‘Real Matters’ provides the latest insights and thoughts from the Janus Henderson Global Property Equities Team. In the fourth article in the series, Tim Gibson, Guy Barnard and Greg Kuhl discuss the issue of an ageing population and how REITs can provide a way to capitalise on this demographic trend.
The ‘silver tsunami’ metaphor is frequently used to describe the ageing of the baby boom generation – those born from approximately 1946 to 1964. According to the United Nations Population Division, over the next 25 years the global population of people aged 65 and older will double to almost 1.3 billion. In the US, they account for nearly 25% of the population and are the country’s second-largest demographic group. In China, the scale of this issue is such that the authorities relaxed China’s one-child policy in 2015, due to concerns about the 4-2-1 problem of one child caring for two parents and four grandparents.
Clearly, the needs and desires of this cohort have been a driving force in shaping many aspects of today’s economy and society. It should come as no surprise that baby boomers remain a key demographic for real estate owners. In real estate, conventional wisdom seems to be that those businesses directly associated with healthcare delivery, such as senior living facilities, are best positioned to benefit from the silver tsunami. This may explain why the assisted living industry has seen an explosion in new development, with total available supply increasing by more than 4% a year over the past five years. Unfortunately, however, this development is being completed well ahead of the demand to fill it. Brookdale Senior Living, the largest senior housing operator in the US, has an average entry age of 85 years in its assisted living facilities, yet the oldest baby boomers in the US are turning 73. We expect senior housing, which accounts for the largest portion of US healthcare REIT asset value, to remain challenged for several more years as supply growth is set to continue outpacing lagging demand.
There are other areas within US REITs that are better positioned, in our view, to ride this demographic wave today and over the medium term. We believe early retirement-focused manufactured housing communities are the clearest winners from baby boom demographics – and they are meeting the needs of households today, not ten years from now. These communities are home to relatively young, independent, and fun-loving recent retirees, with an average entry age of around 60 and an average tenancy of longer than 10 years. With baby boomers ranging in age from 55 to 73 and 10,000 Americans turning 65 every day until 2030, this property type is uniquely positioned to benefit from a large and growing demand pool. Importantly, little to no meaningful new development of manufactured housing communities is expected, creating an extremely favourable environment for owners of these assets.
Source: Sun Communities, Palm Creek, a 55+ community in Arizona
The Janus Henderson Global Property Equities strategy owns REITs that are focused on this specialised property type, including Sun Communities, which is a significant position across our portfolios. Sun’s housing communities are 96% occupied and the strong demand environment has led the company’s management to forecast a 6.6% increase in ‘same store’ property operating income for 2019, representing one of the strongest growth profiles available in the REITs market.
Given the global nature of these trends, we are also looking for investment opportunities in other markets. In Japan, a country well known for its ageing population, we are seeking to capitalise on this trend through an investment in Tokyo-based commercial property specialist Hulic. Part of Hulic’s business model is to develop and invest in nursing homes and other senior housing facilities, offering a high-end differentiated product.
As a team, we continue to focus on those cities, sectors and companies that are benefiting from these demographic trends, as well as structural shifts driven by technological advances. For those REITs able to benefit from the trends associated with an ageing population, it may well prove to be a silver lining for earnings.
Portfolio holdings are correct at 28 February 2019 and may be subject to change.