International Investing: A Global Demographic Primer
Mueller, Paige, Ball, Asli, Journal of Real Estate Portfolio Management
For many institutional investors, real estate is a long-term investment. So while near-term changes in economic, property and capital market conditions impact our daily decision-making processes, long-term trends help create a framework for decisions regarding portfolio growth, allocation, exit strategies, and investment performance. As new investment vehicles become available, many real estate investors have started looking outside of their national boundaries, although investors from geographically-constrained countries have been investing in real estate outside their countries for many years. Analysis of a new country for real estate investment usually starts with a review of political, economic, legal, and capital market structures. After this initial review, analysis of demographic short- and long-term trends, are important determinants of real estate demand. Long-term demographic forecasts also give us some glimpse of which markets-and on a global basis, countries-will produce strong demand for real estate, which may reach a turning point that could necessitate changes in policy or behaviors, and which will be more suitable for particular property types.
In the long run, demographers suggest that the global marketplace could be quite different 10, 20, and even 50 years from now. But when looking at the future, it is important to remember that future events are not always so easy to forecast and the longer the timeframe, the larger the margin of error. While investors often assume that events will continue on a smooth trajectory or return to a historical average, history suggests a path that is not necessarily so smooth. In addition, major events sometimes create a change of path and these events are not so easy to forecast. Even the basic population forecast has not been without error; for example, the baby boom/bust and the impact of HIV/AIDS on populations in Africa. For this reason, it is necessary to constantly re-evaluate the current trends, as well as investment assumptions and models.
So given the above caveats, what can we learn from our demographer colleagues about the future of real estate? While a complete analysis would be worthy of an entire book, this paper focuses on a couple of the larger issues: the distribution of global population growth and a short synopsis of aging populations.
The Global Scene Now (and a Very Truncated History)
Our generation has already experienced a doubling of global population from about 3 billion in 1960 to more than 6 billion in 2000-a relatively short time period given that it took 118 years to double from 1 billion around 1805 to 2 billion. The United Nations (U.N.) forecasts that population growth will slow, but bring world population to 8 billion by 2030 and 9 billion by 2050. These numbers represent a growth rate going forward (0.8% per annum on average) that is half the pace of the past fifty years.1 While this topic alone is deserving of lengthy study, we relegate most of this discussion to the References section for further reading in the need for brevity (see the U.S. Census Bureau publications in particular), and limit discussion here to the difference between the developed countries and the developing countries.
Improved living conditions and healthcare have led to longer life spans throughout most of the world during the past 50 years. Conversely, changing social, educational, and economic conditions have caused birth rates in the developed countries to drop precipitously. Thus population growth has slowed considerably in most of the developed world. A noticeably different pattern can be seen in the least developed countries where birth rates remain high and life expectancies are not only half that of some long-lived Asian countries, but in some cases, are declining.2 As a consequence, the U.N. forecasts that 99% of population growth3 through 2050 will be in the developing countries while the percentage of the global population living in the developed countries will decline to 14% in 2050, from 20% in 2000 and 32% in 1950 (Exhibit 1). …