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Investing in tomorrow's world real estate
As featured in Preqin's 2020 Global Real Estate report, Mike Sales, CEO, Nuveen Real Assets & Real Estate, explains how as the market evolves at an unprecedented pace, shaped by the rise of technology and ESG, managers have to flex and adapt to continue to add value.
With high valuations leading to heightened competition for deals, which sectors in real estate investment are proving to be the most attractive?
We remain 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, this includes holding and repositioning only those assets fit for tomorrow’s world and incorporating, where desired, more mixed-use elements and a greater emphasis on convenience, experience, and value. Our office strategy is embracing the growing demand for more flexible, innovative space, focusing on the wellbeing needs of the occupier, while an 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 an evolution in the residential sector, via the development of modern, purpose-built multi-family housing, and co-living and student accommodation, considering a global, more discerning demand base. 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 for an extended period. 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 and as such can offer a core or value-add investor an array of risk-adjusted returns, security of income, and diversification 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 development, repositioning, or letting risk 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 simply those 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 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 and 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. At Xanadú, a super-prime shopping center we manage in Madrid, the asset’s value proposition 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 store in Europe 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 as well as enhancing the user experience.
As well as trialing 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 – being one of the first buildings to receive WELL Platinum – is highly energy efficient, and is a Smart Building, with data from all aspects of the building’s operation and user experience centralized 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?
Sustainability continues to be at the forefront for us when considering potential investments as we transition to the low-carbon economy. 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 as 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.