Geopolitical risk is difficult to ignore these days. The crisis in the Middle East, the ongoing war in Ukraine and the brewing tensions in the Taiwan Strait have become regular fixtures in the headlines, as are any number of global elections due to take place over the course of this year.
Why is it, then, that some private real estate executives are not taking geopolitical risk and its potential impact on their investment activity more seriously?
For example, one chief executive who spoke at our soon-to-be-published European roundtable brushed off the suggestion that geopolitical uncertainty – whether it be conflicts or election outcomes – would have any direct impact on his firm’s decision-making. His rationale was that such risk was not of significant concern for the industry, since most managers are in fairly established and liquid Western or Asian markets.
Is he underestimating the proximity between geopolitics and his business? As PERE examines in its February cover story, published this week, geopolitics creates ripple effects that affect global real estate markets from the most established to the newly emerging, with heightened risks redirecting real estate capital flows globally.
In the US, regional conflicts and global economic and political competition have helped fuel the rise of onshoring and domestic manufacturing. Onshoring, in turn, has generated real estate demand in new investable markets, or what Elisabeth Troni, fund manager at CBRE Investment Management, called in the cover story “micro markets” that have seen little to no institutional investment activity to date.
Such micro markets – with populations of 50,000 or less – are among the top 15 manufacturing growth markets in the US and include towns like Brownsville, Tennessee; Elizabethtown, Kentucky; and Sherman, Texas, according to commercial real estate services firm Newmark.
Geopolitical conflicts also have a measurable impact on real estate returns. In a podcast also published this week, Oxford Economics associate director Abby Rosenbaum tells us that increased tensions between China and Taiwan could be damaging to industrial capital values in North America. This is just one example of a geopolitical scenario where it is not so easy to connect the dots.
Indeed, one Europe-based executive at one of the world’s largest sovereign wealth funds told PERE this week that their organization was closely monitoring geopolitical risk, specifically China-US, China-Taiwan and China’s economy more generally, since many European countries rely heavily on China exports. The executive added the sovereign wealth fund has spent considerable time on asset reviews and was surprised geopolitical events such as the Red Sea attacks are not more widely discussed in terms of real estate implications.
That makes dismissals of geopolitical risk all the more worth challenging. Today’s uncertain times call for managers and investors to view the investment landscape from as broad a lens as possible. This means not considering geopolitics solely in terms of the direct effect on markets where they have assets, but also in terms of the wider flows within the global capital markets they so heavily depend on and benchmark against.
These indirect – and not-so-obvious – impacts of geopolitics on private real estate investing should be getting more attention from the industry, not less.
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