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The great demographic shake-up

Goola Warden, Bryan Wu and Thiveyen Kathirrasan
Goola Warden, Bryan Wu and Thiveyen Kathirrasan • 17 min read
The great demographic shake-up
Commuters wait to board a train in Mumbai, India. The country’s population is fast catching up with that of China at 1.4 billion / Photo: Bloomberg
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The growing proportion of older people has hit historical proportions in the developed world. This has huge implications on how people invest


The biggest demographic changes in Asia have taken place this year. China’s population is believed to have peaked. On Jan 17, the country’s National Statistics Bureau announced that its population had fallen by 850,000 in 2022, with a national population growth rate of –0.6 per thousand.

According to the United Nations Population Prospects report, India’s population was estimated to be at 1.417 billion at the end of 2022. In January, China’s population stood at 1.412 billion, marginally lower than India’s.

We have seen demographic issues of this ilk before, with fertility rates declining as the population ages. Fertility rates in Japan, South Korea and, of course, Singapore are among the lowest globally.

In a 2022 report, Jefferies points out that Asia is home to half of the top 10 fastest-ageing countries in the next five years, with Japan, South Korea, Singapore and China particularly affected. “Japan is a country at the leading edge of this demographic change as the total population peaked in 2009 and is now in sharp decline. But its annual growth rate started to shrink back in the 1970s,” Jefferies adds.

The fear for East Asian-majority countries is that the Japanese experience will become a blueprint for the future. Japan may be an economic power but it has an impending problem. Its debt to GDP is rising, particularly now that inflation is picking up. This is happening without the deflationary impact of China, because the latter is no longer a low-cost manufacturing centre with its endless chain of cheap young workers, as its demographic slant is looking increasingly like Japan’s, according to Jefferies.

See also: ISCA launches ‘fast-track route’ for local accountancy undergraduates to become Chartered Accountants of Singapore

Interestingly, Japanese companies did what Chinese companies are doing now — moving production to economies with surplus labour such as parts of Asean. In addition, Japanese companies realised that China’s integration into the world economy after its accession to the World Trade Organization (WTO) in 2002 would produce a large market of its own.

Property problems?
The impact of a shrinking population on the property sector is obvious. Fewer people lead to fewer households forming and lower demand for homes. This will have wider ramifications for an economy like China whose banks currently get 40% of their earnings from real estate loans, and where 60% of household assets are tied up in properties.

See also: Singaporeans more likely than global peers to overspend, only 43% feel good about daily finances: Fidelity International

As it is, by some statistics, China is already home to the single largest number of retirees; some 250 million people are over 60 and the median age of the whole population is already 48 years old and rising. “Its birth rate is falling at a double-digit CAGR in line with marriages. Household formation has stalled and is falling,” the Jefferies report says.

No surprise then, that China may already have enough housing to meet its future needs. “The mistake would be to carry on building regardless as Japan did in the late 1980s. If the construction rate continues in China as demand softens, then there is a real risk that prices could roll over significantly and cause a Japan-style correction, and that could significantly impact China’s future economic growth outlook,” Jefferies says.

An ageing population, coupled with a low birth rate, is an economic burden although places like the US, despite its many faults, continue to attract global talent.

In December 2022, the US Department of Homeland Security projected that between 9,000 and 14,000 migrants may attempt to cross the US southern border daily. Global top talent is also attracted to the US. Silicon Valley in Northern California gets its name because of an agglomeration of tech talent in the area. If a falling population is a demographic drag, the US does not suffer from that. From 2020 to 2023, the US expelled two million people.

Singapore too has taken a leaf out of US policy by attracting talent to these shores. The move has been so successful that the government is raising the investment sum for its Global Investor Programme, which, for one, requires that foreigners bring in $10 million to invest instead of just $2.5 million previously if they are to attain permanent residency. So far, no such clamour to enter China has materialised.

People looking for better lives continue to flock to the ideological West. Stephen Kotkin, the Kleinheinz senior fellow at the Hoover Institution and a senior fellow at the Freeman Spogli Institute for International Studies at Stanford University, defines “the West” not as a geography but as a series of institutions and values. “‘Western’ means rule of law, democracy, private property, open markets, respect for the individual, diversity and pluralism of opinion,” he says.

Growth reaches stall speed
A declining population affects not just property — real estate comprises around 30% of China’s economy — but economic growth in general, and possibly capital markets. No surprise then that China’s National People’s Congress is forecasting 5% growth in 2023. But it appears increasingly likely that China could grow old before it gets rich.

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In a Feb 23 report, Bank of America (BofA) Securities says that China’s population decline is likely to continue. “The contraction in coming decades is inevitable, given the falling population of females at fertility age and a potential decline in the already low total fertility rate (TFR), which stood at 1.3 in 2020 according to the census and 1.18 in 2022 according to the UN estimate, way below the replacement rate of 2.1. We assume the TFR will gradually decline to 1 by 2050, where Singapore is today,” BofA says.

In August 2022, the Chinese central government introduced a policy package to boost births pledging to improve public services such as healthcare and childcare as well as to offer priorities on public housing to bigger families. Local governments have since followed suit, rolling out home purchase subsidies or allowances for families with multiple children.

“The current fiscal situation won’t allow a substantial nationwide childcare allowance. In addition, the effect of such policies will be to slow the fertility rate decline, we believe, rather than spur a reversal,” BofA says, referring to Chinese government policies.

On the other hand, more educated workers, continued urbanisation and technological innovation would raise productivity. “The government’s recent measures to spur technology upgrade in the manufacturing sector will also likely help support the productivity gain. We believe potential policies to allow and facilitate mobility among the different regions of the country will also help boost efficiency,” BofA says.

Demographics and investment trends
Demographics have a direct bearing on investment trends. Different generations have different views on how and where they should put their money to work. Add geographical differences to the mix and there is a lot to ponder.

For example, property looms large for East Asian investors. Since the 1960s, following the post-war industrialisation of Japan and subsequently for the newly-industrialised economies (NIE) in the 1980s and 1990s, property investment was popular and profitable.

New York City-based Yieldstreet, which focuses on expanding access to private market investment products, says: “A star player on every team of alternative investments, real estate usually performs well regardless of what else is going on in the world. Safer and more predictable than the stock market, certain factors that work against the market actually bolster real estate’s potential. Inflation is a good example.”

While inflation tends to eat away the value of money, it increases the value of real estate holdings. While stocks often struggle in an inflationary environment like the one we are currently experiencing, property values and rents tend to increase with inflation. This makes real estate a solid buffer against inflationary losses, Yieldstreet says.

Direct investment into real estate in its physical form is a form of private equity. Here, investors either acquire the property directly or with partners, failing which some investors have the opportunity of investing in physical real estate via a private equity property fund.

The Baby Boomer generation (circa 1946 to 1964) and Generation X (circa 1965 to 1980) were fortunate in real assets because, back in the day, it was possible to acquire a home and subsequently an investment property. Property is not liquid as it requires investors to hold on to it for the long term and eventually pass it on to offspring.

In the US, from 2000 to 2022, private real estate as represented by the National Council of Real Estate Investment Fiduciaries outperformed the S&P 500, the broad market index representative of the US equities market, which by all accounts is the deepest equity market globally.

In Singapore, the relationship between real estate and the stock market is not as clear-cut. The Straits Times Index has outperformed the Singapore Residential Property Index (Chart 2) for all dwellings.

Property investors usually hold these assets for decades. In the stock market, the temptation to trade is likely to be higher. Property prices have been more volatile in Singapore than in the US but less volatile than equities. It is this lack of volatility that may hold the secret to long-term outperformance.

From 2011 onwards, the Singapore government introduced a raft of measures to raise the cost of investing in a second residential property. In the Budget this year, the government has also made it more expensive to acquire commercial properties. It may be that the property dividend for the older demographic is unlikely to be repeated for more recent investors.

Since 2002, investing in property has been made a lot easier and a lot more accessible with the S-REIT sector. Most of the returns are likely to be from the property’s cash flow and its yield. Over time, valuations could rise but most Singapore properties in S-REITs are likely to have a leasehold tenure. REIT investors need to be cognisant of the assets, rents, land tenures, tenants, interest rates and, of course, the manager.

Born too late for private equity?
Interestingly, different ways to invest have the effect of highlighting the gap between generations too. For example, private equity is seen as the epitome of patient capital. This is because it takes years to reap rewards. Private equity has less exposure to excess volatility. The processes used to value private equity holdings primarily focus on earnings expectations. Private equity volatilities track more closely to public equity small-cap earnings volatility and not their price volatility.

Private equity is not available to all investors for a couple of reasons. First, it requires patient capital as the asset class is illiquid. Secondly, for the longest time, only the wealthy had access to deals in this sector. In today’s context, the wealth gap between age demographics has also limited the younger investing public’s access to private equity, like second property ownership, that certain classes of older generations have enjoyed.

In Singapore, Millennial and Gen Z demographics are facing similar challenges to their counterparts in other countries in terms of building wealth. In its Global Wealth Report 2019, Credit Suisse says that Millennials “have not been a lucky cohort” — not only were they hit at a vulnerable age by the Global Financial Crisis of 2008-09 but the associated recession and poor job prospects that followed. They have also been disadvantaged in many countries by high housing prices, low interest rates and low incomes, making it difficult for them to buy property or accumulate wealth.

Data shows that the wealth gap between the younger and older generations in Singapore is widening, with Millennials holding just 5.2% of the country’s total wealth in 2019, compared to 30.4% for Baby Boomers. A key factor in keeping younger generations from overcoming the “lingering disadvantage” of their poorer economic start has been the rising cost of property.

Private residential property prices in Singapore have been steadily rising — with no sign of abating — making it more difficult for younger generations to afford homeownership and build wealth through property investments.

Although the private residential Property Price Index (PPI) eased to an increase of 0.4% in the last quarter of 2022 after rising 3.8% in 3Q2022, this still marked the 22nd consecutive quarter of price growth for the sector. The PPI has increased from below 140 points in the second half of 2017 to 188.6 points in the URA’s latest release. This has made it increasingly difficult for young people to save for a down payment on a second property, let alone afford the mortgage payments that come with it.

In addition, tighter lending standards have made it more difficult for younger generations to obtain the necessary financing for private equity investments, to say nothing of the global macroeconomic conditions that could spell the end of the era of cheap money.

The Monetary Authority of Singapore has introduced a series of measures in recent years aimed at reducing the risk of a housing market crash, including stricter loan-to-value ratios and loan tenures. While these measures have helped to stabilise the housing market, they have also made it more difficult for young people to access the capital they need to invest in private equity.

Second property ownership could also be seen as a luxury simply out of reach to younger investors in Singapore — of whom an overwhelming majority is housed by the government. With some younger Singaporeans now struggling to even afford public housing amid the unfortunate incidence of low wages and rising inflation, second property ownership is not even a consideration for those without a foot on the property ladder.

One might argue, however, that this is simply a dilemma of causality — that the lack of access to private equity instruments and opportunities has caused some young investors in Singapore to overlook an asset class that could improve their financial situation.

“My opinion is that investors simply cannot afford to ignore private equity because, among other things, the universe of public companies is shrinking. You can miss out on important sectors and diversification parameters if you don’t embrace private equity,” says Jochen Mende, head of secondaries at UBS Asset Management, real estate private markets.

“When you look at the full spectrum of private markets asset classes available — private equity, real estate, infrastructure and private credit — in terms of the longevity and returns profile of the industry, private equity makes a great deal of sense,” he says.

UBS has introduced “private equity secondaries” offering products that have a shorter duration and more liquidity than the underlying private equity portfolio. Only time will tell if Gen Z-ers can access this asset class.

Measures of volatility
The appetite for volatility differs across generations. Younger people are expected to have more stomach for volatility. In 1981, Nobel prize-winning American economist Robert Shiller introduced the concept of excess volatility to describe the difference between fluctuations in public equity prices and the earning expectations of those equities.

While variability in earnings expectations and resulting dividends and cash flows should logically drive fluctuations in equity valuations, stock prices are far more volatile, he found. Other factors, both technical and psychological — including flows, momentum, fear/greed and animal spirits — contribute volatility on top of that generated from changes in earnings expectations. Shiller called these extra contributions “excess volatility”.

Volatility has been taken to the extreme with the introduction of Bitcoin and other cryptocurrencies. Chart 3 reflects the Volatility Index (VIX), which measures the volatility of the S&P 500, and compares it to a similar gauge for Bitcoin. This comparison shows that the mean volatility for the S&P 500 is around 20 against Bitcoin’s 75.

Risk takers versus passive investors
Thiveyen Kathirrasan, The Edge Singapore’s senior analyst, says: “Historically, over the long-term, passive investing has outperformed active investing. Frequent trading would result in significant trading costs to the investor, which eats into their potential returns. But passive investing, as the name suggests, is not as exciting as actively picking stocks or buying Bitcoin.

Active investing gives more of a reason for the investor to be emotionally invested as they have to monitor prices and valuations more frequently than passive investors. Generally, the younger the generation, the longer one has to be a passive investor to outperform the rest of the market over the long term.”

Being the youngest generation, Gen Z-ers have the longest investment runway/horizon. This implies that they can afford to take relatively more risks. Even if the investments or trades do not go as planned, the amount invested is unlikely to be significant, relative to what they can earn through an active job. Further, those in the older generations who have more capital or savings cannot afford to have a large proportion of their investment portfolios in risky asset classes because it will take a longer time to recoup lost capital; the converse applies to Gen Z-ers too.

Gen Z-ers are also much more adept at newer technologies and asset classes such as cryptocurrency. Gen Z-ers generally do not have a large assortment of asset classes in their portfolio, hence more time can be dedicated to trading cryptocurrencies. In addition, believing they can understand how it works further supports why Gen Z-ers would want to invest in it. They also generally have a higher risk appetite, in the sense of trying out new ideas and ventures, such as investing in cryptocurrency.

A portfolio for Millennials
The timeless advice from Benjamin Graham, the father of value investing, is to have stocks within the 25% to 75% range of the total investment portfolio. Assuming the archetypes of generations, younger generations such as Millennials have a longer investment horizon and hence can afford to take more risks, this implies that the proportion of stocks in their portfolio can be higher, with secondary allocations to bonds, real estate and other asset classes.

Even if there are considerable losses due to severe market downturns, Millennials would be able to recoup losses much better than older generations as they are still in the early to middle stages of their active career. Ultimately, every individual’s financial and investment profile is different and the willingness to take risks ought to be balanced with the capacity to take risks — too much willingness could lead to unrecoverable losses; too little would mean the investor is missing out on potentially better returns or higher opportunity costs.

Not all hope is lost
There are also signs that the landscape for younger investors could be changing. One key development has been the rise of digital platforms that are making it easier for young people to access private equity opportunities. Certain platforms now allow investors to pool their money to invest in a range of assets, including real estate, start-ups and alternative assets. These platforms often claim to be more accessible than traditional private equity investments, with lower minimum investment requirements and greater transparency.

Younger investors could also benefit from being ahead of the curve in the spaces of sustainable and impact investing, which are seeing increasing focus from institutional investors. According to a survey by UBS, younger investors lead the way when it comes to sustainable investing in Singapore, with 94% of those under the age of 35 interested in sustainable investments.

The UBS Investor Watch report says that 52% of Singaporeans will hold sustainable investments by this year, including 71% of those under the age of 35. This shift in priorities could lead to higher investment in areas like renewable energy, social enterprises and affordable housing, which could create new opportunities for younger investors who could be the first ones on the bandwagon.

Just as Japanese and Chinese companies have identified Asean for its growth opportunities, Singapore too will have to turn to its regional counterparts to reap the demographic dividends of decreasing dependency ratios to offset its demographic deficit.

Fortunately for Singapore, its location within one of the fastest-growing economies in the world — Asean is on track to become the world’s fourth-largest economy by 2030 — presents a positive case for real-estate investment as a long-term growth opportunity, considering the region’s burgeoning middle-class. And as regulatory governance eases and regional governments open their doors to foreign direct investment, the number of possibilities available to investors is also set to expand.

If enough potential entry points can be created for younger investors to enter the property sector — whether through crowdfunding, impact investing or new opportunities — shrinking populations in developed economies do not necessarily spell the demise of real estate.

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