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Why growing cities are accelerating returns for investors

There is a growing trend of cities growing in size disproportionately quicker compared to the overall population of a country.

This is happening for a variety of reasons, but one of the key factors is that people are moving from rural areas into cities. A lot of the time the key reason for the move is for better employment opportunities.

Increasing urbanisation creates higher returns as more money and energy is focused on cities. For example a lot of infrastructure is being built in Australia’s big cities, with Mirvac Group (ASX: MGR), Lendlease Group (ASX: LLC) and Transurban Group (ASX: TCL) all benefiting.

Lots of companies benefit from urbanisation in various ways. Property portal sites REA Group Limited (ASX: REA) and Domain Holdings Australia Limited (ASX: DHG) benefit from large amounts of property from the same city being advertised on their sites – they all have to pay good advertising to stand out.

Various healthcare businesses would not be profitable in a village or small town. Yet large cities provide excellent grounds for Ramsay Health Care Limited (ASX: RHC), Japara Healthcare Ltd (ASX: JHC) and Monash IVF Group Ltd (ASX: MVF) to operate.

There’s no way that Bendigo or Launceston are big enough to support an airport business of Sydney Airport Holdings Ltd’s (ASX: SYD) size, but Sydney’s growing population is proving to be very profitable for the airport. Similarly, Crown Resorts Ltd (ASX: CWN) benefits from Melbourne’s size as a city.

A lot of other companies benefit from cities due to profit margins and economies of scale because of the network effects with how many operations it can set up in city. I’m thinking of businesses like National Storage REIT (ASX: NSR), Greencross Limited (ASX: GXL) and 1300 Smiles Limited (ASX: ONT).

Foolish takeaway

Cities are increasing returns for businesses and shareholders, which is a good thing. As time goes on, cities are going to become increasingly dense and create even more opportunities for those businesses to grow profit.

Another business that is growing thanks to the urbanisation of our cities is this top stock which is predicting profit growth of 30% this year.

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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited, JAPARA DEF SET, and Ramsay Health Care Limited. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited, Greencross Limited, Sydney Airport Holdings Limited, and Transurban Group. The Motley Fool Australia has recommended 1300SMILES Limited, Monash IVF Group Ltd, National Storage REIT, Ramsay Health Care Limited, and REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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