Smart cities – do you see the investment potential?

Cities play an extremely important role in the world today. As powerful engines of growth that account for nearly 80% of global GDP, cities provide the networks and interactions that make us more creative and productive as a society, meaning they are crucial for economic development and wealth creation.

Today, around 55% of the world’s population is based in cities, but this hasn’t always been the case. Over the past few decades, the proportion of the global population living in cities has increased significantly, and this is a trend that looks set to continue accelerating. According to UN estimates, urbanisation could add another 2.5 billion people to the world’s cities over the next 30 years, which means that by 2050, up to 70% of the global population could be city-based.

Naturally, this urbanisation trend is creating challenges. With populations steadily increasing, many cities across the world are struggling with issues such as traffic congestion, high energy consumption, and inefficient waste disposal programmes. Looking to the future, cities will have to find smarter solutions to improve their infrastructure and provide a better quality of life for their residents.

This is where technology is already playing a key role, and today, we are seeing the rise of ‘smart cities’ that are using technology to improve efficiency, enhance sustainability, and boost economic competitiveness. With the help of advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI), cities are transforming everything from traffic management to street lighting, to make themselves far more adaptive than they were in the past.

Worldwide, the market for smart city technology is enormous, with annual spending projected to reach US$158 billion by 2022. For this reason, we believe that smart cities is an investment theme that warrants attention. There is a huge growth opportunity here for innovative companies that are helping to develop the cities of tomorrow, and this, in turn, is creating a number of exciting opportunities for investors.

Below, we take a closer look at the smart cities investment theme and explain how investors can take part in this exciting long-term growth opportunity.

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What is a smart city?

Let’s start with the basics. What exactly is a smart city?

Put simply, a smart city is a city that is able to collect and analyse large quantities of data from a wide variety of industries – ranging from urban planning to waste disposal – and use this data to become more efficient.

Through a network of interconnected sensors, devices, and software, a smart city can harness the power of technology to improve the lives of its residents and visitors by making the city more connected, more productive, and more sustainable.

Which technology is powering smart cities?

Smart cities are supported by a number of different technologies that work together to collect and process large volumes of data. These include:

• Internet of Things(IoT) technology – this refers to the network of physical devices that are connected and can receive, analyse, and transmit data to other devices.
• Information and communications technology (ICT) – this includes technology such as wireless networks that transmit information. 5G networks are the next generation of mobile networks and these will play a key role in smart cities due to their speed, bandwidth capabilities, and reliability.
• Cloud technology – the cloud provides a storage destination and processing power for the vast quantities of data that cities generate.
• Big data – this technology helps cities to process large quantities of data.
• Artificial Intelligence – AI technology can be used to interpret data and make decisions without the need for human intervention.
• Geographical Information Systems (GIS) – this technology is designed to capture and analyse geographical data and is helpful for city planning and mapping purposes.

Of course, these are just some of the key technologies that are playing a role in the development of smart cities. There are many others. However, the common denominator when you consider all of these technologies is data. By collecting data and processing it effectively, it can be used to significantly improve the infrastructure in a city. By using technology such as sensors, wireless networks, image recognition and artificial intelligence, cities can potentially respond to incoming data in real time, which can have a big impact on the lives of residents.

Smart cities technology: major sub-sectors

There are many different ways that cities can use technology to enhance the way they operate. Here’s a look at some of the main sub-sections of the smart cities theme.

• Energy efficiency: One major focus of the smart cities theme is improving energy efficiency in order to reduce costs and enhance sustainability. Today, smart street lighting, which can reduce energy consumption by turning itself off when no one is around, is becoming increasingly popular. For example, Chicago recently launched a programme to replace nearly 300,000 street lights with smart technology controls by 2021, which could save the city around US$10 million per year in energy costs. Other cities have implemented rooftop solar microgrids that enable users to sell energy to each other.
• Water: Technology can also play an essential role in improving the sourcing, treatment, and delivery of water. Smart water systems today can measure rainfall, provide real-time flood analysis, detect leaks, and also track consumption patterns, which can help optimise water usage and reduce water waste.
• Waste management: With the help of advanced technology, cities can also make waste removal services far more efficient. For example, cities can use IoT sensors to measure the fill level of bins so that when a bin is full, it can instantly send this information to a cloud-based application that can optimise the route of waste collection trucks. Recently, the Spanish city of Santander implemented this kind of waste disposal system, deploying 6,000 IoT devices around the city to monitor its bins.
• Traffic management, public transportation, and enhanced mobility: By harnessing the power of technology, city planners can gain insights on traffic flow patterns, roadwork, road congestion, and road conditions, and use these insights to improve traffic flow. One example of a city that is already using a smart traffic management system is Amsterdam. Monitoring traffic in real-time, the city is able to broadcast information on current travel times, which helps motorists decide on the best route to take at any given time. In addition, technology can be used to optimise public transportation networks, resulting in faster, safer trains and buses, and cities can also enhance mobility by introducing smart bikes and scooters for short trips. For example, in Barcelona, bicycles are a major part of the public transportation system.
• Environmental protection: While cities produce a large proportion of the world’s GDP, they also produce around 70% of the world’s pollution, and the World Health Organization (WHO) believes that over 90% of the global population lives with pollution above the recommended limits. Here, technology can have a great impact by helping to reduce levels of air pollution in densely populated areas. For instance, through the use of wireless sensor networks, a city can gather and analyse data related to environmental factors such as air quality. Overall, smart cities technology could play a major role in helping cities enhance sustainability.

Smart city examples

When you consider all of the different sub-sectors, it becomes apparent that smart cities technology is a massive market. And this market looks set to grow at a prolific  rate in the years ahead, driven by rapid urbanisation, obsolete infrastructure, and the adoption of new technologies. With the total global smart cities market size projected to reach $2.6 trillion by 2025, there appears to be considerable investment potential here. But what is the best way to invest in smart cities?

How to invest in smart cities

There are a number of ways that investors can profit from the smart cities theme.

One way is to invest in individual companies that are developing smart cities technology. Yet this approach is not always straightforward as there are literally thousands of companies across the world that are all developing their own unique technology. These range from large well-known technology companies such as Google – whose Sidewalk Labs division was created specifically to tackle urbanisation – to nano cap startups that are completely under the radar for most investors. Where do you start? Not all smart cities stocks will turn out to be good investments, so this approach can be challenging.

With this kind of long-term growth potential, the most effective way to invest is often through a thematic investment strategy that is designed to benefit from the growth of the sector, while also providing diversification. For this reason, here at eToro, we are currently in the process of developing our Smart Cities Smart Portfolio – a fully allocated thematic portfolio designed to deliver long-term capital growth by investing in a broad range of companies that are helping to develop the better connected, more efficient cities of tomorrow. This investment strategy will enable long-term investors to profit from the smart cities theme without being exposed to stock specific risk.

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Smart cities are not some futuristic idea that may never eventuate. Across the world today, cities are already implementing the technology, and thanks to advances in AI, big data and IoT in recent years, smart cities are already becoming a reality. Yet the growth potential here still looks to be in its very early days. For astute long-term investors, the smart cities theme appears to offer considerable investment potential.