Five trends in global demographics that will drive real assets demand

In this essay we look at the major core markets we invest in – the US, UK, Eurozone, Japan, Australia and China – and we observed five major trends: shrinking populations; shrinking working age cohorts; fluctuations in student age cohorts; increasing early age retiree cohorts; and later age retirees becoming an increasingly large part of the retiree cohort. These issues impact each market to a different degree as shown in Figure 1 below:


 
Our first group of markets is characterised by demographic headwinds. The table shows illustratively that Japan has the worst demographic outlook, and, as we will explain later, even the strong urbanisation story for Tokyo is faltering.

Our middle group of markets is characterised by demographic transition. This includes Eurozone markets such as the Netherlands and France which are currently in a better position than the first group but are deteriorating rapidly over the forecast period. China also sits in this middle group with a stagnating population that is soon to shrink, and an increasing retiree cohort. While these characteristics are similar to those in the weaker Eurozone markets, in a sense they are more concerning because China is yet to become a high-income country – and without the rapid economic growth that rapid population growth can help deliver – China may well be trapped as a middle-income country.



The Eurozone encompasses a variety of demographic experiences, but in general is half-way between Japan and the UK-Australia and the US. It is characterised by already, or soon to be, shrinking populations (see Figure 2); already shrinking working age populations and an increasing retiree cohort. Within the Eurozone we have placed Italy, Spain, and Germany in the same group as Japan.

Finally, we have the group with the least demographic headwinds, and indeed some tailwinds – demographic resilience. The UK, Australia and the US will not see populations shrink by 2050 – indeed Australia and the US won’t even see working age populations shrink. And, while they will see a rising retiree cohort, those retirees are likely to fall more typically into the young retiree category and, while potentially needing social care, are less likely to need full nursing care. Overall, the US has by far the best demographics of any major market.

A final note is that our student cohort is quite a small one – a mere five years – and so we might well expect to see fluctuations in growth rates over time. But the amplitude of these swings does vary relative to policy changes that impact domestic and inward migration and – as in China – explicit population policies. Note that it isn’t a straightforward translation from the domestic student cohort to actual demand for student housing though: both domestic participation rates and international student mobility will have arguably a greater impact.

The summary is as follows:
In our demographic headwind markets, investors should favour strategies that target established large urban population centres which may experience faster population growth than the country as a whole and where the existing market size is sufficient to guarantee strong demand for logistics and residential property. These types of markets will tend to be associated with lower trend economic growth and interest rates, making leveraged core cashflows attractive. But lower trend inflation reduces the attraction of index-linked cashflows: indeed, they may not even be available in those markets. Finally, these markets are likely to be associated with an increasing proportion of retirees that are in the older retiree cohort, requiring nursing care. Accordingly, we would expect to see attractive demographic driven opportunities in both senior living AND higher acuity nursing homes, IF investors are willing to take the associated higher operational risk.

In our demographic transition markets, one might be able to still opt for cyclical growth strategies that require either full population, working age population or urban population growth – such as mixed-used schemes and certain types of office and retail - but they are potentially time-limited by increasing demographic headwinds as we move through the next decade or two.

Finally in the demographic resilience markets, one might prefer to lean into strategies that benefit from strong population growth and the higher associated trend growth. One might find that these markets offer greater opportunities around sectors associated with high economic investment such as lab and life science, for example. In addition, these markets are likely to have the more consistent student cohort growth allowing for easier demand planning for student housing. That said, this will also be dependent on public policy toward participation rates and international student mobility. Given that these markets will tend to have higher trend interest rates, the opportunity to lever core cashflows may be relatively unattractive. Conversely, the higher associated inflation rates may make inflation-linked cashflows more attractive.










Source for all graphs: United Nations 2019 Population Trends report (https://population.un.org/wpp/).

Demography

The Japanese market is in many ways a foreshadow of what is to come for the developed world in the West. Its population peaked at 128.6 million in 2009 and has since fallen by 3 million. The childhood cohort was the first to fall, with the decline beginning in the early 1980s. This then flowed into sustained declines in the tertiary education cohorts in the mid 1990s and the working age population in the late 2000s. The pandemic years marked THREE key pivot points for Japan.

The second pivot point is that 2021 was the first year that even the population of early retirees started to fall outright too. Consequently, 2021 was also the first year that only the over-80s cohort was actually still increasing in size – and is projected to increase into the mid 2030s.

We also saw a third demographic change in Greater Tokyo during the pandemic, but it’s hard to tell how far this is just a temporary change or the start of a trend. For the first time, the population of Greater Tokyo stabilised at 37.4 million. This was driven by a sharp fall in the number of foreign nationals relocating to the city, and a smaller fall in internal migration, as people moving for jobs worked from their current location instead. One might well expect these factors to come to an end in 2022 and for Tokyo to continue its previous growth rate, but some forecasters are expecting the population to continue to fall. After all, if the country level population is falling, at some point one runs out of people from other cities and rural areas able to relocate to Tokyo. Statista, for example, is forecasting the Greater Tokyo population to fall to 36.6 million in 2030, albeit still one of, if not the largest urban populations in the world.

Economy

Unsurprisingly, with a shrinking working age and overall population, and the long shadow of the early 1990s property crash, the Japanese economy has struggled with decades long low-growth and deflation that occasionally flirts with sustained low inflation. Japan also leads the way in advanced robotics, but for cost reasons also largely outsourcing manufacturing to countries with more plentiful lower cost labour. The funding of social care and retirement is managed at the national level with mandatory savings and centrally organised social care. Since 2000, the government’s Long-Term Care Insurance programme provides retirees with social care on a means-tested basis, funded through contributions from the over 40s. And even for the over 80s, care is typically in the community rather than in specialised residential homes, given the paucity of healthcare workers. That said, there is a proportionately smaller but rapidly growing private sector senior living and nursing home sector.

Impact on real assets

Despite a falling overall and working age population, Japan has remained a relatively attractive market for investment given continued urbanisation and relatively low interest rates. As a result, real asset types catering to the large domestic consumption market of Tokyo and to the expanding urban professional - i.e. logistics and residential - have remained attractive, especially given the low all-in cost of debt. (By contrast, the population of Osaka is now shrinking.) Even with a stable or even slowly shrinking population, Greater Tokyo will remain one of the largest urban centres in the world, and the opportunities of servicing that population’s real assets needs will remain attractive. In addition, one might expect the market for privately owned retirement facilities to prove attractive, as especially if advanced robotics and/or laxer immigration policies resolve the issue of labour. According to research from Savills1 , the private offer is still only half the size of publicly provided facilities, albeit growing at a far more rapid pace.

Demography

According to the UN projections, the Chinese population is 1.45 billion in 2022 and will peak at 1.46 billion in the early 2030s. Thereafter, it joins most of the developed world in population decline. Perhaps the bigger story is that China’s working age population is peaking this year and next at c843 million. Thereafter, it starts to shrink too. And worse still, the “percentage” of the population in the working age cohort actually peaked in 2016 at 59.5% and has already fallen back to 58.2%. It is forecast to fall below 50% in 2050. 

What is driving the shrinking – both in absolute and relative terms – of the working age population? Well firstly, declining birth rates. Thanks to the one child policy that began in 1980 and ran until 2015, China’s birth rate has been below the replacement rate for over 40 years, with the 0-19 year old age cohort shrinking particularly sharply in the mid-2000s. And, despite the policy being rescinded, the twin trends of rising incomes (which are negatively correlated with birth rates globally) and expensive childcare mean that the low birth rates have not been reversed. 

That has fed into declining numbers in the tertiary education cohort, albeit given higher incomes and the perceived prestige of overseas education, the numbers of Chinese students studying abroad has continued to rise. Nonetheless, with the 20-24 year-old age cohort forecast to decline by 21% in the 2020s – the sharpest decade fall in China’s history and in the projections.

The second issue is one common to most countries – longer life expectancy. As a result, the proportion of the Chinese population aged 65 has started to accelerate quite sharply over the past decade, from 7% in 2002 to just 8% in 2012 but rising sharply to 13% in 2022 and a projected 18% in 2032. If we focus on the over 80s, the picture has been fairly stable over the past two decades, with around 15% of retirees over 80. But that is forecast to rise to 20% over the next 15 years and to peak at c45%. 

Economy

What does all of this mean for the Chinese economic outlook and property demand in particular?

For a start it brings a real biological imperative to Chinese policymakers. China is still what economists would define as a middle-income rather than high-income country. To be sure, this is a phenomenal achievement given that as recently as the late 1970s, China was a low-income country and reflects mass industrialisation and urbanisation at a pace and scale unseen in world history. That said, China is now the country that has spent the longest time as a middle-income country, raising fears that it will be stuck at that level given the structural constraints of a now declining working age population, not to mention declining returns on investment and productivity. We can already see some of the effects of this on our five-year macro forecasts for China, where trend GDP growth is decelerating, and smaller markets such as Malaysia and Vietnam are experiencing far higher growth rates. 

One way to mitigate the economic impact of a declining working age population and to reverse the productivity declines would be to re-orient the Chinese economy away from heavy industry and low-value jobs toward higher value-add manufacturing and service-sector jobs. In addition, to pivot the economy from labour toward advanced robotics. This is indeed the challenge facing much of the Western world too. But given that China’s growth story has been so heavily driven by being the world’s supply of cheap manufacturing labour this clearly has implications beyond China’s borders. As the working age population shrinks, international manufacturers will either have to accelerate their move toward cheaper and more plentiful sources of labour in other South East Asian markets, or also move toward advanced robotics: most likely some kind of mix of the two.

Finally, the ageing of the Chinese population raises grave questions – as elsewhere – about the provision of senior living and nursing care and in particular, the availability of savings instruments to fund such care. So far, the West has benefited from an outflow of Chinese capital given the proportionally small size of the domestic equity and bond market. That’s also the reason why the Chinese property market plays such an outsize role in its economy: it’s one of the few domestic asset classes available for retail investment. 

Impact on real assets

In terms of the impact on real assets demand, the following seem likely consequences:

• The need for assets that can absorb the increased need for retirement savings suggest continued strong outflows from China to overseas markets, and net downward pressure on yields for investment grade assets. 
• That said, the decline of the working age population has profound implications for the availability and cost of global labour supply, suggesting a reverse of the deflationary impulse that came out of China in the 1990s and 2000s toward the global economy. Without other scale low-cost labour sources emerging, or a rapid increase in automation, China is likely to go from an exporter of deflation to being neutral at best, and an exporter of inflation at worst. 
• The combination of more capital competing for assets, and a net neutral to positive impulse on inflation would be consistent with even more competition for index-linked real asset cashflows.
  
• Turning to real asset sectors, despite the prestige attending to overseas education, the sharp decline in the student cohort suggests that the provision of student housing targeted at overseas Asian student in general, and Chinese students, in particular, could face headwinds in the 2020s and 2030s.
• If Chinese production is to be sustained through advanced robotics, then the demand for logistics to both service domestic and international consumers could well remain positive. Indeed, despite a falling overall population from 2030, the continued impulse of urbanisation means that the demand for logistics assets that service the domestic economy should remain strong.
• However, if China loses production market share to other South East Asian countries, then we could well see a shift in the demand for logistics that services international supply chains to service the new pattern of production. This could open greater opportunities in markets such as Vietnam.
• It remains to be seen how Chinese policymakers deal with the increasing demand for later living and nursing care, and whether they seek private capital. At present, this is not a market opportunity. 

Demography

The Eurozone encompasses many different demographic trends so we will start with Germany as it has the Eurozone’s largest population and is one of
the most important investment markets, alongside France. It’s also a fascinating market because, like Italy, it is the most “Japanese” in its characteristics. Although it has experienced patches of negative population growth before, especially if we include the historic East German figures, the pandemic was a true pivot point for Germany: its working age population started to shrink in 2020 and its total population is projected to start falling this year. Germany’s tertiary education cohort is also projected to start falling this year. By contrast, its retiree cohort is projected to continue to grow so that the working age population falls to below 50% of the total population in 2031. 

The pattern in France, Italy and the Netherlands is worse. In all three markets the working age population had already begun to shrink in the 2010s. In Italy, the total population also began to shrink in 2018, although it isn’t projected to do so in France and the Netherlands until the 2040s. But before you get too optimistic, during the pandemic France’s working age population slipped below 50% of its total population. 

Economy and impact on real assets

Given the demographic picture, it is unsurprising that the Eurozone economy is increasingly characterised by low trend GDP growth, low trend interest rates and low trend inflation. It seems very much positioned between the US, UK and Australia on one hand and Japan on the other, with a clear direction of travel. 

Demography

The UK stands in sharp contrast to the Eurozone insofar as its population is forecast to continue growing from a population of 68 million. (Indeed, because of its recent fast growth, the UK overtook the population of Italy in 1990, France in 2009, and the UN is projecting that the UK overtakes the population of Germany in 2074.) That said, the peak years of population growth are behind the UK as post-Brexit, the number of migrants coming from Central and Eastern Europe falls. This migrant helped drive population to above 1% per year from 2007 to 2010 not just as first-generation immigrants boosted the immediate population size but also were associated with higher birth rates among this largely Catholic population. Post-Brexit, the UK has been losing EU migrants, with London particularly impacted by outward migration as service-sector jobs dried up during the pandemic. (An oft-cited study by the Financial Times claimed that London had lost 700,000 workers in 2020.2) It remains to be seen how far these trends are reversed post pandemic. Nonetheless, overall migration numbers have not fallen: rather the balance has shifted from EU migrants to those from the Commonwealth.

The UK’s shifting attitude to migration and indeed the high amplitude public policy swings resulting from its particular political system have led to a less stable set of population trends by age cohort than most other markets. For example, the domestic tertiary student age cohort fell outright throughout the 1990s but this coincided with higher education reform that markedly increased the proportion of that cohort actually entering higher education, masking the underlying trend. And then the age cohort experienced rapid growth in the 2000s only to fall again in the 2010s. Going forward, the UN projects that it will continue to fall into the late 2020s, when the cycle turns positive again. Historically the UK has smoothed this underlying trend with international student demand, and David Inskip’s essay “Student housing: another decade of demographic-driven demand”, explores this trend more closely.

Moving to the working age population, this is still increasing in the UK but does decrease in the late 2020s before turning weakly positive again.

As with most other major markets, the retiree population continues to grow at a rapid pace thanks to longer life expectancy. The working age population falls below 50% of the total population in 2033 and the proportion of all retirees that are over 80 increases gradually from 27% in 2022 to 38% in 2050. 

Economy and impact on real assets

The UK economy is one of the most difficult to forecast over the next decade given the twin structural breaks of Brexit and the pandemic. It is especially hard to see how attractive the UK will be to inward migration from the EU: will CEE workers who left when their jobs vanished during the pandemic return, for example? That said, despite higher frictional costs of trade, the UK is forecast to continue to experience higher trend rates of GDP growth and higher trend inflation and interest rates thanks to continued faster population growth offsetting parlous productivity growth. The key question, as in other major markets, is how to fund the increasing burden of social care and nursing provision for the elderly. The UK lacks the kind of compulsory superannuation system seen in Australia or Japan and is overly reliant on taxation out of current income. With its working age population still growing the urgency of resolving this is not as great as in other major markets, but will soon be pressing. 

From a demographic perspective the UK is an interesting combination of ongoing growth and slower ageing than its major European counterparts. The real uncertainty comes from assessing the attraction of London as a destination for both external and domestic migrants and therefore the real assets demand in its major market. The demand drivers of student housing and later living are examined elsewhere in this publication. Suffice to say that the unusually liberal supply side and receptiveness to private sector funding of the real assets infrastructure means that there are attractive opportunities for providing next generation assets.

Demography

Australia “young and free” – so the national anthem goes and so the demographics show! In stark contrast to other developed markets, the Australian population has yet to peak. 

That said, there are some interesting patterns to be observed within the population cohorts. For instance, in the tertiary education cohort, the UN is expecting the population decline that began in 2016 to continue into 2023 after which we see some quite strong growth in the late 2020s. Similarly, as that cohort ages into the young worker cohort, we see declines in that population through the 2020s before population growth becomes positive again.

And, of course, Australia does not escape the impact of longer life expectancy on the gradual ageing of the population. The working age population peaked at 53% of the overall population during the 2000s and 2010s, but started to decline in 2019 and forecast to dip below 50% in the early 2030s. And, while early retires made up over 80% of the all retirees in the 1980s, this has now fallen to c74%, and is forecast to continue to fall. That said, the proportion of retirees that are over 80 will remain lower than in most other major markets. 

Perhaps the biggest demographic story in Australia is that Melbourne is projected to have a larger population than Sydney in 2027, according to the Australian Government Centre for Population, despite the recent curbs on inward migration due to the pandemic.

Economy and Impact on real assets

With continued population growth, inward migration, and strong urbanisation trends, it is unsurprising that Australia is routinely the developed market with the highest economic growth forecasts in our macro House Views. That said, the rapid growth has not come without its problems in terms of housing supply and affordability and trend higher interest rates than other developed markets. 

Investors looking for a “young” developed market with growing population centres that need servicing with real assets are likely to find Sydney and Melbourne attractive, especially in providing assets that meet the need for residential and student housing that services both that forthcoming late 2020s cohort increase, but also overseas student demand. That said, of all the markets covered, the opportunity in later living and particularly nursing care provision seems most limited. 

Demography

The US stands out as the major market globally where the demographic outlook is actually positive! Not only is the total population not forecast to fall throughout the forecast period, but the working age population is also not forecast to fall. The working age population doesn’t slip below 50% of the total population until 2047 and while the population is ageing the majority of retirees will remain below the over 80 cohort. Even the tertiary education cohort is projected to experience positive growth in the 2020s. 

Economy and impact on real assets

The consequence of this is that, from a relative demographic perspective, one should reasonably expect the US to continue to experience relatively high economic growth compared to other OECD markets and higher trend interest rates and inflation too. As with Australia, it is one of the few markets with sustained structural tailwinds across all age cohorts opening up the full range of real assets investments.

Footnotes

¹ https://pdf.savills.asia/asia-pacific-research/japan-research/japan-investment/jp-healthcare-11-2018.pdf

² https://www.escoe.ac.uk/estimating-the-uk-population-during-the-pandemic/