Strategy & economics
We think owning land or buildings close to publicly funded infrastructure results in a large transfer of value to landowners.
The quantum of increase over multiple decades is hard to quantify. Nonetheless, so-called transport nodes underpin economic demand for land use. Transport “nodes” incorporate multiple components that support transit, local, freight and passenger traffic.
We developed a Transport Infrastructure Score (TIS) to provide an information edge and understand which companies have assets located closest to relevant transport hubs. This is a proprietary database and scoring mechanism and establishes which locations, from a transport perspective, are better than others.
Transport: a city’s lifeblood
There are, in our view, two areas that are major contributors to the future success of a city – universities and transport. Universities provide skilled graduates who stoke the flames of the knowledge economy; transport allows a city to function and is its lifeblood.
For investors that own land and buildings close to transport nodes, the benefits are inestimable. The economic strength of any location is a function of demand. Transport delivers higher demand: for example, public rail for office buildings or ports for warehouses. The greater the volume through a transport node, the greater the demand for the land around it.
The challenge is that there is no formula reflecting the impact of transport on land values (this makes it very hard to tax, itself another challenging issue). Research in the UK looking at the implications of extending London’s Jubilee underground line (the Jubilee Line Impact Study) commented on this point:
“Though there is a variance around estimates, the extension of the Jubilee line in London for example, is estimated to have lifted land values in Southwark in the region of £800m and by around £2bn in Canary Wharf. “
‘The Jubilee Line Impact Study (2004): main findings and lessons learnt’. Peter Jones, Tim Eyers, Julia Bray, Neil Georgeson, Tim Powell, Jon Paris, Rob Lane.
Transport for London (TFL) introduced a Crossrail levy in 2007, a year prior to construction commencing of the new 118km railway line covering London and south-east England.
The total estimated cost for Crossrail is now circa £15 billion, of which circa £300 million has been raised by the levy (a mixture of London Planning charge and Developer charge). The aim is a total of £600 million. Two observations would be that the Crossrail levy is a small part of the overall charge; second, the fee is based on the ‘contribution zone’ and not proximity to the new stations. We would argue being adjacent to public transport or being 1km away makes a large difference.
For investors in land and buildings, the importance of transport is understood. The impact transport has on the price paid for land and buildings is less well-known. We think that proximity to busy transport hubs should be a key driver of investment. We also think that the long-term value delivered by transport to landowners is underestimated.
While buildings have a shelf-life, the land beneath it can always be re-used. This means well-sited land has the potential for different uses. As the mores of economies change, buildings on top of land change too. The demand constant of transport is the ultimate defence against disruption, providing enduring value.
Transport Infrastructure Score (TIS)
We wanted to understand the landholdings of listed companies, relative to transport nodes.
Whilst there is no explicit pricing mechanism available, we can assess which owners of land benefit more than others. This means we can compare publicly listed companies and the assets they own, on the basis of asset location to transport nodes.
This provides a quantified understanding of which companies own the most strategic locations, relative to each other. It doesn’t, however, provide a better understanding of how transport impacts the pricing of land.
We worked with our Data Insights Team (DIU) looking at proximity to transport nodes and the volume throughput of each transport node. DIU created a matrix for any listed asset owner, allowing us to compare one TIS score against the other.
The result of the work is a database of 20,933,277 roads (split into centroids or clusters), 4,658 subways, 21,775 train stations, 1,042 airports and 326 ports measured against approximately 80,000 assets.
This information matrix gives the team the ability to cross-compare.
An example of the TIS score at work is the move by our own firm, Schroders, from Gresham St to London Wall in the City of London. The video gives an example of how the TIS score can show why one location is better than another. We conclude that London Wall gets a better score (just), validating the move!
The analysis measures the distance of the new and old Schroders offices from the major transport hubs, in this case office and road. The distance to transport hubs are calculated on a decay basis. In other words, the score drops off the further away from key nodes. This decay calculation, combined with volume through the transport hubs, results in a TIS score for the two offices.
This score does not include any future impact that Crossrail will have when it opens at Moorgate. The increase in volume and efficiency from Crossrail will have a positive impact on the new office at 1 London Wall Place, moving the score further ahead of the old office at 31 Gresham St.
We think the value transfer from public transport assets to private landowners is large but hard to calculate. We have calculated our own transport score, but this looks at one asset to another and not the price impact.
The lack of valuation data means that the importance of land being close to transport is not properly quantified and therefore poorly understood.
Companies that own land in global cities (Schroder Global Cities Index), close to transport nodes, have enduring value.
Understanding this point is critical to long-term real asset investing.
Global Cities: the strong getting stronger
As the world urbanises, certain cities will become more important than others. This is because of a virtuous circle of demand: cities with scale act as a draw to outsiders for the career and cultural opportunities they offer. This, in turn, creates further demand, leading to an even more vibrant location.
As the trend of urbanisation gains more traction, investors in rarefied cities close to transport nodes could be the big winners.
- Vists Schroders Global Cities website to see how your city ranks.
This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.