Read the full paper: Demographics key to the future of real estate
by Francois de Bruin
4 minute read
Seismic demographic shifts, including ageing populations, migration and rising life expectancy, ultimately dictate long-term demand in the majority of real estate sectors and markets. As a result, the traditional sciences of geography and economics can no longer be relied upon solely by investors. A deep understanding of demographics, humanities and social sciences are also required to ensure properties are fit for the future.
The number of older people – aged 60 and over – has increased substantially in the past decade in most countries and regions according to the UN, and is set to accelerate in the coming years1.
Yet research shows there are widely divergent perceptions among nations as to the severity of the issue and how it should be addressed. According to a study by Pew Research, people in Japan are very concerned with the ageing population, with over 90 per cent of respondents citing it as a concern, compared to just 26 per cent of people in the US2.
The difference in attitude is easily explained. Japan’s society is ageing fast and the population has shrank since 2000. By comparison, the US population has increased 15 per cent over the same period3.
Pew Research also surveyed the public in 21 countries on who should bear responsibility for looking after the elderly. In most countries, the public believe government should be responsible for the well-being of the elderly2.
The US is an exception and, in keeping with the “do-it-yourself” attitude towards those in retirement, the roughly 10,000 US citizens4 entering retirement every day will lead to significant demand for senior care and assisted-living properties. As a result, healthcare REITs have grown in prominence in the US, constituting 11 per cent of the overall listed market by market capitalisation in 2017 compared to three per cent in 20005. While supply has responded in a meaningful way over the last couple of years, the long-term demand drivers remain intact and should support industry growth for some time.
Japan is another country where the vast majority of people believe looking after the elderly should not simply be left to the authorities. Here too the prospects for private investment appear strong. The government has implemented a number of measures to encourage the development of healthcare REITS specialising in the care of the elderly.
The fact people are on the move is nothing new. It is the scale and velocity that has intensified. Between 1990 and 2017, the number of international migrants worldwide rose by over 105 million, or 69 per cent. Most of this increase occurred from 2005 to 2017, when 5.6 million migrants were added annually, compared to an average of 2.5 million from 1990 to 2005, according to the UN6.
As migrants arrive at their new destination they have a significantly higher propensity to rent than to buy property. Moreover, low levels of residential construction are fuelling rental growth just as demand, partly driven by migration, is increasing. This, coupled with a significant supply shortage, means rental growth prospects continue to be robust in many European countries, including the UK and Germany.
Furthermore, millennials in the US have demonstrated a preference to rent over owning their properties.
Figure 1: Number of international migrants (millions) by region of destination, 2000 and 2017
Technological advancements in aeronautics and transport have led to a boom in international travel. Japan, in particular, has benefited from a rapid increase in inbound tourism. The number of tourists visiting Japan has increased from 4.757 million in 2000 to 28.691 million in 20177.
Having originally hoped to welcome 20 million visitors per year by 2020, the Japanese Tourism Board doubled its target to 40 million after surpassing its objective in 20168 & 9.
The surge in tourists is having a considerable impact on the real estate sector. In particular, there has been a boom in the construction of new hotels and a surge in the supply of lodging is expected to come onto the market in 2018 and beyond. However, Japan’s existing tourism infrastructure is inadequate and new hotels are needed to replace ageing lodging stock at the budget and premium level10.
While demographic forces have positive effects on real estate fundamentals, investors must also consider the increased risks – both immediate and longer term.
The most apparent risk is the invariable timing mismatch between long-term demographic changes and a near-term supply response. This is evident in the US, where new senior and skilled nursing facilities currently outpace expected demand over the next 12-24 months. Consequently, expected net operating income growth is likely to be subdued in the near term.
Finally, while changing demographics and social preferences are spurring demand in sectors such as healthcare, housing and hotels, some sectors will likely see demand fall. A decline in the number of workers per retiree, for example, could lead to less demand for office space, shops and factories. Globally, the ratio of the number of workers to each retiree is expected to fall from around eight currently to just four by the year 2050. Ratios for individual countries vary widely, but the overall trend is clear11. Technological developments such as automation and artificial intelligence will also play a key role.
Property investors have been hard-wired over the years to think solely in terms of location. However, the quality of an asset is dependent on demand dynamics and one of the key drivers of that is demographics; which impacts what is happening to an area, the kinds of people moving in and out of it and the commercial and residential trends that flow from these trends. Of all the variables investors should factor in when assessing the long-term vialibility of an asset, demographics stands out as the most important.
1 ‘World Population Ageing 2015’, United Nations 2015
2 ‘Attitudes about Ageing; a global perspective’, Pew Research, January 2014
3 ‘World Bank Population statistics’, World Bank, August 2018
4 ‘10,000 boomers retiring every day’, CNBC, October 2017
5 ‘REITWatch’, National Association of Real Estate Investment Trusts, October 2017
6 ‘International Migration Report 2017’, UN 2017
7 ‘International tourism arrivals’, World Bank, August 2018
8 ‘Japan tourism statistics’, Japan Tourism Research & consulting Co., July 2018
9 ‘Japan tourist target’, Japan Times, March 2016
10 ‘Spotlight Japan Hospitality’, Savills World Research Japan, February 2018
11 ‘Ratio of workers to retirees declines globally’, Yale University, December 2015
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