Geopolitical Risk and Their Effects on Real Estate

In today's highly interdependent world, the ripple effects of geopolitical events have been felt far outside of the borders of countries in which they happen. Whether through armed conflict or trade tensions, such global disruptions have redefined investors' approach to asset classes—including real estate. Today, real estate is inextricably connected to global stability. An indication of this industry concern is found in the 2024 report done by Knight Frank when 62% of investors listed geopolitical risk as one of the key drivers in investment decision-making. 

This article explores how different types of geopolitical risk impact various real estate markets globally and what investors need to be aware of.

Table of Contents

Defining geopolitical risks

Key categories of geopolitical risks

How geopolitical risks may affect real estate

• Impact on investor sentiment and capital flows
• Effects on property values and rental markets
• Disruption of development and construction activities
• Geopolitical risk impact on specific real estate sectors

Real estate strategies and resilience building for investors

The Bottom Line

Defining geopolitical risks

Geopolitical risk describes the instability for political, economic, or social upheaval due to tensions between countries, changes in power balances, or wars that destabilize the existing order. Historically tied to warfare or revolution, today's conception of geopolitical risk has broadened immensely.

Today, all of this encompasses interdependent variables from economic sanctions, diplomatic relations, cyberattacks, trade wars, to even populist politics. These risks usually do not exist in isolation. They tend to unfold in intricate chains of causality and intensifying market volatility.

To serve as an indicator of rising concern and growing complexity of such risks, BlackRock's Geopolitical Risk Indicator (BGRI) monitors changes in market attention toward various geopolitical events.

Source: BlackRock

Key categories of geopolitical risks 

Geopolitical risks affecting real estate come in various forms, each of which has its specific list of potential market effects. It is necessary for investors to know about all these different categories in order to determine possibilities for weaknesses and create suitable strategies.

BlackRock's list identifies various key geopolitical events, considering both potential likelihood and consequence for the overall landscape. The following are the top risks to pay closest attention to:

• An increase in trade barriers, in this case, tariff policies from the United States, which would impact economies globally in terms of growth.
• An intensification of regional conflict in the Middle East threatening energy supplies and creating market volatility.
• Increased strategic competition between America and China, possibly over Taiwan or in the South China Sea.
• Increased separation of technology environments in the US and China, affecting global supply chains and innovation.
• Extensive and widespread interruption of critical physical and virtual infrastructure due to large-scale cyber intrusions.
• A major terrorist assault resulting in extensive loss of human lives and extensive interruption to business operations.
• An extended conflict in Ukraine, escalating the risk of war spreading beyond its existing borders and drawing in NATO.
• Increased political risk on institutions and systems in emerging market economies as a result of accelerating global fragmentation.
• Increased development of North Korea's nuclear weapons program in combination with aggressive behavior such as missile tests.
• The re-emergence of European populist movements fueled by slow economic growth, high inflation, and energy security worries, possibly resulting in increased instability.
• COVID and other pandemic

How geopolitical risks may affect real estate

Geopolitical risks have implications that reach far beyond conventional financial markets and into tangible assets such as real estate. These risks affect not just where capital is utilized but also in what manner investors determine safety, value, and future potential in various property markets. Becoming aware of the mechanisms through which geopolitical risk places pressure is crucial to navigating an increasingly unpredictable investment landscape.

Impact on investor sentiment and capital flows

With an increase in geopolitical uncertainty, investor sentiments become cautious. It is bound to cause foreign direct investment (FDI) into real estate to slow, especially in countries in emerging markets. Due diligence intensifies, causing cross-border real estate deals to happen less often and become complicated. Surprisingly, even in spite of increased risk, the U.S. equity market has recorded extremely positive returns amid high geopolitical tensions in the past, research shows.

In real estate, however, the tone is subdued. According to recent investor insights from PwC, many direct market participants remain interested in deploying capital in 2024. Yet, they are holding off until mid-year, awaiting price corrections and closely monitoring geopolitical developments before making commitments.

Effects on property values and rental markets

In regions directly affected by conflict or instability, physical damage to properties can lead to substantial losses. In addition to direct loss, greater uncertainty and security issues usually reduce demand for both commercial and residential space within such areas. Industries relying heavily on international travel and tourism are highly susceptible to tensions in geopolitics, resulting in low visitor arrivals and adversely affecting the performances of related real estate assets. For example, geopolitical tensions in the Middle East have caused fluctuations in regional currencies, which in turn affect real estate investment values in such regions.

On the other hand, a research in the interrelation among geopolitical risks and housing returns in Türkiye reveals that moderate to high geopolitical risks do not impact significantly the real estate returns or its price, while extremely high geopolitical risks can have a short-term impact on potential returns.

Disruption of development and construction activities

Geopolitical instability can greatly impede real estate development and construction operations through different mechanisms. Trade wars and overseas conflicts usually cause interruptions in supply chains. 

In addition, areas suffering from political unrest or security issues can suffer from labor shortages as workers migrate abroad or due to restraints imposed upon workers' movements. Uncertainty created by geopolitical risks can also cause unnecessary bottlenecks in obtaining necessary approvals for a project and accessing funds. 

Lastly, in areas viewed as high risk because of geopolitical uncertainties, developers and real estate owners can be burdened by additional insurance premiums or even inability to get suitable insurance.

Geopolitical risk impact on specific real estate sectors

The impact of geopolitical risks is not equally distributed among all real estate categories, and every asset class is exposed to specific vulnerabilities and effects. As explained in Blackrock's latest upgrade to its dashboard, commercial real estate is at risk primarily through three channels: decoupling in technology globally, conflict among large-scale exporters of oil, and climate policy deadlock. Variations in migration trends, which can be driven by geopolitics, can in turn subject related residential real estate markets in given locations to large effects.

Another research emphasizes wider financial market implications of geopolitical risk playing a major role in shaping commodities, energy infrastructure, financial asset prices, and exchange rates. The research further points out the fact that rising commodity, energy, and other specific asset prices mechanically induce rising building material prices, an effect which has significant implications for real estate development.  Geopolitical risk was actually ranked as the second greatest issue among the 2022/2023 top ten issues in real estate, following inflation and interest rates.

Real estate strategies and resilience building for investors

Handling the intricacies of geopolitical risks needs proactive measures and emphasis on resilience-building across the real estate industry. For investors, diversifying real estate portfolios to minimize exposures to distinct high-risk geographies or sectors represents one approach. With an escalating degree of risk analysis brought about by AI-powered analytics, investors have a better appreciation for potential risks. Even so, 53% of REITs today use AI-powered geopolitical risk analytics, as recent Deloitte research illustrates. This follows an uptick in the use of sophisticated technologies to track and analyze uncertainties in the global landscape.

For developers and real estate owners, building resilience involves a multi-faceted approach. Diversifying supply chains to minimize dependence upon politically sensitive areas can mitigate disruptions in trade. Flexible design and development strategies can be integrated to facilitate adjustment in accordance with fluctuating market conditions as well as possible changes in demand. Additionally, making careful political and security risk analyses prior to venturing into new areas is important.

The bottom line

Geopolitical risks are one of the central factors shaping real estate decisions, development strategies, and overall market stability. The interconnected nature of the global economy and the increasing frequency of significant political events need a heightened awareness and proactive approach from all real estate investors. By understanding the diverse categories of these risks and implementing robust mitigation strategies, investors and developers can navigate this complex real estate landscape, build resilience, and ultimately safeguard their investments in an increasingly uncertain world.