Risk, Resilience, and Real Estate: Understanding Geopolitical Impacts Across Market Cycles
Market Cycles and Fundamentals Series | Edition 4 1
Introduction: Local for sure, maybe regional, not necessarily global The earlier part of the century appeared to herald a remarkably peaceful and unified world, the famous ‘End of History’.1 This optimistic ‘zeitgeist’ was shared by those studying real estate markets too.2 They paid far more attention to the impacts of perceived globalisation than to the impact of regional geopolitical crises or divergent real estate cycles in different parts of the world. This was despite the enormous regional significance of events such as the Asian Financial Crisis of 1997-98,3 or the Iraq War that began in 2003.4 Why was this? The explanation lies in both investors and researchers’ US and Eurocentric mindsets5 as well as the confirmation of long-term cycles delivered by the Global Financial Crisis.6 But all this has now changed. Economic growth and FDI have now helped shape the Gulf of today and real estate market values have risen commensurately to a point where valuations are on a trajectory towards comparability with OECD jurisdictions. As Cavendish Maxwell recognised three years ago, the era of Gulf exceptionalism is over.7 Few international real estate investors now have an exclusively US and Eurocentric mindset – the UAE, Saudi Arabia and other Gulf countries are firmly on their radar.8 This radar has now also picked up important and obvious regional differences that were always there, but which have now become germane to real estate markets. Paradoxically, the brief era of blanket global market analysis has therefore also come to an end.9 Real estate investors have relearned the lesson of how important individual market cycles can be. Potential oversupply in the Dubai market, for example, means that market correction there is not necessarily reflected in European or Asian markets, or even in other Gulf markets.10 Nor, of course, is conflict in one region necessarily expected inevitably to spill over into others.
How do geopolitics and real estate cycles intersect? The Gulf is now moving into its sixth month of intermittent conflict. At the same time, a majority of Gulf jurisdictions have reached or are about to reach the peak of their ‘normal’ real estate cycles.11 12 What do we know about the way in which these two kinds of impacts jointly affect real estate markets? Although real estate markets themselves do not react immediately, the short-term impact of geopolitical events is now well-established. First, more uncertainty tends to limit credit availability and may increase financing costs and hence impact valuations negatively, especially in increasingly mortgaged real estate markets.13 Second, uncertainty often reduces business demand and development activity, which can have an impact on both new development and occupancy rates and rental income.14 Third,
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Risk, Resilience, and Real Estate: Understanding Geopolitical Impacts Across Market Cycles
property prices, market liquidity and investment flows may be negatively impacted as sellers outnumber buyers, even to the extent of capital flight or cross-border reallocation. In every case, the importance of resilience across the built environment is reinforced.15 A two-state Markov model can show the impact of geopolitics at different points in the market cycle. Regime-switching models like this are valuable because they allow us to understand how geopolitical uncertainty viewed as an independent determining factor behaves differently in expansionary versus contractionary phases of real estate markets. The evidence from such models shows conclusively that these effects of geopolitical uncertainty have a greater impact on bear than bull markets.16 International comparisons also show that geopolitical events tend to affect poorly regulated markets more than their more sophisticated counterparts.17 Does this suggest that the impact of the current Gulf conflict will accentuate existing trends?
Three ways Gulf states are different Evidence suggests the impact on the Gulf will be less severe than in a BRICS country, and possibly even less than in the OECD. There are three reasons for this: Firstly, this is because the analysis does need to be adjusted for developed Gulf markets that are nonetheless still significantly dependent on hydrocarbons. Provided that export volumes hold up so as not to pose a threat to macro-economic stability then Gulf markets also receive a muted positive impact even from a regional crisis. Export data for recent months in volume terms are much lower than last year, though now relatively steady and likely to increase over the coming months as new export routes evolve,18 but they have been balanced by higher prices.19 It is safe to say that no one this year is focused on the potential impact of a collapse in the oil price on Gulf real estate markets.20 However, global capital tends to become more cautious when geopolitical risk rises and this may well reverse the trend for the Gulf of ever-increasing FDI this year.21 Secondly, rising commodity prices are also serving to lengthen real estate project delivery times, reducing the number of project deliveries projected for next year.22 Finally, Gulf governments also possess much stronger policy buffers than those in almost every other jurisdiction. Many run fiscal surpluses, most have sovereign wealth funds, and they all have the ability to modulate supply.23 All of these constitute policy levers that can be used to dampen the long-term impact of a geopolitical shock.24
What about the population? The longer-term impact of geopolitics on demographics is probably the most important transmission channel. Not all conflicts are created equal in this regard. In Ukraine more than 7% of the total available housing stock has been destroyed and much of the remainder is under continued threat. Under these circumstances, it is right to conclude that the most influential market factor is the war and factors such as the availability of bomb shelters start to filter through into valuations.25 Even there, the real estate market has proved remarkably resilient in the short-term, and there is almost complete confidence that when the war is over, competition in the domestic market will intensify. This view is based on the balance between supply and demographics. In 2022, 38% less residential real estate was commissioned than in the previous year and this trend has continued.26 But the population fell from 41.4 million in 2021 to around 39.5 million in 2026 and although it is expected to recover when peace finally returns, long-term demographic trends project the Ukrainian population falling to 15.2 million by 2100, which is much more of a threat to Ukraine’s real estate market in decades to come than the war itself.27 Provided current demographic trends continue, this is evidence that this is not a risk that Gulf real estate markets face. In the Gulf as elsewhere, demographics are the decisive long-term transmission channel. These are important caveats but as yet there is no reason to believe that they will change dramatically. So unless a conflict permanently alters population flows, its impact on real estate cycles is ultimately muted. The evidence shows that so far this is not happening. The conflict did trigger visible expatriate departures initially, but the rate of departures has slowed and moreover the underlying demographic trend does still remain positive. Estimates of Dubai’s 2026 population growth have been revised down, but are not yet in negative territory.28 The exodus was cohort-specific rather than structural, and long-term residency groups such as Golden Visa holders, regional and international capital movers remained stable. Government data now indicates that in fact the population has already begun to rebound.29 Saudi Arabia is at an earlier point in the cycle than the UAE; its position is strengthened by less speculative off-plan exposure, more owner-occupier demand, and an even more stable and growing expatriate base. Recent demographic data show that for now Saudi Arabia’s population continues to grow, with net migration remaining positive and forecasts continuing to show an upward trajectory.30 The recent introduction of new foreign ownership rules will also serve to cushion if not reverse any negative demographic effects of the current conflict.
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Risk, Resilience, and Real Estate: Understanding Geopolitical Impacts Across Market Cycles
Conclusions: looking to the future Real estate analysts are therefore remarkably clear about the joint impact of geopolitics and market cycles. They can and do accentuate and prolong them through quite specific and identifiable mechanisms, in particular the effects on demographics, on developer planning for the launch of new developments and on investor confidence. Geopolitical crises will therefore tend to accentuate the downside of real estate cycles. But the evidence shows that there is also a silver lining to their impact: they can also shorten cycles when they pass quickly. It is also worth recognising that whilst geopolitical crises loom large in immediate sight, viewed from the long-term perspective of the economic cycle, their influence looks a lot more muted.31 Market recovery has historically been an almost inevitable consequence of the return of peaceful conditions. What will matter much more for the trajectory of Gulf markets in the short-to-medium term is that liquidity remains in the banking sector, interest rates stay relatively stable and below the levels seen in the recent inflationary period, and mortgage debt remains accessible. These will be the key indicators to watch in the remainder of the year. If crises are prolonged, however, and reinforce existing demographic changes, they inevitably embed into the real estate market landscape. How this happens and what the consequences might be of a prolonged Gulf conflict is the subject of the next article in this series. The answers are quite counter-intuitive and surprising.
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Risk, Resilience, and Real Estate: Understanding Geopolitical Impacts Across Market Cycles
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 Siraj Ahmed
Zacky Sajjad
Director, Business Development and Client Relations zacky.sajjad@cavendishmaxwell.com +971 50 644 5089
Director, Head of Strategy and Consulting siraj.ahmed@cavendishmaxwell.com +971 50 382 4409
Dubai +971 4 453 9525 dubai@cavendishmaxwell.com 2204 Marina Plaza, Dubai Marina, P.O. Box 118624, Dubai, UAE Dubai
Abu Dhabi
Sharjah
Ajman
Ras Al Khaimah
Muscat
Kuwait City
Riyadh
cavendishmaxwell.com
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