The Silver Lining: The impact of an ageing population on the global property market

The world is on the brink of a seismic demographic shift. Today, people aged 60 and over make up 12.3% of the global population but by 2050 that number will have risen to an estimated 22%[i]. In some parts of the world – such as Canada, China and Chile – people over 60 are estimated to exceed 30% of the total population[ii].

Better nutrition, economic well-being, sanitation and healthcare have meant that we are living longer than ever before. In many places, the ageing population has highlighted issues of independence, or perhaps more correctly, dependency. These issues are illustrated by trends within the global real estate market, which has reacted swiftly and creatively to the opportunities presented by the ageing population.

The problem in Japan
In Japan, more than a quarter of its population is aged over 65. Moreover, the population is shrinking as well as ageing. New census figures in Japan show the population has shrunk by nearly one million in the past five years, resulting in a stagnating economy[iii].

In part, Japan’s woes have stemmed from a lack of immigration and an unwillingness to encourage it. Japan also struggles with low birth rate: Japanese culture remains such that women commonly see family and career as an either/or situation – childcare outside of the family is uncommon and secure jobs are scarce, meaning that for many young people, having a family of their own is seen as a career risk; and for women, a sacrifice.

Japan’s population has aged so rapidly that the infrastructure with which to deal with the situation is inadequate. House prices in Japan are now at roughly half what they were at their peak, in 1990: an ageing and shrinking population means that demand is simply not there[iv]. And it is precisely the reaction of Japan’s real estate market to the ageing population that the rest of the world is seemingly making an effort to avoid.

Looking West
It is unusual for people in the West to live many generations under one roof, meaning that people are more likely to find themselves living alone or with a spouse in their later years. In the Netherlands for example, the “silver generation” is encouraged to remain independent for as long as possible. Population ageing has increased pressure on state health provision: state-funded care homes put huge pressure on tight government budgets. Political pressure, as well as cultural norms, mean that the elderly remain living independently for as long as is feasible.

The silver generation therefore present an opportunity for property investors - one promoted by the Dutch Government. Having profited from a lifetime of low interest and rising stock prices, older generations in the Western world have accumulated substantial wealth. Indeed, by the end of this decade, the spending power of consumers aged over 60 will hit $15 trillion globally, up from $8 trillion in 2010[v]. 

Thus, there is a market for properties that offer a higher level of service than we have previously seen. In the Netherlands, much of the existing property is old and cannot facilitate the high level of healthcare servicing that these properties require: the properties must be newly built and high-spec, catering to a growing generation of wealthy people. Thus, the opportunity for global property investors is clear.

An interesting knock-on effect of this trend is that these serviced properties have married the world of healthcare and property development for the first time, the implications of which will be interesting to note as they are unveiled.

Moreover, in Northern Europe we can increasingly see in influx of “kangaroo houses” – dwellings that feature an additional smaller property attached. Unlike in Southern Europe, India or Southern Asia, it is uncommon for grandparents in Northern Europe to live alongside parents and children. Now, however, these kangaroo properties are increasingly common.

Developments in care
Another aspect of the ageing population is its impact on the care industry. Many elderly people are physically healthy, so do not need or wish to leave their homes, but do require some help.

As a result, we see the trend of local community buildings offering housing services, which enable the elderly to remain in their homes, whilst having access to 24/7 care and support. This trend can be witnessed not only in the Netherlands but also in Switzerland, Austria, Germany, Belgium, the UK and the US.

Student housing
A further consequence of the ageing population is a new type of student housing. Across the world, students struggle with finding reasonably priced accommodation, particularly in densely populated cities where housing prices are already high, such as New York, London or Amsterdam.

Students are often cash poor but time rich, whilst the elderly are better off but starved of company. Hence the trend for purpose-built properties that offer students low cost accommodation in exchange for their time: students living under the same roof as elderly people, providing basic care and, importantly, company.

This development seems to have originated in the Netherlands but has spread to the US. Pairing programmes offer US students the chance to move rent-free into retirement homes. Lagging slightly behind is the UK where home-share schemes – whereby students live for free at the private residence of an older person, in exchange for chores performed and time spent in company - are popular.

The purpose-built properties popular in the Netherlands are not yet widespread globally. Nonetheless, with the ageing population on the rise, it will be interesting to mark property investors reaction to the trend worldwide.

Tax and legislation
Although the ageing population presents opportunities for property developers across the globe, in this case, tax legislation is yet to catch up with trends in real estate market. EU VAT legislation dictates that the care and cure industry remain exempt from tax, while real estate transactions remain taxable – making investment in elderly care property a complicated process.

Such VAT exempt turnover does not allow for deduction of input VAT. So new development of elderly housing, triggering VAT on construction costs, affects the business case for investors. Moreover, influenced by EC tax jurisprudence, the Netherlands expects a law change in January of next year regarding land destined for construction. Solutions may be available in redevelopment of existing properties in such a way that VAT costs are limited; a process requiring careful planning and possibly rulings with the tax authorities.

In the Netherlands new legislation is expected to be implemented soon for commercial organisations who carry out medical care for those living in accommodation like a nursing or elderly home. These organisations are allowed to apply a VAT exemption on their care services, but not for provision of food and beverages. 20% of the monthly payments made by the residents goes toward sustenance, this figure is fixed by tax authorities. This means only a limited part of the VAT on the building costs and other investment costs is deductible.

When the new legislation comes in to effect, all services including food and beverage provision will be exempt from VAT, meaning no input VAT will be deductible anymore. This will not only impact future costs and investments, but will also be applied to investments made in the past. The EU Council Directive 2006/112/EC states that the initial deduction shall be adjusted if the deducted VAT is higher or lower than that to which the taxable person was entitled. In the Netherlands this means VAT on building costs, renovation or new immovable property, will have to be paid back over a period of 5-10 years which may impact investors decisions.

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[i] https://www.unfpa.org/ageing 

[ii] https://www.helpage.org/global-agewatch/population-ageing-data/population-ageing-map/ 

[iii] Japan Statistics Bureau via https://www.bbc.co.uk/news/world-asia-35666274 

[iv] https://www.todayonline.com/voices/ageing-population-key-direction-property-market 

[v] https://www.pgim.com/wps/wcm/connect/3e2539e2-a5e8-4328-8aca-3b54104d0a44/Longevity+paper+-+ADA+-3-21-16.pdf?MOD=AJPERES