4 minute read
Changes in the age profile of populations will have a significant impact on demand for real estate; influencing the type, functionality and locations that are likely to be popular writes Monika Sujkowska.*
The population structure is changing across the world. Improving living conditions and medicaladvances are expected to lead to a rapid increase in the proportion of older people over the coming decades. The United Nations (UN) expects the share of the over-65s in the global population to increase from 8.3% in 2015 to 16.2% by 2050.
Younger age cohorts are projected to grow in absolute terms, but their share of the total population will shrink. The proportion of people aged under 20 globally will fall from today’s 34.2% to 28.4% in 2050.
Here, we examine how changing demographics affect demand for different types of residential property in four specific markets.
German apartments: opportunity or trap?
Multi-family residential rents have risen by over 20% nationally since 2012 and prices by nearly 40%.¹ Urbanization resulted in much stronger growth in large cities, led by Berlin and Munich, which saw home prices increase by 11% in 2016 alone.²
The limited supply of residential space, as well as an increased interest in property as an investment given low yields in other asset classes, appears to have driven this strong performance.
Demographic projections for the country overall are subdued, however, and particularly
concerning for 20-40 year-olds. The age group is a major source of demand for rented accommodation and its decline does not bode well for future growth in the rented apartments sector. The size of the population aged under 60 is expected to shrink by 13% by 2030, according to the UN. This decline could beparticularly steep for people in their twenties, with the number of 20-24 year olds expected to shrink by 19% by 2030 and 25-29 year olds by 23%.
Germany is the only Western European country where the working age population in even the largest cities is expected to decline in the short to medium term. For example, Frankfurt’s population aged 15-65 is projected to shrink by 2.5% by 2030 and Berlin’s by 4.2%, according to Oxford Economics.
There are exceptions. Munich’s working age population is set to grow by 7.5% in the same
period, according to the same source. In addition to favorable demographics, there are significant barriers to entry for residential development, with local rules banning high-rises to protect historic views.
Nevertheless, demographic changes are a long-term headwind for the German residential sector. The structural characteristics of the market may also limit growth. Planning regulations support residential development, with the provision of housing being favored over some other policies, such as the preservation of green space.
Although limited supply and high demand have spurred growth in recent years, the medium-to-long term outlook looks less promising given the declining number of twenty- and thirty-somethings.
UK – weakening demand for student accommodation?
The UK student accommodation sector has performed strongly in recent years, with prime rents up by an average of 5.9% per year between 2006 and 2016.³ Higher yields than traditional real estate and good growth prospects have resulted in robust investor demand. Assets worth £6 billion ($8.9B**) were traded in 2015 and approximately £4.5 billion ($5.6B**) in 2016, compared to an average of £1.8 billion ($2.9B**) per year between 2010 and 2014.⁴
Rising student numbers – applications to UK universities increased by 41.9% between 2006 and 2016 and acceptances rose by 36.9% over this period - have driven occupier demand.⁵
Following solid growth in the number of people aged 18-24 in 2000-2012 (20.5%), a 1.2%
decline was recorded between 2012 and 2015.⁶
Projections are available for the 15-24 age group. A 6.3% fall is projected for this cohort for 2015-2020 due to the demographic dip in the early 2000s.
This decline is expected despite steady growth in the total UK population.⁷ While a rebound is expected in 2025 following a recovery in birth rates during 2010-16, demographics are likely to limit demand for student accommodation over the medium term.
There are factors other than demographics that might yet spur demand. The UK student
accommodation sector operated by private operators is still small, with bed spaces accounting for only 14.7% of the full-time student population.⁷ A growing preference for occupying privately-operated student facilities as opposed to house sharing or living in family homes could support demand. A significant rise in participation rates or a pick-up in overseas students choosing the UK as a place to study would also have an impact on aggregate demand, although there are downside risks to these sources of demand.
Investors should take a view on each of these demand drivers to judge if they can offset
demographic weakness over the next 10 years.
Australia’s retirement villages
Demographic changes imply rising demand for all types of retirement living in Australia over the long term. The UN projects a 108.9% increase in the number of people aged over 65 by 2050 – the highest growth rate in the developed world. This is only partially a product of an aging population – Australia’s overall population growth projections also exceed other developed countries.
The provision of real estate suitable for retirees will have to increase to accommodate this
growth. In countries like Japan and Germany, there is considerable flexibility to convert assets accommodating younger age groups into real estate suitable for older demographics. In Australia, robust growth across all age groups will likely limit the potential for conversions.
Investors need to assess the income growth prospects for retirement villages in Australia by
taking into account not just favorable demographics but also the barriers to entry facing developments. Attractive cyclical opportunities are likely to exist as supply often lags demand. In the long term, however, out-of-town locations and the land-rich nature of the country may limit the rental growth potential.
US manufactured homes
Manufactured homes – including factory-built homes and recreational vehicles (RVs) – make up 6.4% of US housing stock, according to the 2011 US Census.
A manufactured home (also called mobile homes) can be located on an owner’s land. Alternatively, an investor owning a manufactured-home community can lease land
upon which residents can place their factory-built homes or RVs on a permanent,
long-term or short-term basis.
Poorer members of the population have historically occupied manufactured homes. The household income of today’s occupiers still stands at just over half of the national average. There are, however, pockets of the market that attract residents with higher incomes, most notably some age-restricted communities. Around 23% of US manufactured-home occupiers are currently retirees.
The US population aged over 65 is forecast to increase by 64% over the next 15 years and by 82% by 2050, which is likely to lead to a rise in the number of people in need of such accommodation.
Sunbelt states are particularly popular with retirees, and likely to remain so. In Florida, the proportion of over 65s currently stands at 20% (compared to the national average of 15%) and is expected to increase to 25% in 2035.
Alongside demographic drivers, investors ought to consider supply side factors.
Currently, securing zoning permits from US local authorities is a considerable barrier to entry. On the other hand, there are limited geographic barriers given the out-of-town locations. A more favorable regulatory environment for manufactured home site development would have a significant impact on the potential for rental growth.
* Investment professionals are members of AIA/AIC's Participating Affiliate, Aviva Investors Global Services Limited ("AIGSL").
** Based on currency exchange rates (close of day) as of December 31, 2015 and December 31, 2016, respectively
 Association of German Pfandbrief Banks (vdp), Macrobond
 Stiftung Warentest
 “Student Accommodation comes up Trumps in Brexit Year,” CBRE, December 7, 2016
 Office of National Statistics
Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as of November 29, 2017. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results.
The name “Aviva Investors” as used in this presentation refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva Investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.
For Use in Canada
Aviva Investors Canada, Inc (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager.
For Use in the United States
Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). In performing its services, AIA utilizes the services of investment professionals of affiliated investment advisory firms who are best positioned to provide the expertise required to manage a particular strategy or product. In keeping with applicable regulatory guidance, each such affiliate entered into a Memorandum of Understanding (“MOU”) with AIA pursuant to which such affiliate is considered a “Participating Affiliate” of AIA as that term is used in relief granted by the staff of the Securities and Exchange Commission allowing US registered investment advisers to use portfolio management and trading resources of advisory affiliates subject to the supervision of a registered adviser. Investment professionals from AIA’s Participating Affiliates render portfolio management, research or trading services to clients of AIA. Investment professionals from the Participating Affiliate also render substantially similar portfolio management research or trading services to clients of advisory affiliates which may result in performance better or worse than presented herein. This means that the employees of the Participating Affiliate who are involved in the management of
strategies and other products offered to US investors are supervised by AIA.
AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to:
225 West Wacker Drive, Suite 2250
Chicago, IL 60606