Resilience in global cities

Q: What is the rationale behind the choice of global cities as a vehicle to benefit from global megatrends?

NRE has identified 6 global megatrends - urbanisation; the rising middle classes; ageing populations; technology; the growing economic power of the East; and sustainability. We believe these trends will have a material impact on demand for real estate over the longer term. In some instances, notably urbanisation and rising middle classes, the impact on demand for real estate is broadly positive. However, shifting economic power, technology and ageing populations will also change the nature of demand, benefiting some sectors and geographies but leaving others less viable in the longer term.

We believe that while the short-term performance of real estate is likely to continue to be materially impacted by economic cycles, over a longer period, performance will be influenced by the impact of such megatrends. Consequently, understanding long-term structural trends will be key to value preservation and growth. NRE seeks to invest in those cities that it believes will ultimately benefit from global megatrends and actively avoid locations that may see longer-term demand compromised as a result.

Having explored these megatrends, we expect their impact to be more pronounced at the individual city level, as opposed to a country level. Compelling cities should not be overlooked due to a negative national level perception. This approach is consistent with the way in which occupiers are perceived to consider their requirements and representation. Accordingly, in selecting cities to invest in, we complete a top-down analysis of global megatrends and tactical real estate fundamentals to identify the cities that we believe are best positioned to deliver real estate performance over the long term.

We have a proprietary cities filtering process to identify those cities globally that are best positioned to benefit from structural growth. The filtering process starts with a universe of locations with a base level of population to support commercial real estate. For resilient cities, the filtering process firstly involves a transparency filter where cities without adequate data for analysis are eliminated. Secondly, cities in countries where economic and political stability is at a level unsuitable for a core strategy are removed. The remaining cities are then analysed for their resilience in light of global megatrends.

Q: What criteria are used to select the global cities and more specifically the underlying assets or real estate to invest in?

Metrics include some traditional measures of scale and productivity (prosperity factors); scores for liveability and likeability (personality factors); progressive measures and environmental sustainability.

Asset-level analysis includes the following metrics:

• Loan-to-value
• Loan-to-purchase price
• Weighted average lease expiration
• Determination of exit cap rates
• Determination of rental growth
• Expectation on void periods for new leases
• Expectation of capex
• Provision of refinancing

In addition to the above, the asset opportunities are assessed in terms of the market and other relevant factors. The assessment requires input from NRE's research team looking at factors such as real estate fundamentals, economic cycles, and capital markets. To develop a rigorous bottom-up assessment of these data metrics we draw on information from real estate brokers and property managers, a variety of economic news and real estate sources. For example:

• Real estate brokerage relationships: NRE's relationship with leasing and investment brokers provide timely on-the-ground insights with respect to tenant demand, market pricing and leasing trends, etc.
• Data: NRE also has the ability to track data from a variety of sources related to economic conditions, real estate fundamentals, and capital market conditions, and is able to generate insights from these external data sources, which can help guide its setting of fundamental asset parameters for investment appraisals. Our in-house proprietary input and external sources are leveraged to develop a house research view, including market and asset selection, forecasting, strategy, underwriting and due diligence.

Q: In the current environment of higher interest rates, inflation and possibly a period of slow growth, how might the real estate in NRE's portfolios be affected?

We anticipate that property sectors will behave differently in the current environment. Industrial, housing and healthcare's fundamentals are very strong with major markets experiencing vacancy rates well below historical average, which we believe will lead to continued rental growth. Market sentiment is less positive around traditional office, business hotel and discretionary retail. Nuveen's diversified, global core real estate portfolio is well positioned with high occupancy rates and limited tenant rollover or capital events in the near term. In a number of Nuveen's portfolios, we seek to maintain leverage ratios below target levels, and balance that with positive capital flows coming into our funds that allow us to take advantage of opportunities.

Q: What is the outlook for growth and income in the near to medium term?

Nuveen's diversified, global core real estate portfolio is very well positioned for near-term growth as we take advantage of potential pricing opportunities. Certain of our portfolios are invested primarily in industrial, housing and healthcare, the sectors that we believe have the strongest fundamentals.