Geopolitical Risk and Its Impact on Real Estate Markets

In today’s interconnected world, geopolitical events are felt far beyond their point of origin, often causing ripple effects that reach across borders and industries. From military conflicts to trade tensions, these global disruptions significantly influence investment strategies, including real estate. As global stability becomes more precarious, investors in real estate must adapt to these shifting dynamics. A 2024 report from Knight Frank revealed that 62% of investors now consider geopolitical risk a primary factor in their investment decisions, highlighting the increasing relevance of global events to the real estate market.

This article will explore the various types of geopolitical risks and how they impact real estate markets globally, providing insights for investors on how to navigate this complex landscape.

What is Geopolitical Risk?

Geopolitical risk refers to the potential for political, economic, or social instability caused by tensions between nations, shifts in power, or wars that threaten the existing global order. While historically associated with war and revolution, the scope of geopolitical risk today is far broader. It includes factors such as economic sanctions, diplomatic relations, cyberattacks, trade wars, and even the rise of populist politics. These risks often occur in interconnected sequences, leading to increased market volatility.

A key tool for understanding the growing complexity of these risks is BlackRock’s Geopolitical Risk Indicator (BGRI), which tracks changes in market attention toward various geopolitical events.

Types of Geopolitical Risks Affecting Real Estate

Geopolitical risks come in various forms, each affecting the real estate market in different ways. Investors must be aware of these risks to identify potential vulnerabilities and develop appropriate strategies.

Some of the primary geopolitical risks to watch include:

• Trade barriers and tariffs: Trade policies, such as those implemented by the United States, can have far-reaching economic effects, slowing down global growth.
• Regional conflicts: Escalating tensions in the Middle East can destabilize energy markets and create market volatility.
• U.S.-China competition: Rising tensions between the U.S. and China over issues like Taiwan or the South China Sea can create economic uncertainty.
• Cybersecurity threats: Large-scale cyberattacks can disrupt both physical and digital infrastructure, impacting real estate operations.
• Terrorist attacks: Major attacks can not only result in loss of life but also disrupt business operations and investment confidence.
• The Ukraine conflict: Ongoing instability in Ukraine could escalate into broader regional conflicts, potentially involving NATO.
• Emerging market instability: Political risks in emerging economies, driven by global fragmentation, can have serious implications for investors.

How Geopolitical Risks Affect Real Estate

Geopolitical events have far-reaching effects on real estate markets, impacting everything from where investors put their money to how they evaluate the potential for growth and stability in various regions.

Investor Sentiment and Capital Flows

As geopolitical uncertainty rises, investors often become more cautious. Foreign direct investment (FDI) in real estate tends to slow, particularly in emerging markets. Due diligence becomes more rigorous, and cross-border real estate transactions become more complicated. However, research shows that even amid high geopolitical tension, markets like the U.S. have seen strong equity returns.

In real estate, many investors are adopting a wait-and-see approach. According to PwC’s latest report, investors are hesitant to make commitments in early 2024, preferring to hold off until mid-year while monitoring geopolitical developments and waiting for potential price corrections.

Property Values and Rental Markets

Geopolitical instability often leads to significant losses in regions directly affected by conflict. Beyond physical damage to properties, security concerns typically reduce demand for commercial and residential spaces. Tourism and industries relying on international travel are especially vulnerable, as geopolitical tensions can lead to lower visitor numbers and weak market performance in these sectors.

However, studies on housing markets, such as one in Turkey, indicate that while moderate geopolitical risks may have little impact on real estate returns, extremely high risks can affect short-term returns.

Disruption to Development and Construction

Geopolitical instability can create major disruptions in real estate development and construction. Trade wars and conflicts abroad often lead to supply chain interruptions, while political unrest or security issues can cause labor shortages. Additionally, geopolitical uncertainty may slow down the approval process for real estate projects, leading to delays. In high-risk areas, developers may face higher insurance premiums or find it difficult to secure appropriate coverage.

Sector-Specific Impact of Geopolitical Risk

Not all real estate sectors are equally affected by geopolitical risks. For example, commercial real estate is particularly vulnerable to factors such as technological decoupling between the U.S. and China, conflicts among major oil exporters, and climate policy uncertainty. Shifts in migration patterns, driven by geopolitical events, can also impact the residential real estate market in specific locations.

Additionally, geopolitical risks can influence broader financial markets, driving up the prices of commodities and energy. This, in turn, increases the cost of construction materials, which can significantly impact the economics of real estate development.

Real Estate Strategies for Mitigating Geopolitical Risk

To navigate the complexities of geopolitical risks, real estate investors and developers must adopt proactive strategies focused on resilience. Diversifying real estate portfolios can help minimize exposure to high-risk regions or sectors. The use of advanced analytics powered by artificial intelligence (AI) is increasingly helping investors assess potential risks, with 53% of Real Estate Investment Trusts (REITs) using AI tools to analyze geopolitical threats.

For developers, resilience involves strategies such as diversifying supply chains, reducing dependency on politically unstable regions, and designing flexible development plans that can adapt to market fluctuations. Additionally, conducting thorough political and security risk analyses before entering new markets is crucial for making informed decisions.

Conclusion

Geopolitical risks are now a central factor influencing real estate decisions, investment strategies, and market stability. As the global landscape becomes more interconnected and unpredictable, real estate investors and developers must adopt a more sophisticated approach to risk management. By understanding the various types of geopolitical risks and implementing effective mitigation strategies, investors can build resilience and protect their investments in an increasingly uncertain world.