Research article

The drivers

sector overview

The way people live is changing, social trends and demographic shifts are altering the type of accommodation people inhabit. This is driving demand for ‘alternative’ forms of accommodation

The rise of Gen Y (and Z)

Generation Y (or millennials) are those born between the early 1980s and the turn of the millennium, aged 15 to 34 (although there is no exact definition). By 2025, this group will comprise over half the world population and account for 75% of its workforce. Understanding their needs and aspirations is therefore important as they become a major real estate occupier.

Characteristics of Generation Y:

  • Increased use and familiarity with digital technology
  • More likely to be single than those of older generations
  • Delays moving out of the family home and ultimately more likely to rent
  • Favours city living
  • Came of age and entered the job market at the outset of the Global Financial Crisis
  • Footloose and moves jobs regularly
  • More liberal approaches to politics and economics
  • Better educated than its predecessors

While Gen Y are the first generation to be familiar with digital technology, Gen Z (the demographic group that follow them) are the first to grow up with such technology as the norm. In 2018, there were 82m Gen Zs in the EU compared to 99m Gen Ys. Similar to Gen Y, Gen Z is thought to be liberal and are likely to end up staying at home, or renting, for a long time.

Growing up during the Global Financial Crisis (GFC), they are generally more price-conscious than Gen Y as a result. City-living, globally mobile, and settling down much later in life, flexible rental products are a natural fit for these groups as they come of age.

Housing affordability

Housing affordability has become a major global issue since the Global Financial Crisis, partly because mortgage lending has been significantly curtailed by regulation. Gen Y, usually needing the highest loan-to-value ratios and loan-to-income ratios, are most affected. This generation is finding it ever more difficult to raise sufficient equity for a deposit to buy their own home.

By contrast, equity is concentrated in older generations through a history of home ownership, mortgages and price rises. For those lucky enough, the ‘bank of Mum and Dad’ has become an increasingly important source of deposits for young people in the West. The chart, below, shows affordability in selected global housing markets. Housing in Mexico and Latvia is the most affordable among the countries sampled, where average wages exceed 40% of the average house price. At the other extreme, average wages are just 6% of average house prices in Switzerland.

Average national wage as a share of average national house price

Average national wage as a share of average national house price
Source: Savills World Research and OECD

In the US, the ratio is 29%, but major cities are far less affordable. In San Francisco, New York and Los Angeles, the very cities young generations are flocking to, median household income to house prices are around 10%.

As a consequence, Gen Y increasingly turns to the private rented sector for accommodation. Around one-third of the population in Anglophone countries now rent, while those with a shorter history of widespread owner occupation have always experienced higher rental rates. Owner occupation rates in Austria, Germany and Switzerland for example, are all under 60% (see chart below).

Population split by tenure status

Population split by tenure status
Source: Eurostat, ABS, Statistics Canada, Stats NZ, US Census Bureau

The policy challenge across the developed world is how to deal with a generation of renters unable to access housing unless they receive a legacy from older generations. The focus is will be on how to provide the secure, rented accommodation needed now and for future generations.

Things look different for China

While the young generations of the West have felt affordability constraints most acutely, a study by HSBC found that 70% of Chinese Gen Ys are homeowners. China’s previous one-child policy and a historically high savings ratio have meant that the younger generation have been able to draw on equity accumulated not only by themselves but by parents and grandparents. This trend, however, may be rapidly drawing to a close as house prices especially in key cities outstrip savings of those not on the housing ladder, precipitating a similar “have” and “have nots”, as seen around the world.

The Chinese government is actively promoting the multifamily rental sector, selling plots designated for rental development at much cheaper rates than those earmarked for the sales market. Three key models have emerged, namely purposely built development, repositioning and refurbishment of existing properties as well as a managers or secondary landlords for individual owners. Ziroom, a company that operates the latter format, currently has more than 500,000 units and is targeting one million units by the end of 2018.

Ageing populations in the developed world

As Gen Y comes of age and enters the housing markets and workforce at scale, their parents, the Baby Boomers, are retiring and entering a new life-stage too. The global population aged 65 and above will rise from 612 million in 2015 to 1.5 billion by 2050. Pacific Asia represents 64% of this growth.

For Japan, this trend is already a reality. Over a quarter of the population is over the age of 65, and by 2030 the share is expected to reach 30%. China, thanks to its one-child policy, now has a rapidly ageing population, forecast to have almost 300 million over 65s by 2035, up from 160 million today.

Italy, Spain and Germany are fast-ageing European countries, where more than 30% of the population is forecast to be over 65 within the next few decades. Together they will have an extra 13 million over 65s than there are today by 2035.

This creates economic challenges for national governments as dependency ratios rise. It also underpins demand for senior housing, but not necessarily in the same form we see it delivered today. Living healthier, for longer, the new ageing demographic want to live independently. They want many of the same things Gen Y is looking for; a place where they can be exposed to new trends, access restaurants, and importantly, good healthcare. Many want to be close to their grown-up children, who are navigating national and international labour markets. New, flexible residential models are emerging to serve them.

The demographic time-bomb by country

The demographic time-bomb by country
Source: United Nations Population Division (assuming medium fertility variant)

The most, and least, youthful European cities and regions in 2028

Youthful Europe % population aged 20-39 in 2028

Youthful Europe % population aged 20-39 in 2028
Source: Savills World Research using Oxford Economics

European cities to watch

Demographic trends at a national level tell only part of the story. While some countries are ageing rapidly, certain regions and cities within them continue to attract young people who migrate to urban areas for employment and lifestyle reasons.

For example, the former East Germany is forecast to have one of the highest proportions of over 65s in Europe by 2028, accounting for 32% of the population. Berlin, at its heart, however, is set to remain one of Europe’s younger cities; 23% of Berlin’s population is forecast to be over 65 the same year.

As a percentage of total population, Europe’s most youthful cities in 2028 are forecast to include Edinburgh, Toulouse, Copenhagen and Stockholm (see map above). Vibrant urban environments, large higher education sectors and the availability of skilled jobs make them magnets for young, globally mobile individuals.

Aged Europe % population aged 65+ in 2028

Aged Europe % population aged 65+ in 2028
Source: Savills World Research using Oxford Economics

These cities, small by global standards, offer residents city living on a compact footprint: shorter commutes, easier access to amenities and a better work/life balance. They offer significant potential for residential product targeted at a wide range of young people.

By contrast, some cities present specific opportunities for senior housing based on their forecast demographic profile. Spain has witnessed lower levels of in-migration in recent years as many young workers have left the country for opportunities elsewhere. The larger Spanish cities of Madrid and Barcelona are forecast to have an over 65 population of 1.5 million and 1.1 million respectively by 2028 (23% and 24% of their total populace).

As a proportion of total population, Europe’s most ‘aged’ cities in 2028 are forecast to include Dresden, Genoa, Bilbao, and the Nice-Cannes conurbation (see map above).

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