What If This Is the ‘New Normal’? A Scenario Approach to Gulf Real Estate Market Resilience
Geopolitical Perspectives Series | Edition 7 1
Real estate benefits from scenario analysis The financial techniques typically used in property investment (NPV, IRR, and sensitivity testing) already assume that the investor faces an uncertain future, but they are usually employed only to generate mechanical what-ifs (e.g., ‘rents fall 30%’, or ‘construction costs rise 40%’). Moreover, as the Global Financial Crisis demonstrated to fund managers, even techniques such as Monte Carlo and associated Value-at-Risk analysis are best at analysing investments where classical distribution curves are appropriate, not markets where the underlying drivers may undergo sudden, structural change.1 What the scenario-planning literature over the past half-century shows, however, is that scenarios need to be properly thought-out qualitatively in advance of being used quantitatively in investment analysis and prospective asset performance reviews.2 Scenario analysis has long been recognised as an essential tool for managing risk in capital-intensive sectors,3 and real estate is no exception. Each scenario should be based on a single coherent narrative about political, economic and technological changes, with the result that all the values of key variables are moved mutually consistently from the central base forecast.4 For real estate markets, this reflects the reality that the primary drivers of value (mortgage market conditions, capital flows, regulatory shifts, geopolitical stability, and demographic change) influence each other. Proper scenario analysis forces real estate investors and policymakers to explore how these drivers move together under different geopolitical conditions. It then invites them to consider how the three dimensions of resilience identified in the scenario literature can be built into portfolios and development strategies.5 6 The claim therefore is that by ensuring the assumptions behind the numbers employed in real estate analysis are actually thought through and collated, scenario analysis justifies a prominent role in financial modelling and therefore decision-making in real estate.7 In that spirit, then, what would be the impact on Gulf real estate markets if the current geopolitical conflict becomes the ‘new normal’?
What do we already know? Scenarios involving rapid change to market conditions are usually placed in one of three different categories: short-, medium-, and long-term. Short-term impacts involve mainly operational disruption, with investors taking financial measures to stabilise cash flow as a result.8 9 The recent conflict in the Gulf has already seen this happen. Beyond the two-year mark, investor sentiment shifts and stakeholders adjust to the constraints and opportunities of the
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What If This Is the ‘New Normal’? A Scenario Approach to Gulf Real Estate Market Resilience
new environment.10 Here in the medium term, the 'new normal' in the title of this paper, lie significant impacts on real estate markets through altered corporate strategies, regulatory structures such as rent controls, anti-speculative measures and tighter government controls over land use,11 12 and changes in demographic patterns, all of which feed through into different development priorities, accompanied by a change in the balance between different techniques employed by valuers. Finally, beyond the medium term, existing technologies transform markets and even very frequently stakeholders themselves. Evidence from real estate markets exposed to persistent conflict in nearby jurisdictions shows that once the initial shock phase passes, migration flows settle at relatively predictable levels, often including population movement within countries affected by the conflict, as seen in Ukraine, and between them, as notably in the case of the Iraq War.13 14 Real estate markets react approximately symmetrically as a result. The most affected regions predictably experience price falls, as extensive work on Damascus during and now after the Syrian Civil War has demonstrated.15 16 In areas that have become more desirable thanks to their location further away from conflict zones, however, prices may even rise – sometimes even dramatically.17 Real estate cycles may be accentuated by rising interest rates working in one direction, subsequently counteracted by inflationary tendencies that lead to real estate being used as a safe haven in the other.18 In the case of the Lebanon, for example, land has been seen as the only safe means of storing money.19 Global evidence suggests that capital flows also rebalance: FDI and domestic investment also settle at a lower level, and international risk premia rise, although not necessarily significantly.20 The result undoubtedly affects development. During periods of prolonged regional tension – still more during a conflict itself – history demonstrates that development can fall to less than a quarter of pre-war values, whilst investment inclines towards existing real estate in lower-risk submarkets.21 22 Worldwide too, the evidence suggests that valuation methodologies also adjust to match: discount rates rise in line with country risk premia, income projections incorporate higher volatility, and scenario-based risk assessments become more prominent in underwriting.23
A catalogue of impact In the ‘new normal’ scenario, FDI to the Gulf would not disappear, but it would evolve. A growing literature, to which real estate analysts must now pay close attention, already points for example to more defence investment, aimed at still more national resilience capability. We would expect to see such investment more strategically distributed geographically, and more tightly integrated with improved national data management, dual-use and defence production and training facilities.24 25 26 Nor does net migration necessarily turn negative, although the skill sets that new arrivals bring would alter, as government expenditure would increasingly shift to projects that protect the civilian population and enhance urban and industrial resilience. There is evidence that this process is already under way.27 28 As in this scenario hydrocarbon exports are still severely curtailed, oil prices stay high, over
$100 a barrel, which benefits Gulf government revenues or at least has an approximately neutral fiscal impact. Nor can US interest rates rise significantly under any sustained power projection into the Gulf, which also assists governments in the region. Less helpfully for the real estate industry in the scenario, however, construction costs continue to climb and supply chains remain under the same levels of stress that analysts have already described as prevailing this year.29 The most significant impact would be on development: the scale and pace of development would slow, and geographies and asset choices reflect what might begin to seem a permanently altered geopolitical environment. Large government linked developers would be able to maintain flagship national projects, but only by stretching phasing, slowing launches, and redirecting capital toward politically and socially essential sectors, such as logistics, data centres, food security, health, education and mid market housing, as well as by benefitting from government defence construction contracts, as has been observed elsewhere.30 The trend towards repurposing existing assets, which has already begun in the Gulf, would accelerate, possibly seeing redevelopment on a scale yet unseen, such as underperforming malls converted into mixed use districts, offices repositioned into short-term leasing space or government service hubs, or hotels reflagged as long stay, co living or staff accommodation. Large private developers would also seek to adopt a much more conservative strategy. They would likely exit non core markets and concentrate on – guided by government – build-and-hold in what they would perceive as safe harbour submarkets. These would probably be income stable sectors such as build to rent, staff housing, healthcare, education and logistics, residential additions to existing retail facilities, and office to residential or office to medical conversions. Some smaller developers would merge; others would exit the market altogether. The survivors would choose to accumulate land banks much more selectively, partner with larger developers, especially those linked to government, concentrate on predictable sectors, and probably engage in projects with short-term income potential, such as the adaptive reuse of existing real estate. As new development slows, the secondary market will inevitably dominate. Gulf markets would in fact become much more like their counterparts in other developed jurisdictions such as the UK where sales of new residential property at market value represent 6.5% of residential transactions, and much lower in London and other large cities. In Dubai, for example, initial sales from developers accounted for approximately 72% of residential transactions in the first nine months of 2026, of which 68% were off-plan and 4% completed ready stock, illustrating the extent to which Gulf markets remain dependent on new development activity to generate transaction volume.31 33
Valuation in the ‘new normal’ When a development market enters prolonged stasis or structural deceleration, valuation methodologies adjust to the new reality. In a development-led market, valuers place substantial weight on forward supply: residual land values, absorption rates, developer margins, and pipeline feasibility. Once development slows, valuation practice pivots from speculative land toward existing, operational assets with scarcity value:
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What If This Is the ‘New Normal’? A Scenario Approach to Gulf Real Estate Market Resilience
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Comparable Sales: Transaction evidence from existing stock becomes the primary benchmark, as activity takes place within a stable, existing inventory rather than an expanding pipeline.
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Residual Land Appraisals: Residual valuations become less frequent. The inputs that underpin them (stable construction costs, debt availability, and absorption velocity) become volatile, making residual assumptions harder to defend.
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Depreciated Replacement Cost (DRC): Replacement cost approaches gain prominence, not because construction ceases, but because low transaction volumes in specific asset types require valuers to baseline what existing assets would cost to reconstruct today.
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Income Capitalisation and DCF: Cash-flow underwriting adjusts directly for supply constraints and tenant retention risks. Capitalisation rates and discount rates in DCF models will shift upward to incorporate elevated geopolitical risk premia.
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Institutional Governance: Local valuation standards will align even more closely with global RICS guidelines, alongside tighter regulatory oversight to ensure consistency across asset classes experiencing structural supply limits. Valuation practice will adapt alongside the market it measures.
Conclusions Scenarios such as the ‘new normal’ undoubtedly have their limits. They are rarely wholly accurate representations of future reality. Even if the current Gulf conflict were to become the ‘new normal’, the scenario described here incorporates a range of individual assumptions and is intended to illustrate how Gulf real estate markets might respond under a prolonged period of conflict, rather than to predict a single future outcome. The central scenario of a return to more peaceful conditions will most likely reassert the conventional real estate cycle as the driver of value. That is not however to say that this thought experiment does not have value. What it has shown is that even the downside of the medium-term for Gulf real estate would generate development and value capture opportunities for astute investors. Like all investors, however, they must balance the pursuit of alpha with the gamma that underwrites long-term resilience.
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What If This Is the ‘New Normal’? A Scenario Approach to Gulf Real Estate Market Resilience
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
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