Cities and the Eurozone debt crisis
10 January 2012
How European Cities are faring:
The ‘flight to quality’ of recent months has seen enormous surges in urban investment across core cities in Western Europe (Hamburg, Munich, Frankfurt, Paris, Amsterdam, Brussels, Barcelona and London) as investors, particularly those from the Middle East and Southern and Eastern Europe, pour money into stable markets. London’s property market, for example, has seen growing investment volumes in high quality real estate in prime locations, despite wider global economic uncertainty. Yolanda Barnes, director of Savills residential research, estimated that in the past 18 months net inward investment in London by international buyers has totalled around £6 billion. This highlights the trend towards safe haven investments rather than riskier opportunities in the current climate of economic uncertainty.
Aside from core Western European markets, other cities across Europe have had varying degrees of exposure to the debt crisis. With income tax rising across Europe to pay for the recession, Swiss cities such as Geneva have had a greater resilience to the crisis due to its attractive tax breaks, lax regulatory climate and its links to global markets. Other smaller European cities outside core markets have had to work harder to secure investment, but like Geneva some have performed well due to their specialist knowledge economies that offer investors a unique selling point. Cities in this category include Cambridge, which has increased its appeal through its emerging IT specialism within the UK and the quality of its talent pool.
Cities like Milan and Madrid have been brought down by their national economies and heavy borrowing. Spanish cities like Madrid borrowed from the banks rather than government and were highly leveraged when the crisis hit. The extent of public debt combined with the suction effect across Europe created by Greece has raised the cost of borrowing for cities within struggling economies such as Spain, Portugal, Ireland and Italy meaning growth forecasts are likely to be downgraded. An exception to this rule is the city of Barcelona, which has found its exposure to the crisis limited due to its strong export industry, tourism, rich cultural attractions and its sustainable growth model that had sufficient public reserves to combat the crisis.
Arguably the greatest resilience to the debt crisis has been seen in the resource rich economies of Russia and Turkey. A new report from LaSalle Investment Management recently argued that Moscow now topped Europe’s ranking’s as the most attractive city for real estate investment. This owes to its enormous growth potential, rising GDP and increasing employment rate. Istanbul has also thrived due its strong growth and its locational significance as a regional financial centre between Europe and the Arab world.
What can Cities do to increase their resilience to the debt crisis?
The crisis represents a good opportunity for city and regional leaders to reassess their strategies and adjust to more sustainable models of growth. Leveraging land rather than capital would be seen as a proactive approach to reducing public debt in the current climate. Struggling cities in Spain and Italy are starting to adjust prices to reflect the risks in the current market, which should see a wealth of opportunities to acquire core real estate at attractive yield levels. Cities like Madrid are already doing this in order to attract investment and boost its struggling economy.
What can Cities do to attract investment?
Differentiation and effectively promoting city specialisms will be crucial to attracting investment in the current climate. A key factor will be the ongoing internationalisation both of their companies and locations to attract global investors, entrepreneurs and international talent. Cities need to assess their economic strengths and how they can connect these with the demands of established and emerging markets. Medium-sized cities in Germany’s polycentric urban system have been able to compete on this basis. Frankfurt’s strength lies in its financial and legal services, Stuttgart is recognized for its engineering base, Hamburg for the media and logistics sectors, while Munich, another major economic hub with a balanced functional structure, exhibits strengths across a number of sectors.