Ageing gracefully? The impact of demographics on European real estate

Europe’s population is set to contract and age significantly over the coming decades, but the demographic shift will not be uniform. Understanding this dynamic will be an important driver of real estate investment performance, explains Monika Sujkowska.

4 minute read

A picture of media harbour Düsseldorf

For a region that is only now beginning its path to economic recovery after a decade characterised by two turbulent periods – the global financial crisis and sovereign debt crisis – Europeans could be forgiven for hoping that the worst is behind them. But there is a longer-term issue on the horizon that could present sizeable challenges for the region over the next few decades. That said, the effects of it will not be felt evenly across the continent with some cities prospering while others suffer as a result.

The issue is demographics; specifically an ageing and shrinking population. Europe is the only region forecast to see its population fall by 2050, from 738 million in 2015 to 707 million, according to the United Nations. Along with rising life expectancy, a long period of relatively low fertility means that the median age of Europe’s population is expected to increase from 41.7 in 2015 to 46.2 by 2050.1

Demographic shifts in Europe will be far from uniform, however. Countries in Eastern and Southern Europe are likely to be worst affected, with the total population in these areas projected to shrink by 11 per cent between 2015 and 2050. While the population is expected to expand elsewhere in Europe, Germany is forecast to be the only western European state to see its population contract by 2050.2

Demographics and the city

Even though the populations of most countries in Europe have long been predominantly urban, the share and number of people living in urban settlements is expected to continue to rise across the continent as more migrate from rural areas. The UN forecasts that urban Europeans will account for 82 per cent of the continent’s population in 2050 compared with 73.6 per cent in 2015.2

In aggregate, European cities generate 68 per cent of output in the region from 59 per cent of the population. That said, urbanisation favours some cities over others. Larger cities tend to be more successful at attracting incomers, especially capital cities. The populations of the capital cities of EU-15 countries grew by eight per cent between 2002 and 2012, compared with the total population growth of five per cent in the bloc, according to the European Commission.3

Cities tend to have a higher share of the working-age population and lower share of people over 65 than rural areas. Large cities also tend to have more better-educated residents, higher employment rates, more innovation and higher productivity. That means the demographic outlook for cities can vary greatly.

For example, although Germany’s working-age population is set to drop by 9.8 per cent between 2016 and 2030, better demographic prospects mean Munich is expected to have 7.5 per cent more working-age citizens by 2030, while Leipzig should have 5.6 per cent fewer over the same period, according to Oxford Economics. Similarly, in France the working-age population of Toulouse is projected to expand by 10.2 per cent between 2016 and 2030 compared with 1.3 per cent in Paris and a 3.4 per cent contraction in Lille over the same period.4

Demographics and demand

The different demographic prospects for areas across Europe will have a significant impact on the need for all types of real estate. Changes in the age profile of residents and workers is a significant driver of demand for real estate and strongly influence the type, functionality and locations that are likely to be popular.

For instance, demand for residential property is likely to be more directly impacted by demographic changes than other markets. While the size of the population is an important driver of demand, the age profile has a significant impact on the type of residential property likely to be sought. For instance, fewer young people implies less need for student housing, while more old citizens suggests increased demand for retirement housing.

Although demand for retail space may be more affected by structural shifts such as the rise of online shopping than the outlook for the population, changes in the size of catchment populations generally affect the value of retail centres.

Turning to logistics, the sector is likely to benefit from population growth in selected locations. In addition, as more jobs are automated there will be less need to locate warehouses close to pools of cheap labour, meaning that transport links and proximity to markets may influence asset values more. This can add to demand for real estate in the most vibrant centres.

Finally, demand for office space is likely to increase in line with working-age populations in locations that boast a high share of knowledge-intensive activities, which are more resilient to the automation of jobs. The reverse is likely to be true in locations that rely on routine, low value-added employment; potentially offsetting any positive demographic changes.

We analysed how demand for office space might be affected by anticipated changes in the working-age population in different European markets. In doing so, we disregarded the potential for a fall in floor space per worker due to increased flexible working or for labour market participation rates and retirement ages to rise. The analysis demonstrates the wide differential between markets. Barcelona is set to lose 838,000 square metres of occupied floor space between 2016 and 2030. By contrast, Stockholm is likely to need 1.2m square metres more over the same period, with demand boosted by persisting population growth on the back of higher birth rates and higher net migration than Barcelona.

Our analysis reinforces why real estate investors will benefit from analysing the potential demographic impact on the market by city rather than by country or region.

A tale of two cities

As well as demographics, size and quality of the labour force, business environment, entrepreneurship, quality of governance, market access and level of innovation are other factors affecting the productivity of cities. In addition, cities generate agglomeration effects, such as the “matching, sharing and learning” benefits that quality firms reap from being in close proximity to each other.

By examining in which cities these attributes are most prominent, we can see which are best placed to benefit from higher productivity, stronger demographics and more robust real estate demand. Brussels and Paris show why a more nuanced view of a centre’s long-run prospects is called for.

Brussels’ population is set to expand by one per cent a year between 2016 and 2030.5 However, its economy is expected to underperform many European peers over the period, due to an over-reliance on public sector demand for commercial real estate space and relatively weak digital infrastructure and levels of human capital. Furthermore, the market is characterised by low barriers to entry and has suffered from periods of significant oversupply. So despite a reasonably robust demographic profile, pan-European investors may be well-advised to build their strategic presence in stronger European cities.

In contrast, the demographic outlook of Paris is less favourable, with expected average annual population growth of just 0.1 per cent a year in 2016-30.6 However, the city benefits from agglomeration effects due to its large size.  

Paris is an important international business hub with a large financial sector and many international corporate headquarters. The city has exceptional levels of human capital, including world-class universities and business schools as well as high levels of research and development activities. Paris attracts knowledge-intensive employment that tends to be highly resilient to technological disruption. Finally, it attracts extremely high numbers of tourists on the back of its cultural appeal; students due to its prestigious education institutions; and business people thanks to a large and diverse local economy.

These qualities explain why we favour Paris over Brussels. Such contrasting fortunes highlights why real estate investors should take a nuanced view of a city’s long-term prospects, with demographics one of a number of important factors to consider.


1 World Population Prospectus, United Nations, 2015

2 World Urbanization Prospects, United Nations, 2014

3 The State of European Cities 2016, European Commission

4 Oxford Economics, December 2016

5 Oxford Economic Forecasts

6 Oxford Economic Forecasts


Important information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 21 June 2017. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.


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