GLOBAL BUILT ASSET PERFORMANCE INDEX Which countries gain the best economic returns from their buildings and infrastructure?

GLOBAL BUILT ASSET PERFORMANCE INDEX 2014 Which countries gain the best economic returns from their buildings and infrastructure?

2 1 CONTENTS 1.0 Foreword 2 2.0 At a glance 3 3.0 The Global Built Asset Performance Index 4 3.1 Current state of the world economy 6 3.2 Measuring built asset performance 7 3.3 Contribution of built assets to GDP 8 3.4 Global built asset performance by country 11 3.5 Return on built assets per person 16 3.6 Built asset wealth and performance relationship 20 4.0 Future built asset performance 28 4.1 Built asset performance growth forecasts 28 4.2 Regional changes in performance 30 5.0 How to boost built asset performance 34 6.0 Appendix: Research methodology and data sources 36

2 3 1.0 FOREWORD 2.0 AT A GLANCE The built environment is incredibly important to the health and wealth of a nation. Vibrant cities with good transport networks allow freedom of mobility; water networks provide clean water and take away waste and storm water; first class housing enables active communities to flourish; schools and hospitals improve skills and health and high quality office space attracts business and efficient workers. But how much economic value do all of these built assets contribute to society and how can they be improved to provide better returns? The Global Built Asset Performance Index reveals how physical buildings and infrastructure contribute to national GDP across the world. Drawing on insights from the Global Built Asset Wealth Index, which quantified the stock of built asset wealth across 30 nations, this report examines the income generated by these stocks of buildings and infrastructure. The aim is to investigate trends, relationships and disparities in built asset performance across the same 30 countries, collectively representing 82% of global GDP. The Global Built Asset Wealth Index report, published in 2013, analysed the value of the world s built environment and mapped out its distribution across different countries. The results were striking; the built environment was valued at US$193 trillion across the 30 nations covered in the report, with China predicted to overtake the USA as the wealthiest country by built assets over the next few years. This follow on report, the Global Built Asset Performance Index, explores the economic value that is generated from the built asset wealth of these same 30 countries. It aims to answer the following questions: What proportion of a country s GDP can be attributed to built assets? Which countries generate the greatest return from their built assets? Over the next decade, which countries are best placed to improve the performance of their built assets? How can countries gain better performance from their built assets in order to develop new sources of competitive advantage? Whilst research has been conducted to assess the economic value of individual asset classes such as residential property, office developments, a power station or transportation infrastructure, this is the first time that the value of the whole built asset base has been taken into account and its economic performance measured. As the leading global natural and built asset design and consultancy firm, Arcadis is committed to delivering exceptional and sustainable outcomes for its clients. Combining its expertise with data collected by the Centre for Economics and Business Research (Cebr), this report provides valuable insight for asset investors, owners, occupiers and users seeking to maximise the performance of their built assets across the full range of industry sectors and geographies. David Sparrow Global Director, Multinational Client Program Arcadis Produced by Arcadis and informed by research conducted by the Centre for Economics and Business Research (Cebr), the Global Built Asset Performance Index finds that: Built assets generated a total income of US$27.1 trillion of GDP across all 30 countries in 2013 This amounted to, on average, 40% of total GDP across these countries This proportion increases to 45% in emerging economies, but is lower in advanced economies at 35% Mexico and Turkey generated the highest proportion of income from their built assets at over 60% of GDP due to low labour costs and large industrial sectors Russia is the least reliant on built assets for generating GDP; just 14% of Russia s economic output is attributed to its built assets highlighting a need to invest in the quality of its infrastructure Chinese built assets generated US$6.9 trillion in 2013-53% of GDP - this is forecast to rise to US$7.4 trillion in 2014, the highest level of any single economy In the USA, built assets accounted for US$5.6 trillion of income in 2013, but is forecast to grow at a much slower rate in 2014 to US$5.7 trillion. While still boasting a worldleading built asset stock, renewing and extending its built assets remains an important measure to support future growth At US$29,500 per capita, the city-state of Singapore has the highest built asset income per person thanks to its strong industrial output The Eurozone has some of the highest built asset wealth per capita, but returns are relatively low due to recent economic stagnation and overcapacity problems Despite having lower levels of built asset wealth per capita than many advanced economies, the UK manages to extract a better than average economic return from its built assets, but has significant challenges ahead if it is to remain competitive Saudi Arabia has a relatively low built asset performance compared to Middle Eastern nations such as the UAE and Qatar, but their built asset performance is forecast to grow by 70% over the next decade Brazil lags behind other emerging nations with just 32% of its GDP generated by built assets, significant investment is needed if it is to drive sustainable growth.

4 5 3.0 THE GLOBAL BUILT ASSET PERFORMANCE INDEX Built assets generated a total income of 27.1 trillion US$ of GDP across all 30 countries in 2013 The 30 countries in this report collectively represent 82% of global GDP CANADA RUSSIA Built assets generated 40% of total GDP across the 30 countries in this report MEXICO USA UK FRANCE SPAIN NETHERLANDS POLAND GERMANY ITALY EGYPT TURKEY SAUDI ARABIA QATAR UAE INDIA CHINA SOUTH KOREA JAPAN HONG KONG THAILAND PHILIPPINES US$29,500 Singapore has the highest built asset income per person CHILE BRAZIL SOUTH AFRICA SINGAPORE MALAYSIA INDONESIA AUSTRALIA

6 7 3.1 CURRENT STATE OF THE WORLD ECONOMY Global economic fortunes have shifted of late. In the short term at least, growth in emerging markets is slowing, while advanced economies have gathered momentum. The Eurozone has finally returned to positive growth, the UK is expected to be amongst the fastest growing advanced economies in the world in 2014, and the USA is being powered forward by a resilient private sector. (See Figure 1) 3.2 MEASURING BUILT ASSET PERFORMANCE Measuring the income generated by a country s built asset wealth provides valuable insight into how effectively an economy makes use of the built assets it has at its disposal Emerging markets, on the other hand, are facing a raft of problems that are likely to slow their progress in the short term. Having out-performed the global average during the financial crisis, these countries are facing a cyclical slowdown in 2014. In advanced economies with improved growth prospects such as the USA and UK, investment opportunities are likely to Figure 1 - Global real GDP, annual percentage change 10% 8% 6% 4% 2% 0% -2% -4% -6% become more widespread. If these nations can seize the opportunity to expand their built asset wealth, this should act to reinforce future growth. Meanwhile in emerging economies, the challenge is to remain attractive to investors whilst maintaining the rate of investment in built assets that will help to close the gap with more advanced nations. In emerging economies, the challenge is to remain attractive to investors whilst maintaining the rate of investment in built assets that will help to close the gap with more advanced nations What is a built asset? In economic terms, built assets can be thought of as encompassing all tangible fixed capital investment: this includes infrastructure, residential and non-residential construction, as well as plant and machinery and improvements in natural assets through, for example, land reclamation. The performance of built assets is assessed by estimating the share of annual national profits that are generated by these built assets. The profit attributable to built assets is defined in this report as the residual income, once profit associated with wages, intangible capital and rent from natural assets such as mineral deposits is taken into account. Profit, or benefit, is obtained by the owners, funders, operators and constructors of built assets. Users of built assets, such as roads or other infrastructure, also secure benefits that can be described as profit. Why is built asset performance an important measure? Measuring the income generated by a country s built asset wealth provides valuable insight into how effectively an economy makes use of the built assets it has at its disposal. This report measures this income and compares it to the value of built asset stock. This measure of efficiency is a key determinant of the productive potential of an economy and, therefore, the economic growth that a country might be able to achieve relative to its peers. Furthermore, this measure reflects the return on investment obtained within an economy, and thus the potential profitability of businesses operating within it. Our analysis of built asset wealth and performance aids the wider understanding of built asset demand, growth and changes in economic performance. This report makes use of internationally comparable data compiled by various institutions and government bodies, allowing us to isolate the economic returns attributable to built assets. Built asset valuations in this report are presented on the basis of Purchasing Power Parity (PPP) allowing direct comparison of different economies within the sample. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 World Advanced Emerging Source: IMF World Economic Outlook; Cebr Global Prospects

8 9 3.3 CONTRIBUTION OF BUILT ASSETS TO GDP Built asset wealth generates income of over US$27 trillion across the globe The 30 countries under study represent a mixture of advanced and emerging economies from all regions of the globe. Taken together, these countries are estimated to have generated economy-wide income of US$27.1 trillion from their built assets in 2013. This figure is expected to rise to US$28.1 trillion in 2014. Built asset returns account for 40% of economic activity across all 30 economies This is equivalent to built assets generating, on average, 40% of GDP in 2013 (Figure 2). Built assets are a key foundation for economic prosperity in any economy, representing the infrastructure, machinery and equipment that is crucial to productive activity. The dependency of an economy on its built assets can be illustrated by looking at the income generated by this fixed capital compared to the income generated in the economy through wages and salaries and intangible capital and natural resource rents. Figure 2: Average GDP distribution across all countries 1 2 3 40% 6% Wages and salaries Built asset returns 54% Intangible capital and natural resource rents Looking behind this global average, there is significant variation in the return produced by built assets across the world, as shown in Figure 3, which illustrates the total return in 2013 and expected return in 2014 by country. Advanced economies have a relatively lower proportion of GDP generated through their built assets at 36%, while emerging economies saw a higher proportion of 45%. This difference is indicative of how advanced economies tend to see a generally higher proportion of GDP find its way into wages and salaries. Investors in built assets and other forms of capital still secure a return, but it represents a smaller share of overall income. Furthermore, as economies develop and diversify, investment in intangible capital such as software and computing power becomes relatively more Figure 3: Return on built assets as a proportion of GDP Rank 2013 Forecast Rank 2014 Country 2013 % Forecast % 2014 % Change from 2013 1 1 MEXICO 61 62-1 2 2 TURKEY 61 60-1 3 3 CHINA 53 53 0 4 4 POLAND 51 51 0 5 5 SINGAPORE 50 50 0 6 6 INDONESIA 47 46-1 7 8 UAE 44 43-1 8 7 JAPAN 44 44 0 9 9 THAILAND 42 42 0 10 10 SPAIN 42 42 0 11 11 INDIA 41 40-1 12 13 EGYPT 40 39-1 13 12 PHILIPPINES 40 40 0 14 14 SOUTH AFRICA 39 39 0 15 15 SOUTH KOREA 38 37-1 16 16 USA 37 37 0 17 17 CANADA 37 37 0 18 18 FRANCE 36 36 0 19 19 HONG KONG 36 35-1 20 20 MALAYSIA 34 35 +1 21 21 GERMANY 33 33 0 22 22 ITALY 33 33 0 23 23 BRAZIL 32 32 0 24 24 AUSTRALIA 31 31 0 25 25 NETHERLANDS 31 30-1 26 26 UK 29 29 0 27 27 QATAR 28 28 0 28 28 CHILE 21 21 0 29 29 SAUDI ARABIA 16 17 +1 30 30 RUSSIA 14 14 0 Source: Cebr analysis important to driving growth. This reduces the relative contribution of tangible investment, including built assets, to overall GDP. An abundance of natural resources, such as fossil fuels, may also reduce the relative contribution of built asset wealth to supporting economic activity, as resources are attracted into the extractive industries (i.e. oil and gas).

10 11 3.3 CONTRIBUTION OF BUILT ASSETS TO GDP 3.4 GLOBAL BUILT ASSET PERFORMANCE BY COUNTRY Russia is the least reliant on built assets Of the 30 countries studied, Russia is the least reliant on built assets for generating GDP. Just 14% of Russia s economic output in 2013 can be attributed to income from built assets. As well as having a relatively high labour income share of GDP - over two-thirds - a further fifth of Russia s GDP is accounted for by the rents extracted from natural resources. Interestingly, whilst the Russian industrial sector is large (36% of GDP), much of the profitability resulting from industrial activity comes from the subsidising effects of extractive industries, rather than the value added of built asset wealth. The low contribution to GDP from built assets also points to Russia s enduring problems with the quality of its infrastructure, having under-invested over many years. 14% of Russia s economic output in 2013 can be attributed to income from built assets Mexico and Turkey are most dependent on built assets for GDP income Income from built asset wealth is highest as a proportion of total economic activity in Mexico and Turkey, at slightly over 60% in each. Low labour costs, and modern, low cost industrial plants mean that for every unit of output, a larger share of the proceeds find themselves into profits as opposed to wages. Combining low labour costs with relatively large industrial sectors (over a quarter of GDP in each country) and lower levels of reliance on natural resource extraction means that a relatively larger proportion of economic activity appears to be rewarding investment in built assets. Furthermore, these countries are newly-industrialised, and as such built assets could be expected to deliver high gains in productivity as their economies continue to develop. With a young, growing workforce in both countries, these dynamics should combine to spur on further built asset investment as the rewards for such undertakings are more likely to find their way into boosting business profitability, creating an even greater incentive to invest. 61% of Mexico s economic output in 2013 can be attributed to income from built assets Whilst the Russian industrial sector is large (36% of GDP), much of the profitability resulting from industrial activity comes from the subsidising effects of extractive industries, rather than the value added of built asset wealth In absolute terms at least, China generates the greatest return from its built assets, estimated in PPP terms at US$6.9 trillion in 2013 and expected to rise to US$7.4 trillion in 2014 (Figure 4) Wages and salaries in China account for 41% of GDP, with the remaining 59% representing profits. After excluding the profits resulting from natural resource extraction and intangible capital (6% of GDP), the remaining 53% of GDP is attributable to the use of built assets. This result has been driven by the sustained intensity of fixed capital formation in China s heavily manufacturing focused economy, where industrial production accounts for over 45% of economic output. Figure 4: Total return on built assets US$ (PPP measure) billions 0 CHINA USA INDIA JAPAN GERMANY MEXICO FRANCE UK BRAZIL TURKEY ITALY INDONESIA SOUTH KOREA SPAIN CANADA POLAND RUSSIA AUSTRALIA THAILAND NETHERLANDS EGYPT SOUTH AFRICA UAE PHILIPPINES SINGAPORE MALAYSIA HONG KONG SAUDI ARABIA CHILE QATAR Source: Cebr analysis 1,000 2,000 3,000 2014 2013 4,000 5,000 6,000 7,000 8,000 China is followed by the United States, where built assets are estimated to have generated US$5.6 trillion in 2013 and is expected to increase by 2.1% over 2014. The US is a more balanced economy than China, with significant contributions from investment in intangible assets as well as natural resources, as illustrated by the recent shale oil and gas boom. An interesting insight from the analysis presented in Figure 4 is that the size of the economy does not always directly relate to the level of built asset performance. For example, Indonesia is currently a smaller economy than Italy but the returns from built assets in Indonesia are expected to surpass those of the more advanced southern European economy in 2014, reflecting, again, the key issue of the relative balance between capital and local costs of labour. These disparities in performance shed some light on the likely path of international economic transformation. The large returns in some countries provide the potential for greater re-investment and this may act as a catalyst to drive further growth. This allows countries with larger built asset incomes to close the GDP gap with bigger economies that may have less capacity to invest as a result of relatively high wage costs.

12 13 COUNTRY SPOTLIGHT: USA Almost two fifths (37%) of GDP in the US was generated through its built assets in 2013, representing a strong return from its accumulated capital and built asset wealth. However, with China and other emerging markets investing heavily and improving their capacity and productivity, the US needs to review the condition and use of its current assets and be strategic about its new asset creation in order to maintain its competitiveness and improve performance over the next decade. Some of the original assets are now 60-70 years old and still generate income despite their depreciation in value Ironically, the condition of built assets in the US, such as the road network or power generation, could emerge as a constraint on the efficient use of relatively expensive labour. The US experienced a building boom in the 1950s and 1960s and again in the late 1990s - mid 2000s, when real estate values were at their highest. Some of the original assets are now 60-70 years old and still generate income despite their depreciation in value. A high proportion of US built asset investment is spent on ongoing maintenance for these ageing assets and managing the liabilities of assets as they come to the end of their lifecycle. For example, the recent slowdown has led to a need to transform the Federal estate as organisations including the US Airforce seek to redefine the use of its vast portfolio. In addition, as many as one in nine bridges in the US were deemed structurally deficient, with an estimated repair bill of US$76 billion in a recent report by Transportation for America, highlighting the need for major investment. Water infrastructure is also in need of replacement and renewal in many cities, especially on the East Coast. These dynamics see the US needing to both review ageing and redundant assets whilst also entering into an age of asset renewal and extension. A need to support the flow of trade and create viable alternatives to the car and gridlocked city centres, which reduces labour productivity, is driving a focus to invest in high speed, commuter and freight rail and port upgrades. Commercial real estate strategy is also being re-evaluated based on the tastes and preferences of a younger generation. For example, corporate America is shifting away from teleworking to mandatory office working, as evidenced by policies from the likes of Google and Yahoo!. Major new corporate headquarters are being built for technology companies in San Francisco Valley, the Oil and Gas industry in Houston and pharmaceuticals on the East Coast, creating a need for quality built assets to enable strong performance from these industries.

14 15 COUNTRY SPOTLIGHT: CHINA Over the next two to three years, China will overtake the US to become the wealthiest nation by built assets in the world. Investment in new built assets will continue, but with the added dynamic that China needs to generate stronger performance from its existing assets to sustain planned levels of economic growth. This move from growth by investment to growth by performance is particularly important for developed cities such as Shanghai where the infrastructure within the city is already in place. Regional connectivity to surrounding cities will continue to amass at a pace significantly enhancing the mobility of both people and business alike. This, coupled with an embargo on building on agricultural lands, will result in the established cities accelerating the reshuffling of land use and the asset base contained within existing city boundaries. The need to support growth and respond to market dynamics will mean many existing assets will either be replaced or, at the very least, be made to work far harder if growth is not constrained. Demand for water supply and treatment continues to grow as well. If development continues ahead of demand, then the share of income attributable to built assets will fall. In contrast, many tier three and tier four cities will carry on their major built asset investments to improve their connectivity and development. Whilst this will generate non-financial outcomes such as social stability through better living standards and job creation, concerns have been raised about the sustainability of this boom and whether the sheer volume of new residential, commercial, leisure and infrastructure built assets will be fully utilised in order to meet their performance potential. A number of uncertainties, challenges and opportunities lie ahead for China. How the country s built and natural environments evolve will serve as a reliable barometer for China s performance over the next decade and beyond. How the country s built and natural environments evolve will serve as a reliable barometer for China s performance over the next decade and beyond

16 17 3.5 RETURN ON BUILT ASSETS PER PERSON Singapore benefits from by far the greatest returns per head US$29,500 in 2013 While the income generated by built assets is, in the first instance, largely received by the owners, occupiers and immediate users of the built assets; this income should feed through to the wider economy Comparison of performance across countries can indicate where built assets make their greatest economic contribution to GDP. However, these total impacts will have a different relative importance, depending on the size of the economy and the size of population who stand to benefit from them. While the income generated by built assets is, in the first instance, largely received by the owners, occupiers and immediate users of the built assets; this income should feed through to the wider economy, supporting future investment, tax receipts, payments to investors through dividends, or may be simply saved for future use. One way of assessing the impact is therefore to look at the generated income relative to the size of the country s population. This analysis is shown in Figure 5. On this measure, by far the greatest built asset contribution is found in Singapore where in 2013 this wealth generated an estimated US$29,500 for each member of the population, a figure expected to remain broadly the same during 2014. This was significantly higher even than the equivalent figures for Qatar and the United Arab Emirates, which generated US$20,500 and US$17,500 respectively in 2013. Across all the countries within the analysis, advanced economies built assets generated US$14,500 per person in 2013, compared to US$4,000 in emerging economies. The lowest built asset income per capita of any advanced economy, estimated at US$10,000 in 2013, was found in Italy. This performance was surpassed by the highestachieving emerging market, South Korea, where built asset income per capita was estimated at US$12,000. Figure 5: Total return on built assets per person, 2013 and 2014 - US$ (PPP measure) 0 SINGAPORE QATAR UAE USA HONG KONG JAPAN CANADA AUSTRALIA GERMANY FRANCE NETHERLANDS SPAIN SOUTH KOREA UK POLAND ITALY TURKEY MEXICO CHINA MALAYSIA THAILAND SAUDI ARABIA SOUTH AFRICA BRAZIL CHILE EGYPT RUSSIA INDONESIA PHILIPPINES INDIA 5,000 10,000 15,000 20,000 2014 2013 25,000 30,000 Source: Cebr analysis

18 19 COUNTRY SPOTLIGHT: MALAYSIA In 2010 Malaysia set out its ambitious Economic Transformation Programme (ETP), aiming to elevate itself to developed-nation status by 2020. Malaysia s built asset wealth is set to grow by almost US$60billion a year to US$1.8trillion by 2022 Many of the initiatives detailed within the ETP are underpinned by investment in its built environment including projects such as a new high-speed rail link to Singapore, the US$20 billion Medini Iskandar Smart City Development and new or upgraded water systems. These major programmes will significantly increase Malaysia s built asset wealth which stood at US$1.24 trillion in 2012, and is set to grow by almost US$60 billion a year to US$1.8 trillion by 2022. Malaysia s built environment contributed 34% of the country s GDP in 2013, however this is below the global average of 40% and well behind some other emerging economies such as Indonesia which generated 45% of its GDP through built assets. This, in part, reflects the contribution of natural resources to Malaysia s economy, which the ETP is addressing through investment in economic diversification. Implementation of the ETP has certainly accelerated, particularly since the 2013 election. However, with such a high volume of development going ahead at the same time it is important that lessons are learnt from other nation building programmes to maximise the benefit secured from investment. This will help avoid the costly errors of others and achieve the promised high returns. This will enable the country to achieve a new economic standing on the global stage.

20 21 3.6 BUILT ASSET WEALTH AND PERFORMANCE RELATIONSHIP Built asset performance increases with built asset wealth, but there are wide variations across countries The previous sections discussed how national income is accumulated as a result of a country s built asset wealth, illustrating the relative contributions made by built assets to overall GDP. However, the initial analysis doesn t measure the efficiency with which these assets are utilised to produce an economic return. To understand this, we need to compare the performance of the assets with the value of the assets themselves. This comparison is illustrated in Figure 6 below which plots return on built assets against the value of built asset wealth. In Figure 6, countries that sit above the trend line deliver above average returns relative to the sample. Figure 6: Relationship between built asset wealth and performance, 2013, US$ PPP measure RETURN ON BUILT ASSETS PER CAPITA 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Source: Cebr analysis SINGAPORE QATAR INDIA UAE USA CANADA HONG KONG JAPAN GERMANY AUSTRALIA TURKEY UK POLAND FRANCE NETHERLANDS SPAIN EGYPT SOUTH AFRICA MEXICO ITALY SOUTH KOREA CHINA MALAYSIA THAILAND SAUDI ARABIA BRAZIL CHILE RUSSIA PHILIPPINES INDONESIA 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 BUILT ASSET WEALTH PER CAPITA Singapore performs well As with returns per capita, there is a clear division between emerging and advanced economies in terms of their built asset wealth and economic performance. Of the advanced economies, Singapore is a standout performer, having high levels of built asset wealth and a high proportion of GDP attributable to built assets. The Singaporean economy generates far more income per capita from its built asset wealth than the average economy, as indicated by its position far above the trend line. The highly urbanised city-state also performs strongly against comparably urbanised Hong Kong, where high per-capita wealth produces broadly average economic returns. The difference between the two economies built asset returns can be explained by contrasting the economies of the two city states. A high proportion of Singapore s economic output continues to be derived from industrial output, whereas Hong Kong is overwhelmingly a service-based economy. Poland, Mexico and Turkey generate high returns per capita compared to their wealth Among emerging market economies, Poland, Mexico and Turkey stand out as achieving high returns compared to their built asset wealth, albeit that accumulated wealth is significantly lower per capita than for developed economies. These countries have seen a robust increase in their built asset wealth from a low base over the past two decades, which, in turn, has fuelled economic growth and improved returns. Moreover, a degree of economic catch up has been enabled through their emergence from comparatively lower levels of industrialisation and low pre-existing rates of built asset wealth, allowing for faster growth in returns. As these returns are reinvested, the economies are likely to move closer towards the international trend lines, reflecting a general upward growth trajectory. India and China generate lower returns per capita The catch up process is less advanced in other much larger emerging economies, such as India and China. While China has experienced rapid rates of built asset investment and economic growth in recent years, on a per capita basis its built asset returns remain low by international standards. However, with investment levels remaining high and built asset returns still appearing favourable, this large emerging market is well placed to expand its built asset wealth and income. The requirement for built asset investment is even more urgent in India where historic underinvestment in infrastructure remains a major drag on the productive potential of the economy. Chile and Russia appear to be underperforming Chile and Russia both appear to be underperforming in terms of the returns they extract from their built asset wealth. High levels of investment can be observed in both economies, at around a quarter of total GDP. This is expected to feed through into higher returns in the future, although, in Russia s case, much of this investment will be needed to offset previous years of underinvestment in the upgrading of ageing infrastructure. Qatar and UAE outperform Saudi Arabia In both the UAE and Qatar, built assets make a greater contribution to GDP than in Saudi Arabia, in part due to energy subsidies being lower in Qatar and the UAE than in Saudi Arabia. Added to this is the relative low cost of labour in both the UAE and Qatar which keeps construction costs down, facilitating the rapid formation of built asset wealth. It will be interesting to see whether these relatively high returns can be sustained as investment grows in line with plans for economic diversification.

22 23 REGION SPOTLIGHT: EUROZONE Eurozone countries have some of the highest levels of built asset wealth in the sample, ranging from US$120,000 to US$140,000 per capita. However, the returns generated from their built assets are relatively low when compared to emerging markets. This can be partly explained by the economic stagnation that has occurred since 2008, and partly by the diversification of mature economies away from intense industrialisation to a more service led economic model. A similar pattern can be seen when comparing Hong Kong and Singapore. However, diversification of Eurozone economies does not tell the whole story. The analysis suggests that many Eurozone economies may suffer from built asset overcapacity, with a particular problem with obsolete built assets, often situated in the wrong area. This is particularly true of surplus assets held by large corporations, which represent a potential liability on balance sheets in their current use, and a potential asset if repurposed. Underutilised built-assets tie up capital on balance sheets and, as a result, constrain a business ability to invest. The analysis suggests that many Eurozone economies may suffer from built asset overcapacity Revitalising underused asset portfolios is one step that could help existing built assets make a more significant contribution to the wider economy. Other factors affecting the potential economic contribution of built asset wealth include planning and regulation; the need to stimulate sufficient domestic and external demand; and some supply side constraints. Greater flexibility in planning and labour markets will allow built assets to be repurposed to deliver to their true potential.

24 25 COUNTRY SPOTLIGHT: UK Budget cuts introduced since 2010 have spurred many parts of the public sector into a detailed review of the utilisation and financial efficiency of assets that are either owned or occupied The UK has lower levels of built asset wealth per capita than many peers amongst the advanced economies. Furthermore, the contribution of built asset wealth to GDP is slightly lower than the Eurozone average, at about 28%. However, the analysis in Figure 6 (page 18) suggests that the UK secures a proportionally better return from its built assets compared to peers in the Eurozone. The UK has been in the lead in its transformation from a manufacturing to a service economy, so it is less surprising that profit related to built assets and machinery and plant represents a smaller share of UK GDP as the proportion of income from intangible assets grows. However, the fact that the UK secures an optimum return on its built assets presents an interesting insight into how assets need to be sweated to secure best value - a model encouraged in the UK s regulated and privately owned utilities sector. Recent regulatory settlements in the utility sector demonstrate the continuing need to improve built asset performance to reduce cost and drive better returns. Similarly, budget cuts introduced since 2010 have spurred many parts of the public sector into a detailed review of the utilisation and financial efficiency of assets that are either owned or occupied. Consequential estate and portfolio rationalisation programmes should result in further improvements to returns on built assets. However, the relatively low level of the UK s built asset wealth points to the need for greater investment in built assets in specific areas of the economy including housing, education and social care infrastructure. Investment in infrastructure - such as High Speed 2, megawater programmes like Thames Tideway and a major replacement of energy infrastructure - is essential for the UK to remain competitive and see further growth in its built asset wealth and performance.

26 27 COUNTRY SPOTLIGHT: SAUDI ARABIA Saudi Arabia is, at present, achieving relatively low returns from its built asset wealth, particularly when compared to other similarly natural resource rich economies of the Middle East. The country s population is rapidly expanding, with 50% of the population currently under 28 years of age Heavy investment, however, is underway in the country s built environment to support the government s 2025 Economic Vision. Major schemes such as the King Abdullah Economic City, rapid expansion of cities including Riyadh and Jeddah, the development of extensive rail transportation infrastructure and new water supply and distribution systems are all part of plans for sustained economic growth. A key driver for this focus on economic diversification is demographic pressure. The country s population is rapidly expanding, with 50% of the population currently under 28 years of age. Rapid population growth is creating new social infrastructure demands for housing, education, health and public utility needs. If these demands are met, the dynamism created by a combination of growth in human and built assets should enable the country to achieve better returns in the future. One watch out for Saudi Arabia is the need to focus on the delivery of a high quality built environment, in particular during the construction and operation phases of an asset s life. In the past, buildings have tended to be constructed quickly and cheaply, leading to rapid deterioration. The need to create a sustainable economy is driving the adoption of international quality standards and best practice, such as programme management across the whole lifecycle of the built asset. The benefits of these approaches can already be seen in the quality of many new investments, including the Haramain High Speed Rail network. Saudi Arabia has come a long way in a relatively short time and, as it diversifies away from a carbon economy, is on course for a prosperous future supported by its built asset wealth.

28 29 4.0 FUTURE BUILT ASSET PERFORMANCE The previous section highlights the scale of the differences across countries in terms of the contribution which built assets provide to their economies. This section uses the trends in built asset performance on a global scale in order to project how the international built asset landscape is likely to change over the coming decade. When looking at growth forecasts, we have combined projections of growth in built asset wealth with forecasts of the growth of the contribution of built assets to overall GDP and changes in population. This has enabled us to calculate a per capita measure of growth in built asset performance. Advanced economies are expected to see built asset returns increase by on average 21% 4.1 BUILT ASSET PERFORMANCE GROWTH FORECASTS China to realise huge expansion by 2022, with built asset performance increasing by over 75% Over the coming decade, China s built asset performance is expected to increase by 77%, edging ahead of the 66% forecast for Indonesia and 70%, from a low base, in Saudi Arabia. High levels of investment in the Chinese economy, combined with booming GDP growth and high profit to GDP ratio, are poised to support growth in returns. By contrast, built asset performance in Italy is expected to increase by just 8% over the coming decade, with other European nations such as Germany and France featuring in the lower end of growth in built asset returns. This is a reflection of low levels of replacement of the existing built asset base, and the forecasted growth in intangible components of the economy of developed countries. On the whole, built asset performance growth is expected to be greatest in lower income economies, as the process of economic catch up continues over the coming decade. Advanced economies are expected to see built asset returns increase by, on average, 21%. This compares to 66% growth expected in emerging markets, but, of course, from a much higher base in absolute terms. The greater returns available in emerging economies should serve to attract the investment required to sustain this economic catch up, with improvements in the built asset inventory providing the foundation for continued productivity gains across the wider economy. Figure 7: Change in built asset performance 2013-2022 CHINA SAUDI ARABIA INDONESIA INDIA MALAYSIA PHILIPPINES CHILE HONG KONG UAE SOUTH KOREA THAILAND QATAR EGYPT MEXICO POLAND SOUTH AFRICA TURKEY AUSTRALIA CANADA RUSSIA USA SINGAPORE UK NETHERLANDS SPAIN BRAZIL GERMANY JAPAN FRANCE ITALY 0% 10% 20% 30% 40% 50% 60% 70% 80% Source: Cebr analysis

30 31 4.2 REGIONAL CHANGES IN PERFORMANCE Strong emerging market performance and recovery in advanced economies to boost performance Over the next decade, the returns on built assets are expected to pick up across the globe. Advanced economies in particular have been held back in recent years by the post 2008 economic downturn, which has weighed both on investment returns and availability of capital. As these economies gather momentum and their recoveries continue to stir demand, built assets should be able to generate higher levels of income as spare capacity comes back into use. Asian economies are expected to see 52% growth in built asset returns by 2022 Advanced markets return to strengthen In North America and Europe, per capita built asset returns are expected to increase by 17% and 19% respectively over the period 2013 to 2022. The more lacklustre performance of European economies since the financial crisis has held back profitability to a greater extent than has been the case across the Atlantic. In the years ahead, an admittedly slow economic recovery should see returns start to strengthen. Even with faster growth in returns in Europe, North American built asset returns are expected to remain the largest by region in per capita terms, rising from US$15,000 to US$20,000 by 2022. Emerging markets have scope for greater returns In emerging markets, there is scope for a greater increase in returns to be realised from built asset investment, albeit that on a per capita basis returns will remain much lower than in advanced nations. After producing income equivalent to US$4,000 per capita in 2013, Asian economies are expected to see 52% growth in built asset returns by 2022. This expansion will be driven by the forecast strong economic growth, in part resulting from benefits of previous investment in built assets. Moreover, the relatively low starting point of many of these economies in per capita terms provides a platform for sizeable relative advances in built asset returns over the coming decade. While some headwinds will face the region, particularly as the pace of China s growth is slowing, the strong growth prospects of other nations such as Indonesia should support continued gains overall. 25,000 20,000 15,000 10,000 But some lag behind Latin America, Brazil, Chile and Mexico are expected to lag behind other emerging markets, with 20% growth in built asset returns forecast by 2022. In part this is due to the already higher levels of per capita built asset income. However, there are other factors in play. The Brazilian economy, which is the largest of the three, has begun to display some worrying signs of slowing down. Infrastructure bottlenecks, a rigid labour market and weakening investment have threatened Brazil s growth; even as the economy approaches the peak of its demographic dividend with the working population, as a percentage of total population, expected to peak by 2024. Middle East and Africa show robust growth In the resource rich economies of the Middle East and Africa, returns are expected to show robust growth of 29% in per capita terms over the coming decade. Despite this expansion, per capita income from built assets is still expected to be the lowest across all countries, reaching US$5,000 by 2022. As highlighted previously, the reliance of the region on commodities and fossil fuels is likely to reduce both the incentive and scope to extract higher built asset returns. However, as these economies diversify their activities a realignment of investment incentives has the potential to raise built asset returns fairly swiftly. Figure 8: Income from built assets per capita US$ PPP measure, 2013 and 2022 and percentage growth 60% 50% 40% 30% 20% 5,000 10% MIDDLE EAST AND AFRICA ASIA LATIN AMERICA GLOBAL AVERAGE EUROPE NORTH AMERICA 0% 2013 2022 % GROWTH (RIGHT AXIS) Source: Cebr analysis

32 33 COUNTRY SPOTLIGHT: BRAZIL Growing demand for water, power and transportation should be the drivers for built asset investment Compared to other emerging economies such as China and India, Brazil does not produce as much of its GDP from its built assets. In 2013 32% of the country s GDP could be attributed to its built assets. This is below the global average of 40% and significantly behind China with 53%. As a consequence of low levels of investment, the poor quality of Brazil s infrastructure has become one of the most problematic factors for doing business, and thereby a constraint on generating stronger growth. Brazil s infrastructure was ranked 114th (out of 148 countries) in the World Economic Forum s Global Competitiveness Index 2013-14. Investments related to the FIFA World Cup and Summer Olympics in 2016, are quite limited and, other than some of the airport expansion work being undertaken, are unlikely to have a major impact on built asset performance in the long term. Brazil is still looking to universalise its water and wastewater services, with many large infrastructure projects in progress. Brazil s built assets present significant opportunity for producing sustained economic performance. Growing demand for water, power and transportation should be the drivers for built asset investment, with up to 20% of GDP needing to be invested into built asset development to effectively meet this demand. Only by doing this can Brazil realise its true potential and use built assets as the driver of long term sustainable growth.

34 35 5.0 HOW TO BOOST BUILT ASSET PERFORMANCE This report clearly demonstrates the strong relationship between built assets and GDP. It has shown that, whilst some countries are proactively managing their built asset wealth to put them in pole position to reap the economic returns over the coming decade, others are in danger of their ageing built asset base leading to a slow decline in their economic power. As urbanisation accelerates, the hunt for natural resources intensifies and climate change increases the risk of flooding and natural disaster, a stable, fit for purpose, built environment is critical. Creating a sustainable built asset base that protects the environment, enables people to thrive and creates economic value is possible but demands a clear long term vision. Investors, owners and occupiers in both the public and private sectors all have a role to play in boosting their built asset performance to the benefit of themselves and the wider economy. To improve built asset performance and enable countries to move up future built asset rankings the following strategic imperatives should be considered: Planning Plan for the long term through forecasting capacity and demand to prioritise needs Establish a benefits case to determine required performance from assets Depoliticise major infrastructure development by basing decisions on the economic business case and strategic vision rather than short term political cycles Set the right regulatory environment to attract funding Balance design quality with required performance metrics Masterplan city development to create economic powerhouses. Creating Manage the whole programme of works rather than silo projects Set clear delivery priorities and agree interim milestones Manage risk transfer to supply chain Ensure sustainability of asset through use of high quality materials. Operating Understand full asset base to make informed decisions Maximise performance through identifying both costs and revenue drivers and focusing resources where they can make the most impact Put sustainability at the heart of an asset s operation to lower emissions and drive performance Make health and safety a priority to boost productivity through fewer work place injuries. Redefining Be flexible - demands change, allow the asset to change with them Build with the end of the asset s life in mind to allow for easier redefinition when the time comes Find creative new uses of redundant built assets. Our future built asset reports will continue to track this important metric of economic value creation and explore further challenges facing the world s nations as they seek to invest in and gain performance from their built asset wealth.

36 37 6.0 APPENDIX: RESEARCH METHODOLOGY AND DATA SOURCES Defining built assets For 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, residential and non-residential construction, as well as 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 assets The built asset stock was estimated via two principle stages; 1) Establish the composition of fixed capital formation for each country Fixed capital formation was broken down according to; a) residential and non-residential construction (including infrastructure); b) machinery and equipment. Where this data was not available, estimates for the composition of fixed capital were compiled based on economic relationships derived from similar countries within our sample. 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. Applying these depreciation schedules to the flow of fixed capital formation yields the estimated built asset stock estimates. Forecasting the stock of built assets Having established estimates for the initial stock of built assets in each of the 30 countries within our sample, forecasting the change in these stocks required, for each country, an assessment of 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. Calculating the return on built assets The return on built assets was calculated using the share of profits in gross domestic product, adjusting for the return on intangible capital. Rents from the extraction of natural assets, such as oil and gas, were also excluded from the return. As a result, these estimates are reliant on the accuracy of GDP estimates, gross fixed capital formation, labour compensation and natural resource extraction on a country by country basis. The return is somewhat different to that of financial return on investment. For example, it includes only income generated in a given year which results from productive activity and as such may not fully account for changes in the value of assets which result in capital gains or losses. Furthermore, the return is realised at the economy level, rather than by any single investor. The income generated from a built asset is not necessarily all accrued by the owners of the assets. For example, government investments in rail transport or airport capacity may increase tax receipts by supporting business activity, but the profit itself is realised by those businesses which benefit from the use of the infrastructure. Similarly, investments by one business into a new production facility may have spill over benefits for other businesses who construct the facility, and for firms who may benefit from any new business activities associated with that asset. However, in all cases, the increase in economy-wide profits provides an indication of the economic contribution made by the income derived from built asset wealth. As such, it is this increase in profitability which is used to assess the performance of built assets. Since higher profits are most ultimately likely to motivate investment decisions, this report focuses on analysing the returns to capital - in terms of profits - across the economy, which result from built asset wealth. Of course these investments may also facilitate increases in labour productivity, however, such increases in productivity without an increase in profitability could not be expected to act as an incentive to further investment. Measuring the profit income accrued from built asset wealth offers insights into the incentives which exist to undertaking such investments, and can illustrate how such incentives appear to be developing over time. Purchasing Power Parity (PPP) In order to compare the relative value of assets appraised in different currencies, 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.