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Aerotropolis: Real Estate’s Next Investment District?

5 MIN READJune 30, 2020
  Airports have always had a fair share of retail integrated into its countless gates through boutique and duty free stores. But airports could play a much larger role in the future through an Aerotropolis concept that would group all real estate assets into one area. In our latest eMeeting, Dr. John Kasarda, President, Aerotropolis Institute China, shared with GRI Club members the opportunities to invest in what could be the next real estate investment district.

What is an Aerotropolis and why is it an real estate investment opportunity?

The concept of Aerotropolis by Professor John Kasarda

An Aerotropolis stretches up to 30km or beyond including common functions on the airside, such as shopping mall concepts merged into passenger terminals (retail, restaurants, leisure, culture etc.), logistics, air cargo and MROs and on the landside there are Hotels & entertainments, office & retail complexes, convention & trade centers, medical and wellness clinics, free trade zones, cold chain & time-sensitive goods processing. Every component that in an Aerotropolis already exists it is just a matter of putting them together to form the Aerotropolis. In the case of greenfield airport, you can plan the entire area around the airport to develop an Aerotropolis.

When analyzing the dynamic of an airport with a city, it is seen that a lot of the development in terms of the commercial and industrial development occurs when an airport is synergized with the city in proximity and its local economy.
  • Airports generate 60-65% from terminal sales or from non-aeronautical revenue with the airport area itself becoming a significant revenue generating location.
  • The rail and road connectivity to the airport is extremely essential as the presence of proper connectivity will result in exponential growth for anything other than aviation functions in an Aerotropolis. The greatest example is Schiphol, Netherlands. 
  • India currently has three prevailing examples of what an airport city could be: The Delhi airport being the airport at the city center with urban real estate portfolio, the Hyderabad airport being the airport 30km outside the city with 100 acres of development potential around the main city to airport corridor, and the Goa greenfield airport which is a leisure focused airport having a hospitality and entertainment focused real estate development. 

An Investor and Developer's Guide to Investing in an Aerotropolis

In most of the Asia Pacific countries including India, overall infrastructure is poor whereas the infrastructure of an airport is top-notch. Hence the governments plough in funds towards development of infrastructure leading up to the airport which makes Aerotropolis a compelling story for the investors. 
There are many things to keep in mind as an investor and developer to successfully invest in an Aerotropolis. For investors it is important to take the following into consideration:
  • Create an analysis to understand the existing supply and demand of commercial facilities requiring competitor and end-use analysis; ascertain the bankability of the proposed project; the key stakeholders to the project (public or private); and access to land, whether it is through a lease, concessionaire, or freehold.
  • Investors are looking for a ROI which is configured in the cap rate of the net operating asset. In absence of the return, the aesthetics of the airport or the availability of the land are not the factors that would draw in the investment. 
  • Within Greenfield airports that are managed by one entity (i.e. 1 city) as against the airport that are managed by more than one entity (e.g. multiple counties influencing the Denver International airport), the Investors are interested in understanding who is managing the airport. Investors are more likely to invest in an airport having less stakeholders.
For the developers, to achieve bankability on a project is it essential to analyze the following: 
  • The market demand along with the existence of appropriate labor availability
  • Airport area air and surface connectivity providing location advantages over other sites in metropolitan areas
  • The commercial activity representing highest and the best end use of the selected parcel of land selected
  • Timing is of utmost essence, making it essential to demonstrate that the investment is timed and well placed in the value path of the airport-area with the commercial real estate development

2020 Triple Whammy Impact on Aerotropolis

In the current backdrop of COVID-19, a global recession, the collapse of aviation and emptying out of airports, further implications for Aviation and Aerotropolis can be expected keeping in mind the Aviations industry’s historical growth patterns. Through the years, the Aviation industry has weathered through various crises including the oil crisis in early 1970s, Iran-Iraq war in early 1980s, the gulf war and Asian crisis in the 1990s followed by the 9/11 terrorist attacks, SARS and the world economic recession in 2000s.

Aviation industry growth is a structural process reflecting a long-term growth trend with a downward cycle witnessed during times of crisis. These crises have posed a short-term impact on the industry, stalling the upward growth trend for a short period of time. Health crises such as SARS and H1N1, have rarely been able to last for more than two years having a dramatic short-term impact with a recovery always occurring.  

Regarding the impact events such as these would have on the Aerotropolis, even if the airport's area suffers, the strong diversity in the development around the airport will persist. This diversity provides resilience to the airport city. China is the most enthusiastic adopter of the aerotropolis. It is expected that post-COVID it is likely to witness the continued growth of aerotropolis across China. While the current environment is a triple whammy, it is expected that the Aviation industry will rebound from the current predicament in a short period of time from 18-24 months and at max 36 months. 

Aerotropolis Developments Around the Globe

Incheon Airport and Songdo, South Korea 
  • Development of Songdo is a project initiated by the Government to build a US$35 billion city outside of Seoul on reclaimed land near the Incheon airport. The concept of aerotropolis was used at the time of development of the city. 
  • The funds for the developments were raised in phases from international sources as well as Korean banking channels focused on initial acquiring and securing the land parcel. 
  • The airport is connected by a new bridge that is connected to Songdo directly covering the distance in 18 minutes.
  • The development of the city reflected the need for a balanced development between building and activating the commercial asset alongside entertainment and leisure and schools resulting in seven different venues with 50% non-residential assets.
  • To date nearly US$20 billion has been invested in Songdo in all forms of commercial developments and is poised to the second phase of development.
Lima Airport, Peru
  • 270 hectares of construction with a total land of 940 hectares covering the expansion through a concession agreement with the government of Peru on leasehold was earmarked for the project. 
  • The project includes building a new terminal and runway by October 2024 that is 15km away from the city center which is not well connected yet. 
  • The planning stage incorporated the development of an airport city by the book to identify the market demand for different assets where the investors would be. 
  • A challenge faced by the developers was convincing investors on what the product actually is. 
  • A core or nucleus area is developed around the terminal with the development growing outwards to demonstrate bankable and feasible growth. The landside access is highly dependent on the development by the government with the rail project under development. 
Lake Nona Aerotropolis, Orlando Florida
  • 17 square miles within the city limits of Orlando near the Orlando international airport having 35m2 of land between the airport and Lake Nona. 
  • The three pillars of developments are technology (5G living lab), education with multiple universities, health and well-being with a medical city building a neo-urban area. 
  • The airport authority has come up with a US$3 million plan looking to develop the train development station and funding from the private sources to meet the constant construction in residential, hotels, and commercial assets along the land between the airport and Lake Nona. 
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