By Christopher Deves, Client Portfolio Manager, Global Listed Real Estate, AMP Capital
The ageing populations in Japan, China, Korea and elsewhere in Asia signal the potential emergence of senior living real estate as a large, investible sector in the region where, today, there is virtually none.
The greying of Asia is a much discussed challenge for the region. The social changes and improvements in healthcare that accompanied rapid industrialisation and economic growth have been key drivers behind lower fertility rates and higher longevity. In turn, this combination has led to the significant demographic transition towards aged populations.
Japan’s situation is well recognised given that it already commenced its transition to an aged population around 20 years ago. China commands attention as a result of its sheer size but also due to the debate that surrounded its approach to population control through the now discontinued One Child Policy. Korea’s demographic outlook is perhaps less widely appreciated despite its status as the fastest-ageing society in modern history.
As a result, it may be useful to look at how senior living real estate in Asia could emerge as an investment class and how it can be accessed through listed markets elsewhere in the world.
Congregate care stands out among senior real estate types
Shifting demographics and a broad supply gap indicate the congregate-care model, the backbone of North America’s senior living market, could hold investment potential in Asia.
In North America, the congregate care property type has emerged to fill an obvious gap for those seniors who needed more assistance than is available in a retirement community but less care than is provided in heavily medical service-oriented skilled nursing facilities.
This segment has been particularly attractive for operators and real estate investment trusts (REITs) as it offers higher profit margins than skilled nursing, which is subject to a greater degree of regulation and requires a more operationally intensive business model. In addition, congregate care is overwhelmingly based on a private pay model, which again offers more attractive margins, rather than social security or government subsidies due primarily to the lack of a federal program.
However, given cultural variances between North American and Asia, is it reasonable to expect that senior living real estate assets develop, let alone securitise, in places like Japan, Korea and China?
The answer harks back to the issue of demographics. The self-same force that is driving an increase in the demand for senior living real estate is also driving major pension reforms in these countries. China introduced a legislative framework for externally funded corporate pensions in 2004, known as Enterprise Annuities (EAs), which are defined contribution schemes. The EA market currently stands at around US$100 billion in assets and is forecast to grow to US$600 billion by 2020.
Korea first introduced its corporate pension framework in 2005 and initiated a number of enhancements in more recent times including tax incentives, expanded coverage and less restrictive investment parameters. Its corporate pension market also currently stands at around US$100 billion in assets, having trebled in the past five years alone, and the bulk of future growth is to come from the defined contribution segment.
Japan is already the third largest pension market in the world with almost US$3 trillion in assets following a range of reforms in the mid-2000s. It is also home to the world’s single largest pension fund – the Government Pension Investment Fund – with around US$1.2 trillion in assets. Historically a defined benefit market, Japan is also beginning to shift towards defined contribution schemes.
The upshot is that each of these markets has a large, growing pool of domestic capital that will assuredly look to invest part of the portfolio in domestic real estate. In addition, since much of this capital will be held in defined contribution schemes, there is also an important liquidity requirement. This suggests very strong, long-term structural demand for local listed real estate investment opportunities and, in turn, the development or enhancement of local REIT frameworks.
What does this mean for investors?
The potential emergence of senior living as a large, investible sector in Asia underscores how real estate can provide investors with access to some of today’s most meaningful, long-term trends.
Structural shifts of this nature will inevitably produce leaders and laggards, trailblazers and holdouts, winners and losers. In addition, as is the case with senior living real estate, a trend might be new to a particular region but have been seen before elsewhere in the world.
As such, expertise matters in picking winners and understanding trends as they become increasingly global.
Listed real estate investment managers able to tap into experience and information across regional bounds within the same global team have a distinct advantage especially if cross-border activity is anticipated from established players in mature markets into the new frontiers.
Investors should therefore consider managers who are set up to generate and share local insights by design, with a clear focus on building a genuine global portfolio.
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