Blog

Investing in Tomorrow’s World Real Estate

by Preqin

  • 07 Feb 2020
  • RE

Sustainability, demographics, and technology have the potential to disrupt the industry, but they also present opportunities to create value 

by Mike Sales, Head of Real Assets and Real Estate, Nuveen

 

With high valuations leading to heightened competition for deals, which sectors in real estate investment are proving to be the most attractive?
We take what we call a “tomorrow’s world” approach to real estate investing: we are committed to the needs of our clients, occupiers, and consumers, with an investment focus on dynamic, sustainable cities that appeal from a demographic, infrastructure, and technology innovation perspective. In retail, our investment approach includes holding and repositioning only those assets fit for tomorrow’s world and incorporating, where desired, more mixed-use elements. We also emphasize convenience, experience, and value. Our office strategy is about embracing the growing demand for more flexible, innovative space, focusing on the wellbeing needs of the occupier. Our expansion into logistics, and principally last-mile distribution, is a structural, not cyclical movement.

There are also structural tailwinds that support an expansion of commercial real estate debt. And we’re seeing an evolution in the residential sector – a global, more discerning demand base is driving the development of modern, purpose-built, multi-family housing, co-living, and student accommodation. Furthermore, incorporating sustainability and technology innovation upfront in investment management is imperative from an investor, occupier, developer, and corporate responsibility standpoint.

The general consensus is that we are currently at the late stage of the market cycle. What can fund managers do to achieve the highest level of value as the real estate landscape becomes increasingly complex?
Real estate pricing is historically keen, but we wouldn’t go as far as to say ‘late cycle.’ With any gradual normalization of global interest rates being postponed indefinitely, the once-deemed ‘temporary’ and ‘extraordinary’ monetary conditions look set to remain in place. Against this backdrop, we are arguably ‘mid’ not ‘late cycle,’ as the case for real estate investment vs. alternative asset classes is justified.

Furthermore, global real estate is multi-dimensional. As such, it can offer a core or value-add investor an array of risk-adjusted returns, security of income, and diversification benefits across a spectrum of asset types, sub-sectors, and markets of varying maturity and quality. At present, core pricing for Grade-A properties in deep, liquid, sought-after markets with a healthy supply/demand balance should justify taking on risk in development, repositioning, or letting as a route to enhance returns. Alternatively, identifying mispricing in locations or property types that can benefit from improved space optimization and enhanced ESG initiatives – or in sectors that are evolving or emerging from major structural changes in demand – will offer rewards to investors willing to embrace and adapt to tomorrow’s world real estate's needs. 

What kinds of challenges does the evolving landscape of technology bring to investors in real estate?
From e-commerce to co-working, technological disruptors are permeating throughout real estate and their impact cannot be ignored. The rise of the internet and mobile devices has fundamentally changed the way consumers behave. What people want their built environment to provide has fundamentally evolved. We are therefore closely monitoring technological trends to position our assets defensively against them, while also identifying the opportunities that can be gained to create value.

For example, digital commerce is driving many changes to how consumers behave, and we believe it is an opportunity for retail real estate to evolve into a more exciting, dynamic product. This means creating new experiences by blurring the lines between online and offline retail, capturing more data about how retail is used by brands and consumers, and embracing a new generation of digitally native brands. Take Xanadú, a super-prime shopping center we manage in Madrid. It goes well beyond traditional retail with an indoor ski slope, aquarium, and theme park. It also contains non-traditional retail tenants, such as Alibaba, the global retail online marketplace, which opened its first European store at Xanadú in Autumn 2019.

With the advent of 5G and the increasing affordability of sensors, the Internet of Things will accelerate and further increase the potential of Smart Buildings, helping them to become more operationally efficient while enhancing the user experience.

As well as trialling and rolling out solutions across our portfolio – from tenant engagement apps to energy efficiency technologies – we have partnered with Edge Technologies in Europe to create the “office of the future.” EDGE Olympic is one of the healthiest buildings in the world. It is one of the first buildings to receive WELL Platinum, an industry accreditation; it is highly energy efficient, and as a Smart Building it collects data from all aspects of the building’s operation and user experience and centralizes it into one digital platform.

With environmental and social governance remaining at the top of the real estate agenda, what do you believe to be the most important of these factors when considering new real estate investments?
As we transition to a low-carbon economy, sustainability continues to be at the forefront for us when considering potential investments. We strive to be leaders in responsible investing in the real estate market, not only to ensure that we are contributing toward a more sustainable future, but also because it makes business sense. In many cases, investing in the most sustainable, forward-thinking, and advanced assets will have a positive return on investment for our clients too.

However, the changes our industry is now facing no longer just sit within the confines of environmental factors. We are seeing a structural shift with issues of sustainability, demographics, and technology all playing a part. All three overlap and have the potential to massively disrupt the industry, but they also present opportunities to create value. Demographic factors for example – such as urbanization and generational shifts in consumer preferences – will change the needs of real estate in certain locations, offering savvy investors the opportunity to invest in real estate assets that will become more prevalent and necessary in those geographic areas.

Taking a strategic approach to these structural disruptors is part of our tomorrow’s world philosophy, sitting at the core of our investment process and informing our long-term view of real estate investments for the enduring benefit of both clients and society.

This article is taken from the 2020 Preqin Global Real Estate Report. For more expert commentary on the real estate industry, please visit: preqin.com/grer

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Nuveen Real Estate
Nuveen Real Estate is one of the largest investment managers in the world with $130bn of assets under management. Managing a suite of funds and mandates, across both public and private investments, and spanning both debt and equity across diverse geographies and investment styles, we provide access to every aspect of real estate investing.

With over 80 years of real estate investing experience and more than 600 employees* located across over 25 cities throughout the US, Europe, and Asia-Pacific, the platform offers unparalleled geographic reach, which is married with deep sector expertise.

For further information, please visit us at nuveen.com/realestate

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