Q&A: BlackRock readies real estate strategy for ageing world

Global demographic shifts are so big that they “upend” the outlook for real estate, according to BlackRock, the world’s largest asset manager.

Its paper, The real estate implications of an ageing population, outlines how changing demographics will have a “profound” effect on the performance of real estate over the next five to 10 years. In the next two decades, it says, higher median ages across regions will drastically alter the real estate investment landscape.

BlackRock’s research team expects certain geographies and property types to benefit from the demographic shifts, including apartments, healthcare real estate and necessity retail. The functions of some real estate, like shopping centres, are being reimagined for newer uses, including healthcare centres. Dubbed ‘med-tail’, this form of conversion has already started in the US and is being slowly adopted in other regions, including in Asia-Pacific.

Although many believe catering to the swelling ranks of seniors will dictate trends in real estate investment, others are mindful of the impact on existing stock – for example, the effect of a dwindling working population on the office market, or the need to accommodate people opting to work longer, delaying retirement because of a longer life span and better health.

IPE Real Assets seeks answers to some pressing questions facing the real estate industry from Simon Durkin, global head of real estate research and strategy at BlackRock.

How will ageing demographics change the real estate landscape?

We expect ageing demographics to change how people live and work and their subsequent requirements from the built environment. Investors need to look to where these shifts are likely to play out and to participate as early movers in the relatively nascent sectors that will grow in importance as the demographic composition of these countries shifts. 

How will the ageing of populations in Japan, Australia and other countries in Asia-Pacific have an impact on real estate?

Real estate is a pro-cyclical asset class, as higher levels of growth correspond to higher real estate performance. Although an ageing population is typically associated with slowing growth, the Asia-Pacific region is well positioned for accelerating growth relative to other regions. Markets we invest into – namely Australia, New Zealand, Japan and Singapore – benefit from being ‘on the doorstep’ of the engines of growth of China and India without taking the additional specific market risk.

We expect the demographic shift, characterised by an increasing proportion of elderly citizens due to declining birth rates and rising life expectancy, to influence various real estate sectors in several ways.

The first, is the growing demand for senior housing. Specialist housing provisions will become more important. Being well positioned in this space will enable investors to capture the acute supply-demand imbalance in this part of the market. For example, in Japan, the elderly account for nearly 30% of the total population. This is expected to rise to 38% by 2040, creating a huge demand for this product, according to the Japan Statistics Bureau.

The second is retail and services tailored to seniors. Retail spaces may evolve to cater to the needs of older consumers, with products and services designed for this demographic. This may include wellness facilities and healthcare centres. 

The third is childcare and education facilities. Shifts in family priorities, where more women are entering the workforce in the region, will boost investment opportunities in high-quality daycare and after-school education centres.

It is worth highlighting that not the entire Asia-Pacific region is characterised by an ageing population. In Australia, there is a young, growing population with a healthy workforce. According to the Australian Institute of Health and Welfare, as of June 2023, Australia’s population reached 26.6 million, an increase of 634,000 from the previous year, with the age 20-29 demographic experiencing huge growth. This has increased the need for childcare provisions and housing in this market. The differentiated nature of demographics playing out in Asia-Pacific makes it an attractive investment proposition. 

Can you provide some examples of changes, especially in Asia-Pacific?

A rise in assisted living and senior living and changes to residential living – older generations are often keen to downsize and potentially move to more suburban areas. There will be increased investment in healthcare-linked real estate and more initiatives to stimulate work from the non-economically productive in society. Growth in pharmaceuticals and requirements for innovation will lead to higher demand for life sciences. And changing workforce dynamics will create a scenario where it is likely we will see people working for longer; as such, offices will need to become more age-friendly. 

Will opportunities coming from the ageing of baby boomers differ from region to region? For example, will they be different in the US versus Japan or Australia?

While there are similarities in the opportunities arising from the baby-boomer generation, such as the demand for multifamily housing, such opportunities will vary between regions due to differences in cultural norms, economic conditions, healthcare systems and demographic trends. 

According to Oxford Economics in Japan, one in seven employees is deemed ‘elderly’ – they will have different requirements from their workplaces, and occupiers will need to account for this.

For example, from a cultural perspective, in Asia-Pacific, multi-generational housing is more so the norm than in the US; hence, demand is likely to increase. In the US, we also see retirees with greater disposable incomes. This is driving demand for travel, recreational real estate and resort-style retirement communities.

Do you expect the emergence of med-tail opportunities outside the US – for example, in Asia-Pacific?

This is starting to play out, but the sector is in its relatively early stages. We are seeing a lag for other alternative sectors that have matured in the US and Europe, such as life sciences and medical facilities. We expect Asia-Pacific to follow a similar positive route to maturity.

Does senior housing in Asia-Pacific offer better investment opportunities, albeit with higher risks?

It offers an attractive investment opportunity in that the demographic changes in the region are akin to a growing demand pool while there is a limited supply of suitable stock. There are still significant opportunities in other regions, but we are observing a similar demographic shift, and the sector remains in its relative nascency.

It is critical to focus on bottom-up asset and submarket selection alongside the top-down market shifts when determining our investment strategies. Understanding local supply-demand and demographics is critical.

Are Japan and Australia the markets of choice for BlackRock?

We invest in the most liquid and transparent markets. For example, Australia, Japan, Singapore and New Zealand are ranked as ‘highly transparent’. The top set of 13 highly transparent countries have attracted over US$1.2trn (€ 1.16trn) in direct commercial real estate investment over the past two years, representing over 80% of the global total, according to JLL.

These countries are positioned to lead the cyclical recovery in liquidity. This enables us to access the growth in the region without creating risk associated with targeting emerging markets.