Megacities: A Supersized Opportunity

Asia Pacific ex-Japan

Megacities: A Supersized Opportunity

Over half of the world’s megacities will be in the Asia Pacific ex-Japan region by 2030, representing a multi-decade opportunity for investment in real assets.


Population growth = demand for real assets

Population growth is a critical part of our investment thesis for Real Assets. Quite simply, the more a population grows, the higher the volume of demand for the essential services that Real Assets provide. A growing population means increased traffic on tollways, more passengers passing through airports and more people visiting local shopping centres.

The world’s population powerhouse

The Asia Pacific ex Japan (“APexJ”) region is a population growth powerhouse with one of the fastest growing populations in the world. The expected growth rates out to 2030 are far above other parts of the world in both percentage and absolute terms.

Expected population growth: 2015 to 20301

Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). *Based on countries in the MSCI AC Asia Pacific ex Japan Index. Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Urbanisation boosts city populations

We also see large levels of urbanisation driven population growth in the region as people increasingly move to the cities (e.g. for a better life, job prospects, education etc). This is important, as while some countries may see anaemic levels of overall population growth, their tier-1 cities continue to grow rapidly.

A good example is China. While the overall country-level forecast population growth rate is low, the annual growth rates at a city level are some of the fastest in the world.

Expected population growth for large Chinese cities: 2015 – 2030 (%)2

Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Room for more urban populations

Total urbanisation across our investable universe remains low, so there is a lot of room for growth. The United Nations (UN) expects urbanisation in the region to continue to increase, from 47% to 57% by 20303.

Urbanisation in 2015 and 2030 across Asia

Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

This implies significant growth in urban populations, with growth rates at multiples of what we see in other regions.

Urbanisation growth between 2015 and 2030

Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). *Based on countries in the MSCI AC Asia Pacific ex Japan Index. Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

India provides a stark example of this growth. Its urbanisation is forecast to grow by 22%4 by 2030. This will bring total urbanisation to 40% by that time, adding an extra 100 million people living in its large cities5.

Large cities growing faster in Asia

Megacities (i.e. those cities with over 10 million inhabitants), are sizable cities that form an important catchment for Real Assets due to their concentrated population levels and expected growth.

Based on United Nations (UN) data, there are currently 29 cities that meet the megacity definition globally6. Today, the largest city is Tokyo, however, the largest city in 2030 is set to be Delhi in India.

Given aforementioned urbanisation trends, the number of megacities in Asia is expected to grow at faster rates than any other region globally. As an example, by 2030, there will be an almost 50% increase in the number of Asian megacities, and by that time, a resounding half of the world’s megacities will be from the region7.

Megacities in 2015 and 2030

Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

New Asian megacities to emerge between 2015 and 2030 include Chengdu and Nanjing in China, Ho Chi Minh City in Vietnam, Bangkok in Thailand, Chennai, Ahmadabad and Hyderabad in India and Seoul in South Korea. India and China alone will account for over two thirds of Asia’s megacities by 2030.

Bangkok isn’t currently a megacity, but will join the ranks by 2020. Current holding Digital Telecom Infrastructure Fund, which invests in telecommunication towers and fibre optic cable, is well placed to benefit from urbanisation driven increases in mobile subscribers and broadband use.

APexJ megacities in 2030

Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). *New megacities in APexJ between 2015 and 2030. Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

By 2030, Tokyo will be the only developed world megacity in the top 10, with Osaka and New York being overtaken by developing world cities8.

Top megacities 

Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

This represents a shift in global population centres from developed to emerging markets. Interestingly, significant Asian cities such as Beijing, Mumbai and Delhi will all be larger than major US cities such as New York.

Shenzhen: from farm to megacity and more

Shenzhen, a technical mega city since 20109, is a fantastic example of the region’s urbanisation and population growth in action. Farmland 40 years ago, it has now developed into a large, dynamic and populous Chinese city.

It is interesting to note that UN estimates for actual population keep exceeding its own forecasts. The 2014 UN population report forecast 11.3 million people in Shenzhen by 202010, however, this was largely met by 2015, five years ahead of forecast11.

Shenzhen’s population: beating expectations

Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

While we have seen large growth in the urban population already in Shenzhen, we do not expect this to slow anytime soon. The latest UN forecasts suggest an attractive per annum growth of around 1.7% from 2015 to 203012.

A good example of a population-driven project in the Shenzhen area is the new Pearl River Delta Water Resources Allocation Project under construction in Guangdong that will address the potential for water shortages by pumping water from the Xijiang River to the Dongjiang River. This US$5 billion project is currently being built by the sponsor of Guangdong Investments.

Bangalore: garden city to IT mecca

Similarly, Bangalore in India has also experienced incredible growth in recent history, graduating to megacity status in 201513.

Over the past three decades it has converted from being a ‘garden city’ to establishing itself as the “Silicon Valley” of India.

It is now a significant global outsourcing hub for some of the largest players in Information Technology (IT) given the competitive cost of its workforce, the scale of services it can provide, as well as the sheer number of well qualified professionals (across IT, engineering etc.).

UN forecasts for Bangalore suggest these positive growth trends will continue with the city expected to grow by 3.2% p.a. from 2015 to 203014. This is in the top quartile for growth rates of any city globally.

India has recently launched its first ever REIT, Embassy Office Parks REIT, in April 2019. The newly created REIT is now the largest listed office REIT in Asia by floor space. The REIT has an attractive asset base in cities such as Bangalore, with high quality, multi-national tenants and long-term leases.

Future is bright for Real Assets

In conclusion, the Asia Pacific ex Japan region is set to see significant levels of population and urbanisation led growth going forward, which bodes well for the demand for Real Assets. Given that population growth tends to be steady and consistent over time, likewise demand for Real Assets will remain consistent and enduring going forward.

With a combination of quality companies, high population growth and attractive yields, Real Assets remain a bright spot in a world of uncertainty.


Definitions:

The MSCI Asia Pacific ex Japan Index is a market capitalization weighted index that is designed to measure the equity market performance of the developed and emerging markets in the Asia Pacific region ex-Japan.

Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.

Footnotes:

1 Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). World Urbanization Prospects: The 2018 Revision. File 5: Total Population at Mid-Year by Region, Subregion, Country and Area, 1950-2050 (thousands)

2 Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). World Urbanization Prospects: The 2018 Revision. File 12: Population of Urban Agglomerations with 300,000 Inhabitants or More in 2018, by Country, 1950-2035 (thousands)

3 Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). World Urbanization Prospects: The 2018 Revision. File 2: Percentage of Population at Mid-Year Residing in Urban Areas by Region, Subregion, Country and Area, 1950-2050; and 5 as per above

4 Source: File 2 as per above.

5 Source: File 12 as per above.

6 Source: File 2 as per above.

7 Source: File 2 as per above.

8 Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). World Urbanization Prospects: The 2018 Revision. File 11b: Time Series of the Population of the 30 Largest Urban Agglomerations in 2018 Ranked by Population Size, 1950-2035

9 Source: File 12 as per above.

10 Source: United Nations, Department of Economic and Social Affairs, Population Division (2014). World Urbanization Prospects: The 2014 Revision. Final report: Table A.11. The 30 largest urban agglomerations ranked by population size, 1950-2030 (p 315)

11 Source: File 12 as per above.

12 Source: File 12 as per above.

13 Source: File 12 as per above.

14 Source: File 12 as per above.

Top

Important Information

 

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.