The ‘hardest risk to assess is geopolitical risk’, noted one contributor to the recent ULI and PwC Emerging Trends in Real Estate® Global Outlook 2024, when looking at its complex implications for real estate.

Much of the industry has already been in ‘wait-and-see’ mode for the last two years. High construction costs, inflation and ongoing interest rate increases have proven major obstacles, as players tried to figure out where interest rates would settle and their impact on pricing, which is all extremely challenging to a capital-intensive asset class like real estate.

Most recently, the muted investment market saw transaction volumes fall 6 percent globally in Q1 of 2024 and they were at their lowest levels in Europe since 2012, according to data from MSCI. The geopolitical climate risks muddying the waters further still.

Simon Chinn, Vice President, Research & Advisory Services, ULI Europe

Ironically, we’ve recently seen a more cautiously optimistic outlook for investment activity across the world, and the recent global Emerging Trends report revealed that moderate inflation, a peak to interest rates, and clarity on monetary policy can bring cheer, as the market gradually accepts a ‘higher for longer’ interest rate environment and pricing middle ground. Indeed, the latest data from MSCI show European real estate deal volumes were back in positive territory in April after a 21-month slowdown. Could this mark early signs of a return to confidence for the market?

However, this more positive, if delicate, situation is squarely set against a volatile backdrop of growing economic uncertainty and volatility around the world, with pivotal trends, political choices, and worldwide events potentially impacting investment decisions to varying degrees.

The wars in Gaza and Ukraine, and their devastating humanitarian impacts, are perhaps the most visible factors, and undoubtedly risks potential economic consequences such as supply chain disruptions, a resurgence of inflation and uncertainty around the outlook for interest rates.

Further volatility exists with the growing tensions and rift between China and US. This fragmentation of politics and the global economy will create a more hostile market to trade and commerce, making it more difficult for companies (including real estate firms) to navigate. Such uncertainty may have implications for global capital flows and the refinancing of debt in many markets.

Domestic politics are also likely to have an impact, with over half of the world’s population presented with the opportunity to affect change in elections this year. The US elections, perhaps, present the biggest question mark over long term consequences internationally, though all elections inevitably lead to a focus on short-term domestic issues from governments in the pursuit of the popular vote.

The industry is certainly weighing up the implications with such factors lending various levels of uncertainty, potentially undermining any recent stability achieved.

This risk to real estate investment has not escaped some of the greatest and most experienced thinkers in this field. For example, José Manuel Durão Barroso, the former president of the European Commission who is set to open ULI’s European conference in Milan (10-13 June) with a keynote addressing the impact of geopolitics on real estate dynamics.

José Manuel Durão Barroso, former Prime Minister of Portugal and former President of the European Commission

Barroso served for two terms as president, during which time he responded to the then financial crisis, and so his reflections on his experience of dealing with political and economic turmoil will be fascinating and invaluable.

It’s clear we will continue to face many such challenges in the real estate sector for some time.

However, it’s also important to note that during the last two years there are investors who have been challenging the received wisdom in what can be described as a ‘great reset’. Many progressive players have radically rethought what will make real estate fit for purpose long term, in part adopting a longer terms perspective that challenges fundamental assumptions about market dynamics, pricing and risk.

As such, we’re seeing the focus of investment and strategic decision-making shift towards alternative property sectors, notably data centres, and continuing to focus on logistics and various forms of housing, with growing levels of investment also seen globally in niche subsectors including last mile logistics, purpose-built student accommodation and senior living. For some, alternatives are already ‘mainstream’, with the driver for such investor behaviour being demographics, digitalisation, and decarbonisation, or the ‘three Ds”.

There is a strong likelihood that a long-term, more thematic approach to real estate has the potential to unlock a wealth of potential new products for private equity and opportunistic capital, and there seems to be great potential for those prepared to explore these alternative routes.

Geopolitical risk, and the ‘great reset’, are among the various major challenges – and opportunities – currently impacting real estate’s leaders, and along with topics including macroeconomic trends, ESG, and the environmental crisis, are all certain drive many conversations in Milan this June.

Continue the discussion!

Join us to further the discussion, share ideas and experiences meet industry leaders, and learn about the latest global real estate trends from experts. The ULI Europe Conference takes place 10-13 June in Milan. View the full programme here.