THINK Europe: Picking Tomorrow s World Cities

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1 THINK Europe: Picking Tomorrow s World Cities Data generating art Using data from the GPD per, growth and size chart in this report, the graphic represents a spatial analysis of the GDP size of various cities across Europe. 1 THINK Europe: Picking Tomorrow s World cities This document is solely for the use of professionals and is not for general public distribution.

2 Why cities? Challenging market conditions and evolving investor requirements, means we are increasingly looking at longer term drivers of real estate performance. Megatrends notably urbanisation, rising middle classes, ageing population, technology, and the shift of economic power from the West are having a major impact on the built environment and will have significant implications on demand for real estate. These trends are an important component of our global research; we have analysts assigned to understanding each of them. While short term performance of real estate will continue to be determined by economic cycles, there is a risk that these will mask the longer term erosion of value as megatrends play out. Understanding long-term structural trends will be key to preserving value and growth. As we have explored these megatrends, it has become apparent that their impact will be much more notable, for better or worse, at the city level, as opposed to nationally. Therefore, our global strategic advice is now centred on cities, not countries, meaning we can give investors more clarity as to what a portfolio might look like. This approach is consistent with the way occupiers think about their requirements and representation. It means that compelling opportunities do not get missed due to negative country level perception, and vice versa. We have adopted an innovative, two pronged approach to top-down analysis, capturing both structural megatrends and tactical real estate fundamentals, to identify futureproof cities. Fig.1: Cities are more productive (GDP per, difference to national level) 63% 57% Milan 50% 48% 47% 47% 41% 39% Edinburgh Amsterdam Düsseldorf Frankfurt 37% 36% Basel Geneva 34% 32% 32% 28% 23% 23% 21% Fig.2: Cities are younger (proportion of population under the age of 40, difference to national level) 6.5% 6.1% 6.0% Brussels 4.4% 4.3% 4.2% 3.9% 3.7% 3.5% 3.5% 3.3% 3.2% 3.1% 3.0% 2.8% 2.8% 2.7% 2.5% 2.4% 2.2% Stockholm Helsinki Dublin Stuttgart Hamburg Zurich 16% Naples Murcia Palermo Copenhagen Leeds Helsinki Sevilla Hamburg Stockholm Málaga Brussels Lille Manchester Oslo Geneva Belfast Sofia Birmingham 2 THINK Europe: Picking Tomorrow s World cities

3 A strategy for Europe We have scored a number of European cities according to the qualities that make them attractive to people and occupiers, today and in the future. This first stage of our filter process is not about real estate investment fundamentals, but purely about finding economically and environmentally future-proof cities. Cities are scored according to their size, affluence, age profile, adoption of technology and quality of life. And as we are looking for long-term investment opportunities, they are also scored according to the growth potential for all of the above. This approach is not at the exclusion of traditional measures of real estate attractiveness. We also filter all the cities through our global risk model, which scores locations according to liquidity, transparency, income security and volatility; again, all long-term measures of attractiveness. This process has helped us filter over 200 cities in Europe, down to under 50. We believe these cities have the ability to attract talent, tourists and international tenants, based on long-term fundamentals. They are then grouped according to their real estate fundamentals and growth prospects. For core investment strategies, we place a greater emphasis on those cities that score well on key fundamentals today (Defensive Cities), and naturally want to focus on those that score well both today and tomorrow (Defensive Growth Cities). These are leading cities today that we expect will capture an even greater share of global output and demand in the future. Fig.3: GDP: Per, growth and size GDP growth (%, ) 160% 140% 120% 100% 80% 60% 40% 20% 0% Gaziantep Antalya Ankara Konya Adana Bursa Izmir Sofia Cracow Bucharest Warsaw Bratislava Size of bubble represents size of GDP Lódz Wroclaw Stockholm Poznan Prague Edinburgh Reykjavik Dublin Manchester Budapest Bristol Leeds -Bradford Nicosia Málaga ToulouseGothenburg Szczecin Zagreb Madrid Nürnberg Copenhagen Murcia Leipzig Berlin Hannover Lyon Helsinki Dresden Stuttgart Amsterdam Bordeaux Zaragoza Marseille Hamburg Liege Lille Nice Dortmund -Cannes Bremen Brussels Barcelona Sevilla Duisburg Rotterdam Vienna Antwerp Frankfurt Valencia (Spain) StrasbourgMilan Düsseldorf Thessaloniki Athens The Hague Lisbon Rome Cologne Bergamo Porto Palermo Turin Essen Naples Genova Zurich 0 20,000 40,000 60,000 80, ,000 Oslo GDP per ($) 3 THINK Europe: Picking Tomorrow s World cities

4 A strategy for Europe (continued) There are some cities which do not score well in traditional real estate terms today, due to illiquidity, lack of transparency or market size, but whose growth rates cannot be ignored (Growth Cities). These are the cities whose position in the hierarchy is expected to change markedly over the next couple of decades, in terms of economic output or consumer demand. In turn, they should see their perception as real estate investment markets improve and enjoy, over the longer term, a structural correction in both rents and yields. Investments in these markets need to be highly selective, but made smartly and ahead of the curve to enhance portfolio returns. In all categories we classify cities as Tier 1 and 2. This predominantly relates to their size and the scale of opportunity we see there, rather than their attractiveness. We would anticipate a pan European portfolio being biased towards Tier 1 Cities in the Defensive and Defensive Growth categories based on market size and risk profile. Fig.4: Scale: population (million, 2014) Madrid Ankara Barcelona Milan Naples Berlin Rome Athens Birmingham Hamburg Stuttgart Vienna Lisbon Izmir Warsaw Budapest An obvious question here is, why would we not just focus on perhaps the 10 largest Defensive/Defensive Growth Cities? Fig.5: Productivity: GDP per ($, 000s, 2014) Basel Geneva Oslo Zurich Stockholm Amsterdam Copenhagen Aberdeen Düsseldorf Frankfurt Helsinki Edinburgh Dublin Brussels Stuttgart Hamburg Gothenburg 4 THINK Europe: Picking Tomorrow s World cities

5 Growth Cities improve diversification In addition to identifying long-term performance, we also want to maximise the benefits of diversification by location, sector and drivers of demand. The largest real estate markets are typically closely-correlated, driven by financial and business, and so offer little benefit to geographical diversification. Seeking a balance of occupiers by industry, should help lower volatility of rental growth, and avoid over-dependence on any one sector. Investments underpinned by financial and business, for example, should be complemented with investments in resource or commodity-led cities. Our Tier 2 and Growth Cities tend to offer greater diversification benefits to real estate investors hence their inclusion in our target list and in the case of the Growth Cities, should also enhance returns. Investing across different real estate sectors can offer further diversification benefits. Not all of our cities are appropriate for all sectors, and for some we might only target one sector, whilst actively avoiding others. Broadly speaking, the Tier 1 Cities should be attractive for all sectors, while in the Tier 2 Cities we would target mainly retail or logistics. The Growth Cities will likely be focused on retail, their growth really being underpinned by consumer and tourist economies. Fig.6: Fastest growing cities: GDP growth (% change, ) 160% 140% 120% 100% 80% 60% 40% 20% 0% 3 42 Izmir 27 Ankara 45 Bucharest 74 Sofia 23 Warsaw 68 1 Fig.7: Tomorrow s World cities: Size of retail market 2030 (US$bn) Bratislava City rank 2030: total GDP Edinburgh Oslo Dublin Stockholm Prague Budapest Manchester Leeds Bristol Toulouse Gothenburg (US$bn) Madrid Barcelona Ankara Milan Birmingham Athens Rome Berlin Hamburg Stuttgart Vienna Warsaw Manchester Stockholm Izmir Frankfurt All retail sales Fashion & Footwear (RHS) 5 THINK Europe: Picking Tomorrow s World cities

6 Market timing While we advocate a top-down strategy that is underpinned by long-term fundamentals, structural growth and risk management, market timing, cycles and short term pricing will of course play an important role in day to day portfolio management. At any one point in time, some markets will look more attractive than others, based on where they are in their cycle. While our universe of 42 cities will remain unchanged, our short to medium term buy, or indeed sell, priorities, will change regularly to enhance performance via early cycle entry. We conduct five year sector level, city forecasts for all our Defensive and Defensive Growth Cities. Forecasting the Growth Cities is more of a challenge, but the opportunity in these markets is structural rather than cyclical, meaning short term forecasts are less relevant. For all cities, our global risk model gives us a required return hurdle allowing us to assess the relative attractiveness of individual opportunities. A city based real estate strategy, underpinned by long term, structural trends, that strikes the right balance of risk and diversification, while taking advantage of short term pricing opportunities, should enjoy above average portfolio-level returns, lower than average volatility, and modest downside risk, for long term investors. Alice Breheny Global Co-Head of Research 6 THINK Europe: Picking Tomorrow s World cities

7 Fig. 8: GDP breakdown by industry group business business Frankfurt business Madrid business Gothenburg business business Bordeaux business Stuttgart business Leeds business 7 THINK Europe: Picking Tomorrow s World cities

8 City focus: UK Rank within European cities* Population (000) 14,620-1 Population growth (, %) 22% 13% 7 GDP 2014 ($bn) GDP per 2014 ($) 59,143 40, GDP growth (, %) 77% 56% 15 Retail sales 2014 ($bn) Retail sales per 2014 ($) 27,041 23,798 2 Retail sales growth (, %) 65% 53% 15 % of households by income 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Age structure (% of population) $100,000+ $70-100,000 $35-70,000 $20-35,000 $0-20,000 Clothing & footwear sales 2014 ($bn) 24 1 Clothing & footwear per 2014 ($) 1,608 1,491 5 Clothing & footwear sales growth (, %) 178% 156% 1 % population under the age of 65 80% 82% 13 Number of households with income >$100, (000) 2,423-1 *Rank out of 100 European cities (excludes Russia and Ukraine) % -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% UK Outperformance vs national GDP breakdown (% of output) 148% 137% GDP per GDP growth 114% 122% Retail sales per Retail sales growth European cities Average business Transport, information & 8 THINK Europe: Picking Tomorrow s World cities

9 City focus: Turkey Rank within European cities* Population (000) 14,024-2 Population growth (, %) 28% 20% 2 GDP 2014 ($bn) GDP per 2014 ($) 17,048 11, GDP growth (, %) 140% 127% 3 Retail sales 2014 ($bn) Retail sales per 2014 ($) 13,913 10, Retail sales growth (, %) 121% 116% 5 % of households by income 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Age structure (% of population) $100,000+ $70-100,000 $35-70,000 $20-35,000 $0-20,000 Clothing & footwear sales 2014 ($bn) 11 2 Clothing & footwear per 2014 ($) Clothing & footwear sales growth (, %) 100% 95% 30 % population under the age of 65 91% 92% 2 Number of households with income >$100, (000) 2,062 2 *Rank out of 100 European cities (excludes Russia and Ukraine) % -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Turkey Outperformance vs national GDP breakdown (% of output) 153% GDP per 110% GDP growth 127% Retail sales per 105% Retail sales growth European cities Average business Transport, information & 9 THINK Europe: Picking Tomorrow s World cities

10 City focus: Madrid Madrid Spain Rank within European cities* Population (000) 6,677-4 Population growth (, %) 1% -3% 74 GDP 2014 ($bn) GDP per 2014 ($) 36,443 28, GDP growth (, %) 40% 33% 53 Retail sales 2014 ($bn) Retail sales per 2014 ($) 20,439 18, Retail sales growth (, %) 33% 30% 60 % of households by income 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Age structure (% of population) $100,000+ $70-100,000 $35-70,000 $20-35,000 $0-20,000 Clothing & footwear sales 2014 ($bn) 6 5 Clothing & footwear per 2014 ($) Clothing & footwear sales growth (, %) 32% 25% 55 % population under the age of 65 77% 82% 55 Number of households with income >$100, (000) *Rank out of 100 European cities (excludes Russia and Ukraine) % -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Madrid Spain Outperformance vs national GDP breakdown (% of output) 129% 121% Madrid GDP per GDP growth 112% 111% Retail sales per Retail sales growth European cities Average business Transport, information & 10 THINK Europe: Picking Tomorrow s World cities

11 City focus: Germany Rank within European cities* Population (000) 3, Population growth (, %) 16% -1% 19 GDP 2014 ($bn) GDP per 2014 ($) 60,839 43, GDP growth (, %) 49% 34% 36 Retail sales 2014 ($bn) 94-7 Retail sales per 2014 ($) 23,958 20,699 8 Retail sales growth (, %) 50% 30% 33 % of households by income 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Age structure (% of population) $100,000+ $70-100,000 $35-70,000 $20-35,000 $0-20,000 Clothing & footwear sales 2014 ($bn) 5 8 Clothing & footwear per 2014 ($) 1, Clothing & footwear sales growth (, %) 25% 11% 62 % population under the age of 65 74% 79% 73 Number of households with income >$100, (000) *Rank out of 100 European cities (excludes Russia and Ukraine) % -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Germany Outperformance vs national GDP breakdown (% of output) 139% 146% GDP per GDP growth 116% Retail sales per 167% Retail sales growth European cities Average business Transport, information & 11 THINK Europe: Picking Tomorrow s World cities

12 Contact us Alice Breheny Global Co-Head of Research TH Real Estate 201 Bishopsgate, EC2M 3BN T: E: Follow us on Any assumptions made or opinions expressed are as of the dates specified or if none at the document date and may change as subsequent conditions vary. In particular, the document has been prepared by reference to current tax and legal considerations that may alter in the future. The document may contain forward-looking information or estimates that are not purely historical in nature. Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer s opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Nothing in this document is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. TIAA Henderson Real Estate (TH Real Estate) is a name under which Henderson Real Estate Asset Management Limited provides investment products and. Issued by Henderson Real Estate Asset Management Limited (reg. no ), (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, EC2M 3BN) which is authorised and regulated by the Financial Conduct Authority to provide investment products and. Telephone calls may be recorded and monitored. TIAA Henderson Real Estate Limited (TH Real Estate) is a real estate investment management holding company owned by Teachers Insurance and Annuity Association of America (TIAA). TH Real Estate securities products distributed in North America are advised by UK regulated subsidiaries or TIAA-CREF Alternatives Advisors, LLC, a registered investment advisor and wholly owned subsidiary of TIAA, and distributed by Teachers Personal Investors Services, Inc., member FINRA. COMP