Identifying the opportunity presented by longevity
This article first appeared in Portfolio Institutional.
It’s no secret that the UK population is ageing. According to the latest figures from the Office of National Statistics (ONS), a fifth of the UK population is now 65 or over. This age group is expected to grow four times faster than the general population over the next five years, as people live healthier lives for longer.
Though this is undoubtedly a good thing, a major demographic shift of this kind will inevitably have some challenging consequences. Nowhere is this more apparent than with the final-salary pensions schemes struggling to plug deficits which are, in part, being widened by increasing longevity.
In an age of low-interest rates, finding assets which have the right risk-return profile to match the increasing life-expectancy of members is a challenge. But, increasingly, many pension funds – both in the UK and internationally – are recognising that there is another side to the coin, and that an ageing society presents not just an investment challenge, but also an investment opportunity.
To understand this, it is important to consider the underlying drivers of the UK retirement property market. In 2009, the Department of Health commissioned a report to consider the housing needs of an ageing population. It determined that innovation in retirement living was a national priority and that retirees should be provided with better choice through a greater range of housing opportunities.
Research conducted by Knight Frank last year found that a quarter of over-55s would consider moving into purpose-built retirement housing in the future, representing a pool of demand of nearly two million homeowners. Yet, the same research found that private retirement housing accounts for only 0.06 per cent of all dwellings in the UK.
This was reinforced by our own Octopus Healthcare research which found that over two-fifths of people aged 65 and over believe there is a lack of suitable properties to downsize to.
With an emerging pool of demand representing £820 billion of property wealth, and a chronic undersupply of suitable real estate, the need for investment into the UK retirement property market – both in the form or retirement villages, care homes and even GP surgeries – is vast, but so too is the opportunity.
It is this level of sustained and increasing demand, combined with stable, long-term indexed-linked income profiles and favourable pricing relative to alternative sectors, that makes retirement property an increasingly attractive opportunity for institutional investors.
In many ways, it’s a virtuous circle – pensioner money funds improved living conditions in retirement, and the associated income stream goes back into the pot to match the scheme’s liabilities.
The benefits could also go beyond the scheme and members. Freeing up the housing stock held by retirees could, by some estimates, lead to nearly 8 million bedrooms becoming available and would go a long way towards addressing the UK’s housing shortage.
When it comes to an ageing society, challenges are often cited. But increasingly, the benefits for investors, retirees and society are being recognised, and institutional investors are at the forefront of turning this challenge into an opportunity.
Visit the Octopus Healthcare website to find out more.
Octopus Property and Octopus Healthcare merged to form Octopus Real Estate.