The Prolonged Conflict Economy: Real Estate When Peace Remains Elusive
Geopolitical Perspectives Series | Edition 5 1
Six months like no others Tensions between Iran and the Western alliance, the US in particular, had been escalating for years.1 These culminated in the February 28, 2026 US–Israeli airstrikes that eliminated key Iranian leadership. Iran retaliated immediately with missile and drone attacks across all GCC states, fortunately with very few casualties, and mined the Strait of Hormuz in March. This earlier phase set the conditions for the periodic exchanges of fire, diplomatic exchanges that eventually led to the Islamabad MoU of 17 June 2026,2 3 and substantial breaches of the ceasefire with disruption to shipping in the Strait that has already lasted until August with little sign that it will abate in the immediate future.4 The impact of the conflict has reverberated around the Gulf, with the obvious effect of reducing economic confidence and depressing real estate markets, although it has also accelerated efforts toward a more unified Gulf security architecture, most recently evidenced by the Mecca Islamic security agreement,5 as well as spurring Gulf states to take action to enhance their resilience, including the diversification of hydrocarbon export routes.6 There are some grounds for optimism that even the medium-intensity conflict that has emerged since February is temporary. There are numerous peace initiatives. Perhaps most important of all, the next US Presidential election is now only just over two years away; most commentators agree that it is highly unlikely that the next President will wish to continue the conflict in the Gulf. But that still potentially leaves two years, and no easy route to peace thereafter. What we see now may be the new normal. What should real estate investors make of prolonged but relatively low-level kinetic conflict in the Gulf?
Real estate markets under stress Historically, even prolonged wars themselves have very mixed impacts on real estate markets. The evidence from Ukraine is conclusive: unless the war breaks down the market and prevents transactions, real estate markets continue. Even if the war continues, provided this condition is met, they may even resume an upward trend in less affected parts of the country.15 The effect on neighbouring countries has also been mixed: a detailed study of the impact on the city of Szczecin in Poland showed that real estate transactions volumes slowed, development activity reduced substantially, and prices flat-lined, but that rents rose.16 We may therefore expect that conflicts that stop short of war would have even less effect on real estate markets. This is exactly what we find. ▪
The Libyan real estate market was far more affected in the 1980s by government policy decisions such as the 1978 prohibition on multiple home ownership and the flow-through impact of sanctions on revenues and housing construction than by isolated military action by the USA.17 18
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The Iranian real estate market has experienced several cycles over the past four decades. Sanctions have had a negative effect on Iranian housing markets overall,19 even if they have sometimes pushed excess liquidity into domestic real estate speculation.20 However, in the present conflict it has been the severe constraints on oil exports that have exacerbated already very challenging domestic economic conditions, creating hyperinflation and severely weakening housing affordability, in turn curbing price appreciation even at a time of tumbling international value of the rial.21 These have had a much greater impact than the consequences of US or Israeli military actions, which have been aimed at exclusively military targets.
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In other cases, such as Taiwan, the real estate market has not been adversely affected by sustained military pressure and occasional actual confrontations with the People's Republic of China. Analysis again focuses on government policies, not military confrontations.22 23 The Falklands Conflict was actually positive for local real estate, partly because of economic growth generated by military investment in the islands, the long-term effects of which can still be identified.24
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What then of perhaps the most salient example, the Indo-Pakistani Conflict? The same narrative has played out, in this case repeatedly. Participants in the major city housing markets of India and Pakistan pay no attention to successive conflicts. Regulations, demographics and economic cycles have played a far greater role.25 Where a conflict did generate effects directly, refugees and resultant policies were the major factor driving house prices.26 At the border itself and in disputed territory, socio-economic conditions drive housing markets. 27 28
Similarities and differences Where are the historical parallels to the current Gulf Conflict? Air power was not this capable in the past. In the post-colonial era, unilateral examples of the use of air power include the US strike on Libya forty years ago7 and many Israeli operations inside Iran.8 9 It is also easy to forget less well-known examples such as the air clashes over the Formosa Straits in 195810 and throughout the Cold War. Introduce the naval element, however, and it is possible to include the Falklands Conflict in 1982,11 and the ‘Tanker War’ in the Gulf in the 1980s.12 Finally, there are medium-intensity conflicts involving land forces that stop short of all-out war, of which the most well-known is the outbreak of armed conflict along the Indo-Pakistani border in 1965, 1971 and more recently in 199913. Amongst many others, we may also place the Yemen Conflict in the same category.14 So, although advances in military technology mean that the Gulf conflict has no exact historical parallel, these numerous examples show that it belongs firmly to a broader class of prolonged medium-intensity conflicts that flare intermittently yet remain below the threshold of full mobilisation, involve no occupation of territory, and most importantly for investors, coexist with normal economic activity. It is to these conflicts that we should look for lessons for the Gulf.
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The Prolonged Conflict Economy: Real Estate When Peace Remains Elusive
The evidence so far Since February Gulf real estate markets that were already past or nearly at their peak in the cycle performed entirely consistently with evidence from conflicts worldwide. Dubai’s residential market recorded over a quarter fewer transactions in H1 2026 than in H2 2025, when volumes hit a record. So far, activity has remained above H1 2024 levels, although there have been only a quarter as many project launches this year, prices have flat-lined as they did in Szczecin, and rents have softened slightly, mainly because new completions have increased tenant choice. The hospitality market has understandably been worst affected, with occupancy rates for Gulf hotels declining by almost a third in H1,29 although even in this segment optimists can be found identifying a gradual recovery. The office market has actually remained more resilient so far than either houses or hotels, defying any potential impact of a fall in FDI to record both higher transaction values and an increase in traded volume.30 The Abu Dhabi market has shown a similar course, with both prices and rents continuing to climb despite the conflict and transactions more than doubling. So far, international investor interest in the UAE has remained in evidence, with foreign direct investment into Abu Dhabi’s real estate sector trebling.31 Cavendish Maxwell is tracking similar volume and price patterns emerging in Oman and Saudi Arabia during the latter part of 2026. In Saudi Arabia, for example, it is the impact of fiscal constraints that are the indirect consequence of the conflict vying for impact with recent changes in foreign ownership legislation that is driving the residential market.
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The Prolonged Conflict Economy: Real Estate When Peace Remains Elusive
None of this is to suggest that there will be no serious consequences if the conflict continues into the medium term. The most important will be that the rate of population increase seen in the past will not return quickly, lending conditions will remain tight, employment will be constrained and growth will continue around current levels. There will also be very significant implications for economic regional construction costs. Building costs in the UAE have been projected to increase by 7% to 12% in 2026, compared with 1.8% last year, while costs in Saudi Arabia are expected to climb 5% to 8%, up from 2.1% in 2025.32 It is true that supply chains are already adjusting and it is unlikely cost increases will be on the scale of those observed during the pandemic,33 although the impact will be magnified by the increase in freight costs, which quantity surveyors have suggested has been between 35-60%.34 Together, these factors will reduce individual development IRRs. Developers will inevitably become more cautious and new construction will not recover to the levels to which the Gulf has become accustomed. The result will be a pattern of launches similar to or slightly improved on current conditions that will prevail until the conflict is finally resolved. The only silver lining to this scenario is the cushioning effect on the value of existing real estate.
Conclusions Right across the Gulf Cavendish Maxwell’s data show definitively that real estate markets have not been collapsing under pressure from the conflict. They have instead continued to respond to much more familiar cyclical supply and demand factors, albeit also to government policies that are a consequence of the conflict, all of which have been supportive of real estate markets. Throughout the Gulf, real estate markets are continuing to follow their own individual trajectories, not all moving in unison because of the conflict. The evidence from international conflicts suggests that even if the conflict is prolonged, they will continue to do so indefinitely, the conflict may prove to be the pivot for the Gulf from an exceptional real estate market to one much more familiar in developed markets with values holding up, even increasing in particular localities, but the scale of development drastically reduced compared to pre-conflict levels.
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The Prolonged Conflict Economy: Real Estate When Peace Remains Elusive
Authors Julian Roche
Ali Siddiqui
Chief Economist Cavendish Maxwell julian.roche@cavendishmaxwell.com
Research Manager ali.siddiqui@cavendishmaxwell.com +971 50 877 0190
Key Contacts Zacky Sajjad
Vidhi Shah
Director, Business Development and Client Relations zacky.sajjad@cavendishmaxwell.com +971 50 644 5089
Director, Head of Commercial Valuation vidhi.shah@cavendishmaxwell.com +971 56 690 3186
Dubai +971 4 453 9525 dubai@cavendishmaxwell.com 2204 Marina Plaza, Dubai Marina, P.O. Box 118624, Dubai, UAE Dubai
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