Real estate investors should be focused on "Agequake", which is affecting cities globally, writes Andrew Allen, Head of Global Property Research and Strategy at ASI.
“‘Youthquake” was the Oxford English Dictionary’s 2017 word of the year: “a significant cultural, political, or social change arising from the actions or influence of young people.” However Youthquake is nothing new – the term was coined by Vogue in 1965 to describe a cultural movement emerging in London led by the new generation.
The new buzzword that real estate investors need to focus on is the “Agequake” – major demographic shifts across all the generations, having an impact on cities, and therefore our investment strategies, worldwide.
Around the world there are different degrees of demographic change underway, but looking at the UK we can see that over 30 years there has been a marked shift in disposable incomes across age groups. Welcome to the new world of aging and increasing wealth.
We can see significant improvements in the relative financial position of older people, due to several factors - a long period of rising house values, final salary pensions, and strong employment. More striking is the worsening financial situation for younger adults, with student debt, a flexible labor market and unaffordable housing.
All of us that attended MIPIM (an international property conference) were grappling with what this means for the real estate industry and the buildings that we need for housing, shopping, offices, distribution and manufacturing. It is therefore no coincidence that 500 cities were represented at MIPIM this year.
So what are the implications?
Most obvious are the impacts on the retail sector. Retail offers are driven by a longstanding assumption that young consumers are the predominant driver of demand, and yet we know that the young have less disposable income and are at the vanguard of e-commerce. Shopping environments that relied on the footfall of younger age groups are clearly facing an issue of relevance. Meanwhile older people may have more wealth but are not usually associated with high consumption of goods. The obvious question is: How do you produce a retail environment of appropriate appeal? And what does this mean for rental levels?
The good news is that people still want real experiences and social interaction in the built environment. But retail owners must adapt and broaden their appeal to attract the widest spectrum of consumers. The challenge is to create a destination with a real sense of “place” – high-quality malls and town centers with a multi-faceted offer, blending a range of shops, services, restaurants and leisure. This will not be easy for many locations and may require specialist management and ongoing capital expenditure in an increasingly uncertain outlook, with lower and more variable income streams. It is possible to succeed, but increasingly difficult.
More positive for real estate investors is the scale of growth in demand for residential rental properties and a shift of attitude towards renting. For some, the financial barrier of buying a house makes renting a necessity. But growing numbers would choose to rent if offered a professional, secure option. Younger adults are choosing lifestyle over possessions, and owning less makes renting easier. We see evidence of this in the UK and U.S. with declining car ownership among millennials.
More positive for real estate investors is the scale of growth in demand for residential rental properties and a shift of attitude towards renting.
In the UK, private residential renting is set to rise by around 24% by 2022, but currently most properties are owned by individual or private landlords. We strongly expect a transition to the professional Private Rented Sector (PRS). This model is long-established in the U.S. and Germany – with well-designed and managed accommodation blocks, long-term leases, perhaps controlled rents linked to inflation, plus desirable amenities such as gyms, cafes and Wi-Fi. The secure long-term rental streams of PRS offer an ideal opportunity for investors. Our experiences of investing in modern quality plans in Germany show that tenants stay for seven to twelve years – compared to only 12 to 18 months in the UK. The longer the rental, the lower the management costs, and the better operational and cost efficiency for both residents and landlords. This is a model that can work.
As occupiers gain confidence with rental propositions, then the breadth of age groups renting extends. Of course the implication is that there must be value propositions for the young and less affluent, but potentially more aspirational rental offers too, as we know there is a burgeoning cohort of wealthy potential renters out there.
Moving to the office space, this is also influenced by millennials who prefer flexible, open, workspaces where they can share ideas and collaborate. Long gone are the modular offices that their parents experienced, and office space transactions reflect a rapid urbanization of occupational demand at the expense of out-of-town business parks. Young workers recognize the appeal of strong urban environments and so do their employers; we only need to look at the recent location decisions of major tech businesses, eager to attract and retain young and educated talent. It is all about where people want to be – near vibrant leisure, retail and transport hubs.
Investors and developers who provide collaborative, hi-tech workspace and the right mix of services will secure high-quality occupiers and rents – and should deliver strong performance for investors.
So the Agequake is relevant and quite literally at the city gates. Whether for shops, offices or housing, demographics and wealth are the drivers of demand, which will continue to fuel successful real estate strategies in our leading global cities. But it is very clearly our cities that are best placed to succeed.
Property investments may carry additional risk of loss due to the nature and volatility of the underlying investments and may not be available for investment by investors unless the investor meets certain regulatory requirements. In considering the prior performance information contained herein, potential investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that such investments will achieve comparable results.
The article was originally published in CoStar on March 14, 2018.