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Which nations are building the strongest foundations for economic success?
CONTENTS1. FOREWORD
2. EXECUTIVE SUMMARY
3. GLOBAL BUILT ASSET WEALTH INDEX 3.1 Ranking - China overtakes the US 3.2 Asset wealth per person - Qatar leads the way 3.3 Emerging markets gaining ground 3.4 Built asset wealth and GDP relationship
4. BUILT ASSET OUTLOOK 4.1 Ten year forecast – China to move even further ahead 4.2 Implications for the global economy
5. HOW CAN BUILT ASSETS BE MADE TO LAST?
6. APPENDIX 6.1 Methodology 6.2 Data sources
7. FURTHER READING
In this uncertain environment investors, developers and policy makers need to assess whether the global outlook will clear, or crash. Either way, it seems certain that the road ahead will be bumpy.
The 2015 Global Built Asset Wealth Index assesses the development of a nation’s built environment to show which countries are creating the long-term, sustainable foundations for economic, social and environmental success. As global uncertainty rumbles on, it provides an opportunity to take stock of the bricks and mortar that form the basis of our societies.
To do so, we have quantified the value of the built assets in 32 countries, taking into account all buildings and infrastructure – every home, school, office, rail track, waterway, power station – to see where investment is being made into the building blocks of prosperity.
From the wealth of data contained
in this report, two clear insights emerge – and with them two very different challenges.
Firstly, emerging economies, starting with China, have been investing rapidly in built assets and are expected to continue to do so in the next decade. This has profoundly changed the global league table of the world’s wealthiest built asset nations. With so much uncertainty now on the horizon these countries will need a renewed focus on quality over quantity. They will need to be absolutely clear on the rationale and value of their built assets in order to sustain high economic, social and environmental returns.
Secondly, developed economies have experienced at best stagnation, and in many cases outright decline, of their built assets stock. This revelation comes at the very time they may need to tighten the fiscal belts and do more with less. It is critical that each investment they make – be it new buildings and
1. FOREWORD Julien Cayet - Global Leader, Business Advisory, Arcadis
This has been a year of remarkable uncertainty. Amongst the headlines five mega-trends seem critical – crashing commodity prices, the political crises of security and migration, financial imbalance from a slowing China, unprecedented volatility in currency markets and the ever-present threat of climate change.
infrastructure or upgrade and repair – is done strategically to ensure the productivity of their built assets. They need to take a more sophisticated approach to the whole lifecycle of these assets to lower the cost of ownership and deliver the built asset environment that their society needs.
At Arcadis we work with our clients in the public and private sectors to tackle these challenges and improve the quality of life that is provided by their natural and built assets. We combine market sector knowledge from across the world with deep technical expertise to help reduce the risk of investment and bring insights, certainty and results.
This report provides a unique snapshot into which countries are providing a well-developed built landscape that meets the needs of its people, economy and environment. We hope that you find it illuminating as you approach your own challenges.
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• Over the past two years, these countries have invested a net total of US$8 trillion in their built asset stock, reflecting the importance that investment in economic infrastructure and buildings has on the economic, environmental and social well-being of society.
• Total built asset wealth now stands at an estimated US$218 trillion which is the equivalent to US$30,700 per person alive today.
• China has the largest built asset stock in the world with a total of US$47.6 trillion, overtaking the US total of US$36.8 trillion.
• This can be attributed to the enormous investment that China has made in its built asset stock since 2000. In this time China has made a net investment of US$33 trillion, substantially larger than all other economies put together.
• Qataris replace Singaporeans as the richest built asset population, with a built asset wealth of US$198,000 per capita compared to US$192,000 in Singapore.
• Many G7 economies have seen a net de-investment through depreciation of their built assets since 2012.
• The largest of these was Japan which saw a depreciation in its built asset stock of US$4.6 trillion, however, as a proportion of its stock, Germany’s net loss exceeds Japan – at 21% compared to 20%.
• Other developed economies to have undergone significant net de-investment since 2000 include France and Russia, while the US stock has remained largely constant.
• Since 2012, Spain saw the largest de-investment of the countries analysed in this report, equal to 3.8% of GDP.
• The stock of built assets is closely correlated with a nation’s economic output. On average, countries analyzed have a built asset stock worth 2.9 times of GDP.
• Some economies vary significantly from this average. The UK, for example, has a built asset stock worth only 1.8 times GDP. This indicates efficient use of productive capital, but also suggests potential gains could be made from further investment.
• China’s heavily investment-dependent growth model means that by 2025 its built asset stock will be worth over double that of the US, and will exceed in size those of the next four economies combined.
• Whilst not all of this stock will produce value immediately, much of it will still translate into economic growth, demonstrating the continuing shift in the world’s economic centre of gravity to Asia.
2. EXECUTIVE SUMMARY The Arcadis Global Built Asset Wealth Index calculates the distribution of the world’s wealth in terms of the physical built assets which contribute to a nation’s productivity. The index estimates the value of the buildings and infrastructure in 32 countries which collectively represent around 87% of global GDP.
It also forecasts how this distribution of built asset wealth is likely to change over the coming decade. Produced by Arcadis and informed by research conducted by the Centre for Economics and Business Research (Cebr), this second edition of the Global Built Asset Wealth Index finds that:
3. GLOBAL BUILT ASSET WEALTH INDEX From new skyscrapers rising from the deserts of the Middle East to the strengthening of New York’s hurricane-battered flood defences; housing shortages in the slums of São Paulo to new airport runways in congested England, the desire to build and develop our land seems insatiable.
This need to build is reflected in our index which finds that, overall, the world’s built asset wealth has increased by a net total of US$8 trillion since 2012 to stand at over US$218 trillion in 2014. This is the equivalent to over US$30,000 for every man, woman and child in the world today, based on a global population of 7.1 billion (source: UN).
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Meanwhile, some of the OECD economies which topped the table in the past have seen further falls in their standing, both in relative and absolute terms. Some of their fall in built asset stock reflects the long term transition from manufacturing-based economies to service-based ones, which require less machinery and equipment to produce value. However, that does not tell the whole story. Many European economies, such as the UK and Germany, have significantly underinvested in their built assets over recent years. The UK’s under-provision of assets appears to date from further back, as its relative de-investment over the past decade has been less sharp than many other mature economies. These trends date back to before the financial crisis, but have been exacerbated post-crisis as governments and firms have cut back investment.
Although investment continues to rise rapidly on a global scale, the current situation in which advanced economies have seen prolonged de-investment is unprecedented. There is no shortage of funds available to invest globally, which suggests that the private sector may lack confidence in future growth, especially in advanced economies. However, as growth continues to gain momentum, investment may recover with it.
3.1 Rankings CHINA OVERTAKES USA IN BUILT ASSET INDEX This report finds that, significantly, China has now overtaken the USA as the wealthiest nation in the world in terms of built assets.
China’s rapid asset building has run alongside net de-investment in the United States as US businesses and government fail to invest enough to replace old machinery, equipment and buildings.
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FIGURE 1: STOCK OF BUILT ASSETS, 2014, US$ SOURCE: PENN WORLD TABLES, IMF, WORLD BANK WDI, NATIONAL STATISTICAL AGENCIES, CEBR ANALYSIS
COUNTRY SPOTLIGHT: CHINADepending on which economic measure is used, China has either already overtaken the US as the world’s largest economy, or is likely to do so in the near future. This defining moment in the global economy is reflected in this index as China appears at the top of the world rankings, overtaking the US.
China has added US$33 trillion to its built asset stock since 2000. This is larger than every other economies’ investments combined. There are two distinct characteristics which make the rise in China’s built asset wealth so astonishing. One is scale and the other is the sheer speed at which it has been built. However, no assessment of China’s infrastructure asset boom and its effect on the country’s position in the Global Built Asset Wealth Index can be complete without an overview of what underpins it, and how continued growth will be shaped.
Unlike most mature markets, such as those of North America, Europe and Australia, a significant amount of infrastructure projects in China are driven by central government planning. Lands are released for development at ‘public’ auctions with strict
stipulations and parameters around the amount of each asset class to be built. It is critically important for the government to ensure the development of world class infrastructure to support its fast growing economy and the unprecedented levels of urbanization in China.
An important theme for its policymakers over the last two years has been to rebalance the economy towards consumer spending, a task that has proven difficult. Households in China are cautious, preferring to save money rather than spend it, with the absence of comprehensive social security systems being one reason. While this carries dangers in terms of overcapacity and a potential bubble in property, a high saving rate has also given China a formidable built asset stock. The slow pace at which this rebalancing is taking place, along with continued growth, means that by the end of the forecast horizon, China’s stock will exceed the combined value of the next four economies.
The China led Asian Infrastructure Investment Bank, which aims to beef up infrastructure development in Asia, will help China to continue to increase the lead over USA in the years to come.
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COUNTRY SPOTLIGHT: USAThe USA has fallen to second place in global Built Asset Wealth, trailing behind China. This change comes as a result of the unprecedented infrastructure investment China is making (9% of GDP) coupled with US under-investment (2% of GDP).
There is increasing concern about the negative impact an under-performing built environment has on the economic prosperity of US cities. A recent survey by Politico Magazine revealed that 35% of US mayors believe “better infrastructure” is the one thing that could foster the most growth in their cities. The American Society of Civil Engineers (ASCE) recently stated that a whopping $3.6 trillion investment is required to bring US infrastructure up to ideal conditions—funding cannot come from the public sector alone.
To bridge the funding gap, municipalities and city authorities have embarked on a range of previously unpopular private investment models. In contrast, the US built asset wealth embedded in real estate has demonstrated solid long-term growth. A strong driver of growth has been Foreign Direct Investment, whereby capital inflows from markets like China, India and Russia have, in some cases, shown triple-digit growth for a number of years. Due to the likelihood that there will always be a substantial funding gap, the US needs to increasingly embrace unique ways to catalyze private investment in infrastructure, and find new ways to maintain the integrity and service levels of the aging asset base for less money than they currently spend.
The situation in the US is further complicated by the consequences of severe weather. From drought in California to hurricanes in New Orleans and New York – there is an
3.2 Asset wealth per person QATAR LEADS THE WAY
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FIGURE 2: BUILT ASSETS PER CAPITA, US$ SOURCE: PENN WORLD TABLES, IMF, WORLD BANK WDI, NATIONAL STATISTICAL AGENCIES, CEBR ANALYSIS
Qatar and Singapore stand comfortably ahead of the pack on built assets per capita, at US$198,000 and US$192,000 respectively. The countries near the top of this ranking are disproportionately made up of smaller nations, either by population or area, so the density of the built asset stock is much greater per resident. China, by comparison, has a far smaller built asset stock per capita when its built asset wealth is spread amongst its 1.4 billion people.
The UK is far behind other advanced economies. While this means its built assets are very productive, because they support per capita income of a similar level to the rest of the OECD, it also suggests that more built assets would go a long way, given the strength of the correlation between GDP and built assets.
urgent need to build more resilient cities to protect the public and the economy from these devastating events. The economic impact of Hurricane Sandy alone is estimated at over $70 billion. A shift from reactive to proactive resiliency measures will be beneficial.
The US needs to be more strategic and efficient around how new assets are created and existing assets are maintained, find unique ways to attract private investment through the use of models like public-private partnerships and build more resilient cities. A shift from a focus on largely cost-based capital planning and public debt financing to whole lifecycle cost optimization and capital efficiency, such as the selective use of private equity capital, will help the US to see an increase in the wealth of its built assets.
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COUNTRY SPOTLIGHT: QATARQatar tops the index in 2015 as the richest built asset owner per capita at nearly US$200,000 per person, up by over US$140,000 in 2013.
To date, Qatar has the fastest growing construction industry in the Gulf Cooperation Council (GCC), rapidly expanding at an annual rate of 18%, and is expected to continue at this rate for the next decade. This growth will be supported by a number of large investments in infrastructure.
The 2022 FIFA World Cup™ and the country’s 2030 National Vision will have a considerable impact on infrastructure investments over the next ten years. The country is expected to spend over US$150 billion in the next decade with US$20 billion in roads,
US$40 billion in railways, US$40 billion in stadiums, US$8 billion in ports and tens of thousands in hospitality and social infrastructure. Moreover, the country has plans for further investment in transport infrastructure and water and electricity by 2020.
All this growth is subject to the supply of materials and there is a danger of substantial building material inflation unless the supply chain is carefully managed. What is less of an issue for Qatar when compared to the rest of the region, is the little impact to the country from falling oil prices, primarily due to the fact that Qatar exports LNG, which is not as susceptible to the oil market.
With investments in infrastructure, residential and non-residential buildings, Qatar’s built asset wealth will continue to grow at double digit levels for the foreseeable future.
COUNTRY SPOTLIGHT: SINGAPOREIn 2012 Singapore had the highest built asset wealth per capita in the world. The past three years has seen Qatar overtake Singapore to claim top spot in the rankings, however asset wealth had not peaked in Singapore and continued its rise by over US$35,000 (29%) per person during this period. The volume of asset stock is understandably low due to the physical constraints of land mass however the wealth generated from these assets is extraordinary.
The sustained performance of this small, densely populated island state reflects a continued and focused investment in infrastructure. It has retained a high end manufacturing industry and continues to be a desirable environment to live, work and do business.
The development of the Jurong East area of the island is emerging as a bustling commercial hub and a low cost of occupancy alternative to the Central Business District for many international organisations. The attractiveness of this ‘Jurong Gateway’ has been bolstered following the announcement that the terminus station of the High Speed Rail link between Singapore and Malaysia will be located there. Such structured decentralization activities will continue to stretch the asset base into lower cost areas of Singapore, bringing a new diversity of wealth creating asset types. The active EDB (Economic Development Board) support for diverse but complimentary co-location of assets, such as leisure and commercial with manufacturing and residential, supported by world class infrastructure may see Singapore jostling for its top ranking again over the coming years.
COUNTRY SPOTLIGHT: HONG KONGHong Kong has moved from fifth to third place with regards to built asset wealth per capita in the world and now has US$ 159,991 per individual.
Despite being an already built asset rich city, the Hong Kong Government continues to invest heavily in infrastructure works. Whilst real estate projects continue to account for the largest share in the total gross value of construction works, they are closely followed by transport projects. The gross value of construction works performed by main contractors increased by over 12% year on year over the last 12 months. This is reflected in the number of Government major works that are currently in construction. It is expected that this level of expenditure will continue in the short term.
In the medium term the level of construction is forecasted to drop off as projects are completed and the pipeline for future construction activity is thin. Some major construction projects are on the horizon, but do not have firm start dates as yet. These include a third runway at Chek Lap Kok and the Kai Tak redevelopment.
Investment share of GDP remains very similar to the previous years, and the stock of built asset wealth has continued to increase marginally. The Hong Kong government clearly understands that investing in infrastructure is essential in order to keep Hong Kong competitive in the global business environment.
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3.3 Emerging markets gaining ground Other notable changes since 2012 include net depreciations for the largest developed economies – US, Japan, Germany, France, Italy and the UK. Smaller developed economies followed a similar pattern. Spain’s decline, at 3.8% of its entire built asset stock, is the greatest proportionally. The largest capital-stock decline in absolute terms is Japan, at US$590 billion.
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FIGURE 3: STOCK OF BUILT ASSETS IN 2012-2014, US$ FIGURE 4: CHANGE IN STOCK OF BUILT ASSETS, 2000–2014, %
FIGURE 5 CHANGE IN STOCK OF BUILT ASSETS, 2000–2014, US$
SOURCE: PENN WORLD TABLES, IMF, WORLD BANK WDI, NATIONAL STATISTICAL AGENCIES, CEBR ANALYSIS
Investment gaps occur when an economy does not invest enough to replace the portion of its capital stock that depreciates every year: for construction, this is approximately 5%. This implies that in 2014 the US required investment spending of around US$1.4 trillion to replace the depreciation in built assets in construction alone. It fell short by some US$200 billion.
All the advanced nations underinvested between 2012 and 2014, bar Hong Kong, Singapore, South Korea, Canada and Australia. This group of nations was also relatively less affected by the financial crisis and subsequent downturn, as their recent growth has been more coupled with China and less tied to the sluggish economies of the US, Europe and Japan.
The longer term picture of investment from 2000 to the present shows a similar trend.
Figure 4 shows three OPEC (Organization of Petroleum Exporting Countries) members in the top five investors. While still heavily dependent on oil and gas exports, these states have used resource revenues to make initial steps towards diversification of their economies. They are moving into sectors such as tourism, financial services and education. Built assets include museums and galleries (the UAE has commissioned architect I.M. Pei to design a Museum of Islamic
In Europe, only Poland, Spain, Belgium and Turkey have managed to increase their stock of built assets. Spain experienced a construction boom during this time, while Turkey and Poland are still converging with Western Europe in terms of living standards and hence investing to catch up.
For the rest of Europe, the net depreciation over the period reflects chronic underinvestment followed by the financial crisis and recession. The crisis pushed down values of existing assets, often severely. The subsequent recession starved firms, individuals and governments of income meaning that replacement of retired assets and new investments have been put off. In the longer term, there has been deindustrialisation and transition to services, which require less physical capital.
SOURCE: PENN WORLD TABLES, IMF, WORLD BANK WDI, NATIONAL STATISTICAL AGENCIES, CEBR ANALYSIS
SOURCE: PENN WORLD TABLES, IMF, WORLD BANK WDI, NATIONAL STATISTICAL AGENCIES, CEBR ANALYSIS
Art), education (the UAE has set up a satellite campus of New York University), skyscrapers (of which Dubai has built nearly 190 since 2000) and stadiums (Qatar will host the Fifa World Cup 2022).
In the rest of the world, the post-2000 period saw high levels of asset creation. China’s investment has been crucial to many other countries: the extraordinary boom in construction supported high commodity prices throughout much of the period, which enabled
commodity-exporting economies such as Qatar, Canada, Indonesia, Saudi Arabia, Chile and Australia to enjoy high revenues and hence make large investments themselves. Figure 5 shows how China’s investment since 2000 dwarfs that of all other countries put together.
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COUNTRY SPOTLIGHT: GERMANYGermany ranks as the fifth wealthiest nation for built assets with a built asset stock of US$10.2trillion.
Germany remains the economic powerhouse of Europe but it is facing major problems within its public infrastructure.
A long term underinvestment means that newly created built assets have not kept up with depreciation. Over the past 30 years Germany’s investment share of GDP in its buildings and infrastructure has declined from 30% in 1980 to 18% in 2014.
Germany has to deal with huge infrastructural problems. For example, a recent eight week long closure of the bridge across
the river Rhine connecting Mainz and Wiesbaden, and construction works at several bridges across the Rhine in Cologne are just two examples of incidents leading to major disruptions, and huge losses of time in goods and commuter transport due to aging infrastructure.
However, it is not only roads and bridges that have witnessed a shortfall of investments. Other public infrastructure, for example hospitals, urgently need attention as well. According to the Society of German Hospitals (Deutsche Krankenhausgesellschaft) hospitals need investments of €6 billion per annum. Many of Germany’s hospitals were built in the 1960s and 1970s, meaning that their layout does not fulfil the current needs. In addition, contaminated materials are causing even higher costs when carrying out restructuring or refurbishment works.
COUNTRY SPOTLIGHT: MALAYSIABuilt assets will provide a key role in the final stage of Malaysia’s transformation into a fully developed nation.
The 11th Malaysia Plan, published in May 2015, sets out the nation’s strategy for the final five years of the 2020 plan to elevate itself to developed nation status by 2020. The last five years have seen a strong growth in the stock of built assets. Investment in built assets as a percentage of GDP has been growing in recent years. In addition to strong private investment in buildings, there has been strong public investment in infrastructure. For example, over the last five years, the total road network grew by 68% with 93,000km of new roads. Investment in urban rail saw a 32% increase.
The new plan sets out a continuing focus on the strengthening of enabling infrastructure to boost
Experts on both the public and the private sectors are working together to develop financial vehicles to facilitate private investments in public infrastructure, but with a pressing need these efforts must be accelerated if Germany is to ensure its current economic status is not damaged by its failing infrastructure.
productivity and support economic expansion. Major projects to be completed by 2020 include the Klang Valley MRT Line 1, the 2,000km pan Borneo Highway and the West Coast Expressway. A parallel focus will be investment in competitive cities, delivered through City Competitiveness Master Plans to increase liveability and stimulate economic growth.
Experience from other countries indicates that, in the race to achieve the 2020 goals, a key challenge faced by Malaysia will be to ensure that the quality and sustainability of the new built assets are not compromised in the interests of achieving cost and time goals.
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3.4 Wealth and income relationship The correlation between economies’ stock of built assets and their GDP is strong. Some proportion of national income is saved each year, and these savings can be used to make investment, rather than being consumed in that year. In turn, these investments generate returns in future years. Figure 6 illustrates the strength of the relationship, with most countries clustered close to the line of best fit.
Despite this, there are substantial differences between economies. For instance, China is far more capital-intensive than the US – the main difference causing this is the fact that China is a much more manufacturing-driven economy than the US. There is also likely to be significant under-utilisation of assets in China given growth is so rapid and much asset creation is pre-emptive, also known as “build
it and they will come”. The UK, like the US, is highly service oriented and so appears under-capitalised compared to other economies.
Some of the European economies which have seen net depreciation over recent years such as Germany, France and Italy still appear on the “overinvesting” side of the line of best fit. Important to note is the fact that this analysis only looks at
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SOURCE: PENN WORLD TABLES, IMF, WORLD BANK WDI, NATIONAL STATISTICAL AGENCIES, CEBR ANALYSISFIGURE 6: STOCK OF BUILT ASSETS BY COUNTRY VERSUS GDP, 2014 (US$)
COUNTRY SPOTLIGHT: UKThe UK is behind all other G7 members on built asset wealth per capita, and has had a flat trajectory on investment share of GDP for several years since the financial crisis of 2008. However, UK built assets are very productive, and given the correlation of built assets to GDP, this suggests there is opportunity for further GDP growth from investment in built assets. This is perhaps reflected in the government’s forward spending program on infrastructure, and accounts for two further trends: first a shift towards the structural pooling of investment through combined local authorities, and second, an increased level of city-wide planning and collaboration between public and private sector.
From an infrastructure perspective, the UK will invest over £150 billion in the next 5-8
years in its regulated transport and utility networks. New “Totex” (Total Expenditure) regulatory incentive mechanisms have been implemented to maximise the output of those assets and the service they provide to customers. To achieve that asset output optimization, the supply chain is shifting from traditional construction delivery to now include technology and customer service providers.
There will be a further £150 billion investment in other infrastructure “mega programmes”, including Thames Tideway Tunnel, smart metering, nuclear new build, renewables, High Speed 2, Crossrail 2, and airport expansion. Government policy needs to provide better certainty on timing and scale for many of these programs to attract investment funding, and to enable the supply chain to plan effectively for efficient delivery. Certainty and clarity will also enable socio economic benefits to be realised, and the service economy to benefit.
Master planning at a city level is increasing, aligning built asset enablers for education, healthcare, transport, retail, as well as affordable housing. By bundling asset classes into city programmes, the scale of asset investment opportunity is becoming more attractive for investors, particularly overseas investors, which in turn is creating new funding options. Collaboration between combined local authorities and the private sector also derisks the programmes and increases the potential for revenue generation. London, Birmingham, Glasgow, Hull and Peterborough all have good examples of attracting investment, and leveraging assets to generate revenue to enable other public services. This reinforces confidence in sustaining an efficient built asset to GDP ratio.
the quantity of past investments and not their quality nor their usefulness. Therefore an economy can have a large investment gap because assets are unfit for purpose or in the wrong places, rather than there being an absolute shortage. The Arcadis Global Built Asset Performance Index (published 2014) explores the GDP that these built assets generate.
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COUNTRY SPOTLIGHT: AUSTRALIAAustralia’s construction market has slowed over the last two years with end of the mining boom. While there are forecasts for a moderation in Australia’s construction sector, it is still set to expand at a solid rate. Scenarios for growth continue to be positive, supported by residential construction and the public sector emphasis on developing the country’s transport infrastructure.
Recent growth has been impacted by a slowdown in the mining sector as the outlook for Australia’s commodities sector has weakened. The mining industry’s reliance on Asian demand is apparent with a reduction in China having a negative impact on construction activity. This, combined with recent weaker commodity prices, has resulted in capital expenditure cuts by major Australian miners.
Residential building is driving near term growth. There has been an apparent surge in dwelling units approved but they have not yet commenced. The value of residential work commenced has only just started to pick up. Consequently, the delayed impact of residential work commenced will spill over to future quarters, boosting residential construction activity. Population growth and low interest rates in Australia also support residential demand and building activity. Foreign investment is fuelling the residential sector with many inner city high rise apartment buildings being predominantly attractive to Asian investors.
A key growth area beyond 2015 is expected to be in road construction. Government has indicated that it will prioritise road investment to address congestion concerns in major Australian cities.
COUNTRY SPOTLIGHT: BRAZILThe Brazilian economy has grown very little in 2015, the first year of Dilma Rousseff’s second term. This follows stagnation of GDP in 2014, a new round of interest rate climbs and fiscal tightening, while the exchange rate will also continue to depreciate. In these conditions, inflation will hold at around 6% and Brazil’s economy faces major challenges. The investigation into Brazil’s biggest corruption scandal involving oil giant Petrobras and the country’s largest engineering and construction firms is also responsible for the slowdown, it has undermined the construction sector and reduced investment in infrastructure, and has threatened to paralyze projects worth R$870 billion (US$325 billion), including some needed for the Olympics as they got caught up in legal proceedings and thus barred from public work. One of them, OAS, already defaulted on its debt, while Odebrecht and Andrade Gutierrez had their most senior corporate figures detained by police over investigations into allegations that they collaborated with former Petrobras executives and politicians to extract bribes from the oil company.
With the intention to revive economic growth, the infrastructure package worth almost R$200 billion (US$64 billion) was announced in the beginning of June. The plan reveals the intention to sell to the private sector new concessions to build and operate nearly 7,000 km of roads, airports and a number of
ports and railways, worth about R$66 billion for roads, R$37 billion for ports, R$86 billion for railways and nearly R$9 billion for airports (Salvador, Florianopolis, Fortaleza and Porto Alegre plus seven regional ones). Brazil needs expanded transport networks to carry the raw materials it supplies to the world, including iron ore, oil, coffee, sugar and soy. One of the most ambitious projects is a plan agreed previously with China to build a R$ 40 billion “Bioceânica” trans-continental rail link connecting the Atlantic to the Pacific ocean, giving Brazil a cheaper route to China, its top trade partner. But its success would depend on execution as the main concern is whether the government will be fast enough to approve the projects and launch the bids.
The infrastructure plan took a positive step regarding the willingness to open up to the private sector as an effort to reduce the dependency on BNDES, the Brazilian Development Bank, and increase the rate of investment in the country. The private sector has already spent around US$200 billion on infrastructure projects in the past five years. The current economy creates a scenario that is attractive for foreign investors. One of the favorable elements is the high value of the US Dollar compared to the Real. With the exchange rate reaching as high as R$3,30/US$, the purchasing power of foreigners has increased quite significantly. The hope is that the president will use Petrobras scandal to revitalize the damaged oil and construction industries by opening them up to foreign competition.
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4.1 Ten year forecast CHINA TO MOVE EVEN FURTHER AHEAD By 2025 (Figure 7), China will have increased its lead over the US and other countries further. Its total asset stock will be more than double that of the US, and in fact, will exceed the combined stock of the next four economies listed.
4. BUILT ASSET OUTLOOK
For some time the Chinese government has been intending to reduce the dependence of growth on investment. There are concerns that oversupply will reduce the values of built assets suddenly, precipitating a crash. This rebalancing would see China move closer to most other economies where consumer spending, rather than investment, plays the dominant role in the economy. The transition is encountering difficulties, as the government has repeatedly used fiscal stimulus to try to meet its growth targets. Since the government tends to use its resources for investment in China (welfare spending is significantly lower than in the OECD, for example) – the proportion of the economy accounted for by investment is falling only very slowly. This keeps China’s built asset stock growing rapidly. It is unlikely that there will be a rapid slowdown in Chinese growth over the forecast horizon.
India will overtake Japan and occupy third place. Thailand will surpass Australia. Poland and Turkey will overtake the Netherlands, making this a story of emerging economies overtaking more developed ones. The largest gains will be eight places up the rankings, by Indonesia and the Philippines, while the largest fall will be for Russia of seven places. This is due to a “perfect storm” of many Russian oil and gas reserves becoming uncompetitive, sanctions locking its companies out of financial markets, and recession over the next year or two. The end of the commodities boom will have adverse, but less extreme, consequences for Australia and South Africa. However, Saudi Arabia and the United Arab Emirates will continue to climb due to their especially high rates of investment. Their oil is also more competitive compared to most other sources.
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FIGURE 7 FORECASTED STOCK OF BUILT ASSETS IN 2025, US$SOURCE: PENN WORLD TABLES, IMF, WORLD BANK WDI, NATIONAL STATISTICAL AGENCIES, CEBR ANALYSIS
COUNTRY SPOTLIGHT: KINGDOM OF SAUDI ARABIASaudi Arabia has achieved phenomenal progress in its built asset stock in recent years, recording a 200% growth rate between 2000 and 2014. From a global perspective, Saudi has the third highest rate in the world.
This is primarily driven by government spending, supported by oil revenues and fiscal reserves accumulated when oil prices were high. The investments are geared to meet the expectations of a growing population in terms of infrastructure and social services, including the education, healthcare and housing segments. The focus on economic diversification and job creations, including through trade and new policies to attract foreign investments, are also providing impetus for the built asset sector.
The growth is manifested by the large scale programs being announced, like the plan to build 500,000 homes within five years in order to move the country towards its goal of 80% home ownership
by 2024. Or the Tatweer School program, which aims to build 10,000 new schools in 10 years. Furthermore, in the healthcare sector, it is reported that one in six hospitals globally will be built in Saudi Arabia in the coming years.
Built asset spending is forecasted to slow down in 2015, primarily due to recent leadership changes and lower oil prices; however in the medium term, itx is expected to see substantial growth. Saudi is projected to surpass Russia, the UK and Canada by 2025.
The country is often perceived as a difficult environment for international contractors for various reasons such as tight regulations or ease of doing business, but the government is taking progressive steps toward addressing those issues. Saudi Arabia needs to strike the right balance between promoting local human capital, ‘Saudisation’, and facilitating the critical supply of foreign expertise and labor.
Despite the challenges, Saudi Arabia is clearly emerging as a major player in the built asset sector.
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COUNTRY SPOTLIGHT: NETHERLANDSIn recent years the Netherlands has suffered as a result of the financial crisis, however since 2014 an economic recovery is visible. In real estate, some sectors are anticipated to grow in the year ahead as investors are expected to be less risk averse. The focus of investments is concentrated mostly on Amsterdam, but also on other major cities including Rotterdam, Utrecht and The Hague. Reuse of existing assets is preferred over the creation of new assets since 7 million square metres are still vacant (2.3 million have already been transformed or demolished.)
As the Netherlands is partly situated below sea level, the government continuously invests in large water safety programs. Alongside rivers, nature is given more space to accommodate rising water levels in order to keep cities and population safe. In the coastal areas dikes and barrages are being reviewed on their strength and improvement programmes are rolled out when needed.
The infrastructural quality of the network of roads and railway is already of a high standard in comparison to the density of these networks. Despite this, governments (both national and local) are still putting their efforts into further improvements. In Amsterdam contractors have been working on the North to South metro line for years already. Recently financial support of €210 million by the municipality of Amsterdam has been given to the project organization of the ‘Zuidas-dok’. With this financial support next steps for procurement can be taken in order to start constructing the tunnels for the major highway A10 at the beginning of 2017.
4.2 Implications for the global economy
The implications for the global economy of China’s intense asset investment depend on its character. It will be difficult for the state, which still commands much of the economy, to find productive uses for further stimulus so the performance of the new assets may take time to impact GDP.
With US$3.8 trillion of reserves at its disposal and faced with diminishing returns to investment domestically, China is now seeking to redirect its capital so that more of it goes outside its own borders. This will also solve the problem of providing employment for those in China’s infrastructure investment supply chain, as many Chinese companies investing abroad are expected to bring in their own supply chains to complete these investments.
Growing involvement in regions such as South East Asia and Africa shows how Chinese finance is not just building its own, but also other countries’ asset stocks. China’s newly founded Asian Infrastructure Investment Bank (AIIB), though currently junior to the Japanese-controlled Asian Development Bank, will intensify this process. There is a clear scope for the AIIB to raise Asia’s built asset stock in light of the region’s large backlog for infrastructure development. This is largely a legacy of the Asian financial crisis of the late 1990s.
The Asian Development Bank, for example, has said that the Asia-Pacific region needs US$8 trillion in infrastructure funding to overcome this legacy.
However, much of China’s outbound investment is also destined for further beyond its borders. Investment in advanced economies, especially in Europe, is expected to see a notable shift. This will be motivated by China’s desire to expand to more developed markets in order to gain from their know-how in its efforts to move up the industrial value chain and successfully perform the shift towards greater value-added forms of production.
For the US, Japan and other more developed countries whose stock of built asset wealth is in decline, they need to address this by attracting finance from new sources in order to reinvest where it is needed most or they will lose their competitive edge for years to come.
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5. HOW CAN BUILT ASSETS BE MADE TO LAST? A strategically planned, highly developed and well maintained built environment is critical to the economic and social success of a nation. This report clearly shows that whilst some countries are struggling to replace their aging built assets, others are stockpiling built asset wealth in the hope of creating long term returns. In order to understand the driver for built asset development it is important to better understand the cycle of development that each nation goes through on its journey to prosperity.
To illustrate this we can use an adaptation of Maslow’s Hierarchy of Need for built asset development.
Capital spending decreases as development moves up the value chain, but adequate asset maintenance is holding some back
Status - iconic buildings, science, R&D5
Culture & leisure – theatres, museums, sports, entertainment, tourism4
Tertiary economy – o�ce/ commercial, advanced transport, healthcare, higher education3
Secondary economy– factories, mass transport, basic education/ healthcare2
Basic - shelter, housing, food, water supply, energy resources, protection, basic transport1
The key to making assets work for as long as possible is to consider the whole lifecycle of the asset being created, and put in place a robust asset management strategy that prioritizes spend to maintain, not just build the asset. This should be done through understanding the asset and monitoring its condition, as well as putting in place the capability and funds to maintain it in a cost effective way. One way to source this maintenance funding could be through devolving financial responsibility away from central government which may have originally paid for the asset to the end user or local tax payer.
LEARNINGS FROM EMERGING ECONOMIESCreate a clear investment framework
Many of the nations that are investing in their built environment have set in place a framework to attract investment to help fund their built asset investments. Those nations in the West that are facing a depreciating built asset base could take on board some of these strategies to help make themselves more attractive to investors.
Firstly, creating a clear vision for policy and pipeline for development. Many of the leading built asset growth nations have long term plans for growth set out by the government. This provides potential investors with a clear picture of what is planned,
Secondly, accelerate and clarify major policy decisions around energy and transport. Uncertainty impedes innovation and the ability to attract the funds and capability now. Delays in decision making are also likely to cause cost inflation at the back end of the programs as the timeline will become compressed.
Finally, set in place transparent regulatory models to encourage investment and investable projects. Utilities and transport are good examples where stable and predictable returns can enable sustained investment at mutually beneficial rates of return.
As countries build to develop their economies, their requirements change and the amount they spend on capital expenditure over operational expenditure, or maintenance, evolves. The basic built asset needs of a nation are often expensive including housing and energy supply. Without these in place, a nation will struggle to build a long-lasting platform for economic growth.
This can be seen through the Built Asset Index as many economies in Asia and the Middle East are literally ‘nation building’. They are spending huge sums of money to develop their built environment with the aim of creating long-term economic value. In some cases these countries are jumping ahead by creating iconic built asset developments to compete with rival nations. This is particularly true in the Middle East where some construction projects are being undertaken to make a vanity statement rather than for direct economic or social return.
In order to succeed in meeting their goals, these fast developing nations need to learn from the mistakes of the more maturely developed countries in the West. The Built Asset Index shows that many of these nations are seeing a
net depreciation in their built assets through not investing enough back into the first stages of the hierarchy of needs. This is leaving them with a built asset deficit which could take many years to make up.
IS THE NEW STOCK OF BUILT ASSET WEALTH BEING MADE TO LAST?As nations build and strengthen in the East, those in the West are struggling to attract the funding they need to replace, maintain and build new stock. Countries at both ends of this spectrum can learn from each other to help ensure that their built assets are made to last.
LEARNINGS FROM DEVELOPED ECONOMIESConsider the whole lifecycle cost of the asset
Without the necessary funds to replace aging infrastructure, many countries in Europe have had to master the art of maintaining their existing assets so that they retain value long after they should have become redundant. One example of this is in London where the Victorian age sewage system is still being used nearly 150 years after it was constructed.
SUMMARY As we can see, the built asset development race seems set to continue well into the next decade as developing nations look to secure their long term economic future. Establishing a foundation built on bricks, mortar and infrastructure is a fundamental priority. Not all will be successful as they build too much of one asset type or too little of another. Further-more, if they are to be successful they will need to look to the troubles facing the more mature economies and think long term if their built assets are to last.
Overall, the most successful nations will be those that consider the whole lifecycle of the assets they are building in order to thrive. Through doing this, built asset owners can be more confident that the assets they are creating will be built to last and can underpin a successful economic and social future.
Our next built asset report will revisit the performance of the assets being created and which nations are squeezing the most GDP out of them.
FIGURE 8 HIERACHY OF BUILT ASSET NEED DRIVING DEVELOPMENT
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6. APPENDIX6.1 Methodology
2. Formulate depreciation schedules for each component of fixed capital formation
These were drawn from international best practice, including the Bureau of Economic Analysis, the Organisation for Economic Cooperation and Development and the World Bank. Following this guidance, an average service life for each of the components of fixed capital formation (residential and non-residential construction and machinery and equipment) was established. This works out around 14 years for assets of machinery or plant and approximately 70 years for construction assets. The rate of depreciation in each economy depends on the ratio between these two quantities in its overall stock of assets.
3. Forecasting the stock of built assets
Having established estimates for the initial stock of built assets in each of the 32 countries within our sample, forecasting the change in these stocks requires, for each country, an assessment investment growth in constant purchasing power parity adjusted to US dollars, the composition of investment, the depreciation of the existing stock and the rate of population growth.
Cebr relied upon internal forecasts for GDP growth for those countries where detailed forecasts are produced, and made use of IMF forecasts for the investment share of GDP for countries for which Cebr does not produce such detailed forecasts. To forecast the composition of investment, or fixed capital formation, Cebr established econometric relationships in each of the countries within our sample to estimate its evolution over the forecast horizon.
Purchasing power parity takes account of the fact that at market exchange rates, the same number of dollars goes further in poorer countries, making it a better reflection of living standards. Nevertheless, GDP at market exchange rates is also an important measure.
DEFINING BUILT ASSETSFor the purposes of this research ‘built assets’ are defined as including all tangible fixed capital investment counted in the national accounting framework used by national statistical offices. This includes infrastructure investment, construction, investments in plant and machinery and improvements in ‘natural assets’ such as land reclamation. The definition excludes all intangible investments, such as expenditure on software and data, as well as investment in mineral exploration, the vast majority of military expenditure and forms of intellectual property.
CALCULATING THE STOCK OF BUILT ASSETSThe built asset stock was estimated via the following stages:
1. Establish the composition of fixed capital formation for each country
Fixed capital formation was broken down into construction (including infrastructure) and machinery and equipment. Where these data were not available, estimates for the composition of fixed capital were compiled based on economic relationships derived from similar countries within our sample.
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PURCHASING POWER PARITY (PPP)In order to compare the relative value of assets appraised in different countries, a Purchasing Power Parity (PPP) measure is used to account for the sometimes significant variation between price levels across countries and to correct for currency fluctuations.
DISCLAIMERWhilst every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and Business Research Ltd nor Arcadis will be liable for any loss or damages incurred through the use of the report. The report does not necessarily reflect the views of Arcadis.
AUTHORSHIP AND ACKNOWLEDGEMENTSThis report has been produced by Cebr, an independent economics and business research consultancy established in 1992. The views expressed herein are those of the authors only and are based upon independent research by them.
6.2 Data sourcesNATIONAL SOURCESAustralian Bureau of Statistics - http://www.abs.gov.au/
National Bank of Belgium - http://stat.nbb.be/
Brazilian Institute of Geography and Statistics - http://www.ibge.gov.br/english/
Statistics Canada - http://www.statcan.gc.ca/start-debut-eng.html
National Bureau of Statistics China - http://www.stats.gov.cn/english/
French National Institute of Statistics and Economic Studies - http://www.insee.fr/en/
German Federal statistics office - https://www.destatis.de/EN/Homepage.html
Hong Kong Census and Statistics Department - http://www.censtatd.gov.hk/
Indian Ministry of Statistics - http://mospi.nic.in/
Italian National Institute of Statistics - http://en.istat.it/
Japanese Ministry of Internal Affairs and Communications - http://www.soumu.go.jp/english/
Malaysian Department of Statistics - http://www.statistics.gov.my/main/main.php
Mexican National Institute of Statistics and Geography - http://www.inegi.org.mx/
Statistics Netherlands - http://www.cbs.nl/en-GB/menu/home/default.htm
Russian Federal State Statistics Reserve - http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/en/main/
Saudi Arabian Central Department of Statistics and Information - http://www.cdsi.gov.sa/english/
Department of Statistics Singapore - http://www.singstat.gov.sg/
Statistics Korea - http://kostat.go.kr/portal/english/index.action
Spanish National Institute of Statistics - http://www.ine.es/en/
Turkish Statistical Institute - http://www.turkstat.gov.tr/Start.do
UK Office for National Statistics - http://www.statistics.gov.uk/hub/index.html
US Bureau of Economic Analysis - http://www.bea.gov/
INTERNATIONAL SOURCESInternational Monetary Fund, World Economic Outlook, October 2014.
Accessed via Macrobond.
Penn World Table, Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.1, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, Nov 2012.
Accessed via Macrobond.
7. FURTHER READING
GLOBAL BUILT ASSET WEALTH INDEX 2013
GLOBAL BUILT ASSET PERFORMANCE INDEX 2014Which countries gain the best economic returns from their buildings and infrastructure?
SUSTAINABLE CITIES INDEX 2015Balancing the economic, social and environmental needs of the world’s leading cities
SECOND GLOBAL INFRASTRUCTURE INVESTMENT INDEX 2014Competing for private finance
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GLOBAL CONSTRUCTIONDISPUTES REPORT
2015The Higher the Stakes, The Bigger the Risk
www.arcadis.comwww.arcadis.com/builtassetindex
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If you have any questions regarding the issues covered in this index or would like to discuss the index further please contact the Business Advisory Leader for your region or sector.
Tom MorganBusiness Advisory LeaderNorth AmericaE [email protected]
Alan RichellBusiness Advisory LeaderMiddle EastE [email protected]
Greg BradleyBusiness Advisory Leader UKE [email protected]
Adam SuttonBusiness Advisory Leader AsiaE [email protected]
Julien CayetBusiness Advisory LeaderContinental EuropeE [email protected]
Gareth RobbinsBusiness Advisory LeaderAustralia PacificE [email protected]
Esteban AzagarWater Business Advisory LeaderE [email protected]
Don HardyInfrastructure Business Advisory LeaderE [email protected]
Jim HillEnvironment Business Advisory LeaderE [email protected]
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LEAD CONTRIBUTORSJulien CayetGlobal Leader Business AdvisoryBuildings Business Advisory Leader
Alasdair CavallaCentre for Economics and Business Research
@ArcadisGlobal
Arcadis
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