McKinsey on Developing World Cities Highlights the Urban Investment Gap

McKinsey’s latest on cities, Urban World: Mapping the Power of Cities, is a must-read for anyone interested in the potential for urban impact investment in the developing world. The massive shift highlighted in this document is not in the urban reality of our world, but rather how that reality is going to change – and, from our perspective, what that means for environmentally responsible and socially responsive investments in that new urban reality. Our initial read highlights major themes that will underpin the next generation of urban investment:

-          The rise of the developing world’s cities – Developing country cities dominate every one of McKinsey’s top 25 rankings for 2025, crucially, except for GDP and per capita GDP. Otherwise, whether it’s GDP growth, total population, children or total households, cities in China, India, Brazil, Indonesia, Egypt, Pakistan, Nigeria… this is where people are going to be moving and living in the coming decade and a half.

-          The economic power of second tier cities – It’s not the megacities where most of the growth is happening. Second and third tier cities are where the action is, especially within dynamic regional hubs. You can already see this in the real estate investment going into affordable housing and retail developments. Clusters, like Ahmedabad, Vadodara and Surat in India with their myriad counterparts in China, or cities like Campinas outside Sao Paulo, are good examples. Many of these up and coming cities are crucially investing in transport connectivity to avoid the mistakes of the more chaotic tier 1 cities, where growth is flatlining, primarily due to capacity constraints.

-          Rapid growth in household formation – As incomes rise, household sizes fall and household formation increases. According to McKinsey, 85% of new urban households in 2025 will be in developing country cities, half of those in China. Frighteningly, considering the current squeeze on housing in China’s major cities, Beijing and Shanghai are expected to see the strongest growth in housing demand. This is one of the major drivers for the current wave of interest in affordable housing.

-          Dramatic increases in children and seniors in cities – For children to thrive and seniors to live in dignity and safety, this will require dramatically new thinking on how communities are built, especially given the vertical reality of Asia’s new cities. Cities and developers are already having tough conversations about open space, security and place-making, as much as social and physical infrastructure.

Keep in mind that none of this necessarily leads to healthier, more diverse, dynamic, competitive cities. Quite the contrary. These cities may grow up to be uglier, less healthy and more poorly connected than their older brothers and sisters in the megacity club. Advancing the challenge of the next generation of cities has to come from multi-stakeholder public, private and hybrid investment processes and enabling institutions and frameworks. This is where impact investments could potentially play a key role, as they have started to do in developed and very progressive developing cities alike.

Urban impact investment in developing world built projects has to be a major theme for impact investment. We would emphasize this is not just about affordable housing, which is becoming the flavor of the day, but also city centers, existing buildings and brownfields, social infrastructure, services and much more. Community building. Maximizing the value of existing assets.

The double and triple bottom lines are challenging goals in these places, hence the need for appropriate investment frameworks and metrics, specifically constructed for these investments. This is what drives Smart Cities Advisors’ due diligence and advisory frameworks – detailed structure, guidance and metrics that come from the successes and failures of built environment social enterprises all over the developed and developing world.

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