Key points

• In 2050, 41 “mega-cities” are forecast to house more than 10 million inhabitants each, from 28 mega-cities today and ten in 1990.
• Self-managed superannuation funds (SMSF) need to consider how their portfolios are exposed to trends, such as urbanisation, that take years or decades to play out.
• Three companies worth consider are National Storage REIT, Urbanise.Com and iProperty Group.

Few trends are more powerful – and potentially more prosperous – than urbanisation. Global population growth and worker migration to large cities will add another 2.5 billion people to urban populations by 2050, the United Nations projects.

Forty-one “mega-cities” will house more than 10 million inhabitants by then, from 28 mega-cities today and ten in 1990. India, China and Nigeria will account for 37% of the world’s urban population as rural workers continue to flock to large cities.

A brave new world

New mega-cities will form in emerging markets. The authors of a new book, No Ordinary Disruption, predict nearly half of global economic growth between 2010 and 2025 will come from 440 cities in emerging markets, many of them currently unknown in the West.

And about two in every three people on the planet will live in urban areas by 2050, says the UN.

Australia, too, will face incredible strain from urbanisation and capital-city densification. Sydney and Melbourne are projected to each have about 8 million inhabitants by 2050, according to the Australian Bureau of Statistics’ base-case population forecasts.

As capital-city housing affordability deteriorates, and as traffic congestion worsens, imagine when Melbourne has to house another 3.5 million people within 35 years. Or when Sydney must make room for another 3 million. Our cities will burst at the seams.

And what if assumptions behind these projections are too conservative, as has been the case with other ABS population forecasts? Of if governments cannot finance enough new infrastructure, or move too slowly with reform, as is the case now?

My guess is the threat of housing, infrastructure and transport chaos will eventually force governments into action. Much of the solution will come from the private sector and as residents change their living patterns to cope with capital-city densification.

The good news, for investors at least, is that complex problems usually create the most valuable opportunities. Self-managed superannuation funds (SMSF) need to consider how their portfolios are exposed to trends, such as urbanisation, that take years or decades to play out.

A better approach is identifying high-quality companies in long-term growth industries and buying them when they trade below their intrinsic or fair value. Owning small- and mid-cap companies that benefit from strong industry tailwinds is especially important.

Here are three stocks or trusts that will benefit from urbanisation:

1. National Storage REIT (NSR)

The market’s first self-storage real estate investment trust (REIT) raised $183 million at 98 cents a unit in a December 2013 Initial Public Offering. National Storage raced to $1.70 this year in a frothy A-REIT market and has since eased to $1.60.

The market underestimated National Storage’s leverage to urbanisation and its capacity to consolidate a highly fragmented Australian self-storage market.
As more people live in inner-city apartments, demand for self-storage space will rise. Those living in cramped accommodation will increasingly outsource their storage to warehouses on the edge of the central business district and use them as a base as they move between units.

The online retailing boom also benefits self-storage providers. Some report growing demand from online retailers that are using self-storage facilities like a small warehouse.

The big driver for National Storage is its capacity to buy smaller operators on private company valuation multiples. The market’s three largest players, Storage King, then Kennards and National Storage, are thought to account for less than 40% of the market. There is plenty of room to grow by snapping up smaller players.

National Storage is not cheap. A $1.60 unit price compares with a net asset value (NAV) of $1.10. Take care when buying A-REITs that trade at a significant premium to their NAV or net tangible assets (NTA), especially when the 10-year Australian government bond yield is rising and interest-rate-sensitive sectors, such as property and the banks, are at risk of bigger falls.

But National Storage, which owns and manages self-storage facilities, has a different growth profile than many established AREITs in traditional property sectors. It can buy small operators or manage their centres. Moreover, an under-geared balance sheet provides scope to quicken its acquisition strategy in the next two years.

Chart 1: National Storage REIT

2. Urbanise.Com (UBN)

Building-services software group Urbanise.com was another IPO that had little fanfare on raising $20 million and listing in September 2014. Shares in the cloud-based provider of software for building operators have raced from a 50-cent issue price to $1.26.

Urbanise.Com is an interesting play on cloud-computing, the so-called “internet of things” as property devices talk to each other via the internet, and city densification.

Its cloud platform helps building owners manage help-desks for occupants, maintain common areas, co-ordinate work by staff and contractors, manage energy consumption and fix system breakdowns. Connecting to buildings remotely has incredible potential to improve property efficiency, lower costs and lift service standards for residents.

Urbanise.Com is growing rapidly. It serviced 47,307 households worldwide in July 2014, forecasts 170,050 customers by June 2015, and has good prospects in Asia and the Middle East.

Its business model should lead to sticky, annuity-like annual revenue and is highly scalable. Like all good software companies, Urbanise.Com does not require huge extra investment to grow, should enjoy high profit margins over time, and can rapidly expand offshore.

The company remains on track to achieve prospectus forecasts of $4.41 million in underlying earnings (EBITDA) for 2014-15. But with a $298-million market capitalisation, the market is factoring in rapid profit growth as Urbanise.com expands. There is little room for error, meaning it suits experienced speculators who are comfortable with small-cap tech stocks.

Chart 2: Urbanise.Com

3. iProperty Group (IPP)

The Asia-focused online property advertising company slumped from a 52-week high of $3.78 to $2.36 after reporting a $10.7 million loss in February for the first half of 2014-15. It lost another 10% after a trading update in May.

iProperty looks more interesting after those falls. The market clearly got ahead of itself with the company at its peak valuation. But it has a leadership position in several key online property advertising markets in Asia, and expects to be profitable and cash-flow positive in 2015.

Years of hard work should have a bigger pay-off in the next few years as iProperty monetises its audience and capitalises on a lucrative position in South East Asia.

It operates in a property market 15 times larger than Australia’s, and is well positioned to benefit from strong growth in middle-class Asian consumption, higher demand for property, and faster migration from print to online property advertising.

As urbanisation in Asia intensifies, demand for apartments in megacities, and the advertising that goes with it, has to grow exponentially. iProperty looks an obvious candidate for a takeover or, more likely, a merger with a competitor such as PropertyGuru.

iProperty made the Switzer takeover target list, compiled by this writer, last year. It was dropped after stunning share-price gains, but will return in the list’s next instalment.

It has potential to be the realestate.com.au of South East Asia, a market that is still many years behind Australia in online property advertising, but rapidly catching up.

As a loss-making company in a more volatile region, iProperty suits experienced investors.

Chart 3: iProperty Group

*All charts sourced at Yahoo!7 Finance, 22 June 2015

• Tony Featherstone is a former managing editor of BRW and Shares magazines.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.