?
Here’s another one: online dating. Let’s say you’re one of the many young people who has emigrated to the big city, meaning you don’t have much of a social circle. Let’s also say it’s 2017 and your idea of finding a partner who shares your values doesn’t mesh well with approaching total strangers at a bar and asking for their sign. (I’m a Libra, by the way.)
Online dating is taking off in a huge way thanks to those trends, the wholesale shift towards digital communications, and that the median age at which Aussies first get married has increased by around 3 years over the past 2 decades.
Matching couples is big business today. The largest listed online dating company in the US had nearly 60 million monthly users in 2015, and Tinder (which is one of its networks) is now the third-highest grossing app on the Apple App store in the US. All that clicking and swiping is also paying off for a lot of people: a study from the National Academy of Sciences found that more than 1 in 3 new marriages in the US now begins online.
Odds are good that growth will keep going strong. After all, singles go where other singles go, and more of them are going to online dating platforms than anywhere else. One better, the increasing number of singles on a platform increases the range of potential connections at an exponential rate, not unlike the two-sided networks of Seek or airbnb, and increases the odds of singles finding their match.
The combination makes for an ever-increasing virtuous circle — just like in cities — as more and more singles are drawn to the platforms. And, as it so happens, Tinder’s highly profitable parent company, Match Group, is listed in the US. It’s another business we’re watching.
Oh, and one last thing. What’s compelling about all urban networks isn’t just that they’re strengthening in existing cities — it’s also that new cities are tipping into critical mass for such networks. For example, the United Nations predicts that the number of cities around the world that will have populations exceeding 300,000, which would make for about Australia’s 10th largest city today — will increase from around 1,700 in 2015 to 2,200 in 2030.
Back to the future
I’d love to go on about urbanisation and network effects but Donny tells me that people can only take so much. I’d also recommend giving Scale a read if you find yourself with some free time on a beach or an aeroplane. For our part, we’re excited about the range of opportunities the Lakehouse Global Growth Fund’s global mandate affords us, including around the theme of urbanisation, and look forward to telling you more about the fund in the coming weeks.
And don’t forget: we and the fund’s issuer, One Managed Investment Funds Ltd., expect the fund’s product disclosure statement (PDS) to be available to potential investors next month. The PDS is the fund’s definitive offer document, contains all kinds of useful information, and investors should give it a thorough read before deciding whether to invest. We’ll post it to our websites and give you a heads up once it’s there.
In the meantime, feel free to drop us a line with any questions about Lakehouse or the upcoming Lakehouse Global Growth Fund. We can’t offer personal advice but we’re happy to share factual information about our plans for the new fund.
Thanks, as ever, for your time, interest, and support.
Joe Magyer, CFA
Chief Investment Officer
P.S: Curious about Amazon’s potential influence in the Australian landscape? My latest AFR piece Investors brace yourself: pace of technological change is much faster than you think focuses on the power of robots and automation.
Disclosure: Members of Lakehouse team may (and likely do) own shares in some of the companies mentioned in this content.
Lakehouse Global Growth Fund (ARSN 621 899 367) (Fund). The responsible entity for the Fund is One Managed Investment Funds Limited (ACN 117 400 987) (AFSL 297042). The information included in this message has been prepared without taking account of the reader’s objectives, financial situation or needs. All of the commentary, statements of opinion and recommendations contain only general advice. Any person reading this message should, before deciding to invest in the planned Fund, read the product disclosure statement and seek professional advice.