Real estate development at airport cities

Last decades, due to socio-economic and demographic trends, the market structure of the aviation and airport business has changed quickly. By integrating activities which are complementary as well as non-complementary to aviation, airports transform into ‘Airport cities’ or ‘Aerotropolis’. Real estate development is becoming a crucial asset for airports to generate non-aeronautical income. Why is this, what trends influence real estate development at airports and what could be the economic contribution of real estate development at Amsterdam Airport Schiphol1 to the improvement of its competitive position and maximization of welfare ? Therefore the main question of the survey is: “In which way can real estate development at Schiphol contribute in a spatial economic way to an optimal result for the airport, the government and the society in general ?” Recent developments at the airside and landside of the aviation industry and the interaction of airside and landside, changed the level playing field for airports. Globalization of the world economy and socio-economic developments lead to changing location behaviour and consumer patterns, resulting in an increasing demand for air transportation. With an average annual growth of 5%, the aviation industry is growing faster than the world economy (3%). This is changing the quantitative demand and qualitative requirements for real estate at airports. Liberalization, deregulation and harmonization leads to changing market structure of the aviation industry, with the rise of Low Cost Carriers as most affecting recent development. The aviation industry has become a market of severe competition with strong downward pressure on prices for air transportation, leading to increasing downward pressure on airport charges. Therefore airports are diversifying their business strategies to ensure the overall revenue growth and start developing real estate for cross-subsidizing. As a result of globalization, city regions like the Randstad increasingly interact in a global network with city ports as high value connecting nodes. Airports as city ports are a crucial element in urbanregional and economic development of city regions, because the airport, the city region and the transportation network are an united, interdependent and integrated system with reciprocal influence. Airports increasingly integrate in the urban system, accommodating economic activities, adapting urban functions and closely resembling autonomic Central Business Districts. Specific location factors like the quality of the airport product however create a unique business climate at airports compared to regular Central Business Districts, making airports a high potential business location for economic activities. Therefore airports increasingly locate traditional urban functions, changing airports from traditional interchange nodes into new intermodal, multifunctional Central Business Districts of increasing strategic importance, strengthening the competitive position of the globalizing city region. 1 In this thesis Amsterdam Airport Schiphol is abbreviated to ‘Schiphol’ (See also: Definitions) Real estate development at airport cities Ing. Ramón P. van Deelen – August 2010 Erasmus School of Economics – Master Economics & Business 4 Real estate development at airport cities contributes positively to urban regional and economic development by creation of jobs and Gross Value Added. Each direct job at the airport generates 1.2 additional indirect job and 0.5 induced job in the airport region. The direct, indirect and induced economic effects of airports together contribute between 1.5% and 2.5% of the Gross Domestic Product. The Airport City concept, aviation-related clustering, the Airport Corridor and the Aerotropolis concept are identified as concepts for geographical spread due to urban regional development of airports. Besides this spatial impact, it is impossible to isolate and quantify the socioeconomic impact of real estate development at airports measured in creation of jobs and Gross Value Added, because it is impossible to indicate and distinguish which part of the total socio-economic impact of airports is attributable to the real estate development at the airport itself and what is attributable to other factors. However, less tangible and softer aspects of the impact of real estate development at airport cities for the airport, the government and the society can be indicated. Commercialized real estate development at airport cities contributes to the airport by a diversification of business activities of the airport authority, a reduction of its economic vulnerability and a spread of business risks. Airports generate high rent income and concession income on exploitation of commercialized real estate which can be used for cross-subsidizing. Real estate is an asset on the balance sheet, increasing the equity, giving more market value and creating more financial capacity for the airport authority. Real estate development increases the attractiveness of the airport as business location, attracting new and more diverse economic activities and it improves the airport (transportation) product. The competitive position of the airport increases and it strengthens the urban function and the economic importance of the airport in the city region, benefitting the image of the airport. A risk however is resistance from residents and real estate development threatening the primary transport function as core business of the airport due to congestion and space needed for commercialized real estate development. Commercialized real estate development at airport cities contributes to the government by an improvement of the diversity and quality of the regional production structure and the socio-economic strength of the airport region and the wider city region. This improves the attractiveness of the city region as business location, increasing the competitiveness of the city region in a global network of city regions. The government also benefits by job creation, reducing unemployment, increasing purchase power, generating spending, income and welfare effects in the city region. It generated tax income and income by land leasing and land selling for real estate related project development. However, the government faces challenges regarding increased noise, air pollution, congestion, ecological damage and safety risks, requiring integrated policy on mainport development, urban regional and economic development, real estate development and the living environment. Moreover, real estate development at airports might cause Central Business Districts in the city region compete with the airport site as business location, causing unbalanced urban development and economic growth. Commercialized real estate development at airport cities contributes to the society by an increase and diversification of economic activities, urban functions, facilities, an improved airport (transportation) product and investments in necessary landside infrastructure, which improves the quality of the living environment. It creates direct, indirect and induced jobs and income for residents. But also the society faces increased noise, air pollution, congestion, ecological damage and safety risks, which has negative impact on the quality of the living environment for the society. Real estate development at airport cities Ing. Ramón P. van Deelen – August 2010 Erasmus School of Economics – Master Economics & Business 5 For airports with a throughput of approximately 45 million passengers per year, between 30% and 36% of the total revenue is generated by real estate related activities. In ‘06 Schiphol Group generated 29% of the total revenue by real estate related activities, which means that Schiphol Group is lagging behind on real estate related revenue generation, compared to airports with comparable passenger throughput. This can be explained by the increasing share of transfer passengers at Schiphol (43%; ’09), because transfer passengers make less use of commercial facilities at airports and spend much less on real estate related activities than domestic passengers. The other reason is the fact that Schiphol Group is state owned with a multi-level government authority owning the airport, which is one of the most inefficient ownership forms for airports. To make Schiphol Group, the local, regional and national government as well as the society benefit from commercialized real estate development at the airport site of Schiphol, Schiphol Group is recommended to increase its annual growth rate for real estate related revenue between 8.5% and 11.5% per year for the next 5 years, assuming that Schiphol Group will continue to maintain its average long term annual growth rate for total revenue of 7%. Preconditions to realize this growth are to privatize Schiphol Group, because airport privatization increases productive efficiency and operating profitability. Meanwhile, Schiphol Group has to create commitment from government and society for real estate development at the airport site by continuous, intensive and pro-active management of the airport area growth coalitions. Schiphol Group is recommended to increase the overall capacity for commercialized real estate development at Schiphol between 1,992,000 m2 (Global Shift) and 2,340,000 m2 (Balanced Growth) in ’20. To strengthen its position as multi-hub, Schiphol Group is recommended to allocate the potential for m2 real estate at Schiphol to economic activities in the segments Core business, Airportrelated and Airport-oriented. In meantime, Schiphol Group is suggested to focus on new, innovative economic activities in the clusters Recreation, Knowledge and Health & wealth. This strengthens the urban function of the airport, it generates high rents per m2 and therefore are high potential clusters for revenue from commercialized real estate development at Schiphol.