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Agequake: How changing demographics are affecting real estate investment

“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. It has also spawned a linked buzzword for investors, “Agequake”, referring to major demographic shifts across all the generations. These are having an effect on cities, and therefore on real estate investment strategies.

In the UK, one can argue that older people have benefited from a long period of rising house values, the receipt of final salary pensions and high employment levels. More striking is the deteriorating financial situation of younger adults, burdened with student debt, unaffordable housing and a “flexible” labour market.

Implications for real estate

The most obvious effects of this shift are on the retail sector. For a long time, young consumers have been viewed as the main drivers of demand for retail properties, a belief demonstrated by the high proportion of youth-orientated shops on high streets and in shopping malls. Nowadays, however, the young have less disposable income. In February, a report from the Resolution Foundation, an organisation that investigates UK living standards, said that those born in the UK in 1980 earned 13% less at the same stage in their lives as those who were born a decade before.

At the same time, young consumers are leading the demand for e-commerce. Therefore shopping environments that relied on the footfall of younger age groups are facing a fall in demand. Meanwhile, older people may have more wealth, but are not usually associated with high consumption of goods.

Retail owners must adapt and broaden their appeal to attract the broadest range of consumers. The challenge is to create high quality malls and town centres that offer a range of shops, services, restaurants and leisure facilities. For many locations, this will not be easy. The process of transformation may require specialist management and significant capital expenditure in an increasingly uncertain environment, in the face of lower and more variable income streams.

Renting increases its appeal

More positive for real estate investors is the scale of growth in demand for residential rental properties and a shift in attitudes towards renting. According to a report published this year by the Institute for Fiscal Studies, 65% of middle-income earners in the 25-34 age bracket owned their own homes in 1995-96. Two decades later and that figure had fallen to just 27%. For some, the financial barrier of buying a house makes renting a necessity. But even more might choose to rent if they were offered a professional, secure option.

In the UK, private residential renting is projected to rise from 21% of total households in 2017, to around 24% by 2021, according to real estate consultancy Knight Frank’s 2017 Multi-housing Report. Currently, most properties are owned by individuals or private landlords, but we expect a transition to the professional private rented sector (PRS). This is a model that is long-established in the US and Germany, involving well-designed and well-managed accommodation blocks, long-term leases, perhaps controlled rents linked to inflation, and desirable amenities such as gyms, cafés and wifi.

The secure long-term rental streams of PRS can offer an attractive opportunity for investors. The longer the rental, the lower the management costs, and the better operational- and cost-efficiency both for residents and landlords.

There is a need for affordable housing options for the young and less affluent. At the same time, landlords of more upmarket properties can target an increasing number of wealthy potential renters. Another recent report from Knight Frank showed that there was a 34% increase in London’s super-prime tenancies (with rents above £5,000 per week) in 2017 compared to the year before.

Office spaces are also changing

The market for office property is also influenced by millennials’ working ideals and assumptions that they prefer flexible, open, workspaces where they can share ideas and collaborate. Lately, office space transactions have come to reflect a rapid urbanisation of occupational demand at the expense of out-of-town business parks.

Young workers recognise the appeal of strong urban environments; so, too, do their employers, and this is reflected in the recent location decisions of major tech businesses, eager to attract and retain young and educated talent. In the US, job growth is increasing (albeit modestly) in city centres, but falling in the suburbs according to a study of 500 companies carried out by Smart Growth America in 2015. It reflects the desire to be close to vibrant leisure, retail and transport hubs. In our opinion, investors and developers who provide collaborative hi-tech workspaces that offer the right mix of services are more likely to secure high quality occupiers and rents.

Despite the changes that the asset class is undergoing, our outlook for property remains neutral and we continue to view it as a source of stable returns for investors, providing a useful balance to investment in other asset classes such as equities and bonds.

Important Information

Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at July 2018. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

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