Russia-Ukraine War: Why Global Real Estate Just Changed
Today Russian missile strikes are still hammering Kyiv and there are burned-out armoured conveys at Kharkiv. Five days after President Vladimir Putin launched his invasion of Ukraine, and with U.S., UK and European Union sanctions now biting, the conflict raging around Ukraine’s major cities seems to lurch between apocalyptic unpredictability and a bloody stalemate.
Nobody knows what the next few days will bring on the ground, but it is clear that there are profound risks to real estate in the sudden end of a predictable global order.
A stable, rules-based global order was great for business. Over the 30 years since the end of the Cold War, international investment on an unprecedented scale has helped real estate thrive.
Suddenly that stable world order seems in doubt, if not already dead. Something more like the Cold War has returned.
And whilst Russia’s economy may be relatively small (measured by GDP), it has an outsized impact on global energy markets. Any damage done by or to Russia will have geopolitical consequences that property will feel first, and possibly hardest.
So where to look for the medium and long-term consequences of the Ukraine invasion? To find out Bisnow spoke to numerous experts: a professor, a global risk analyst, an economist and an international investor.
Their consensus is that property’s new normal will mean a reset of values, a serious recalculation of property's risks and slower, more cautious and more anxious deal-making for years to come.
It Starts With Inflation
Most analysts are revising up their inflation forecasts, and revising down their growth forecasts for the next 12-18 months. Rising fuel and food costs will dent consumer spending in the medium term, according to Oxford Economics. According to Capital Economics and Pantheon Macroeconomics, UK inflation could hit 8% by April. Eurozone inflation peaked at 5% in February, Oxford Economics analysts suggested. Inflation is already at these levels in the U.S., where it hit a four-decade high of 7.5% in January. The only way is up.
“A protracted period of severe tensions is still the more likely scenario, risking more permanent damage to the European economy, which means that risks to the outlook have now moved firmly to the downside,” Oxford Economics said, predicting that policymakers would delay interest rate rises until early 2023 in an effort to smooth out the bumps. The consultancy is still tipping “a robust recovery in GDP growth in Q2 and Q3 this year” but is prudently slicing the top off its forecasts.
A prolonged bout of inflation can do serious damage. Nearly 50 years ago the Yom Kippur War of 1973 unleashed an energy price shock that in turn slowed the global economy for a decade. Could the Ukrainian crisis do something similar?
Charles Hecker is partner at global consultancy Control Risk, and a specialist in geopolitical dangers. “We’re hearing every single historical precedent being invoked, but I’d say until we have a clear view of what’s happening, be careful with the analogies,” Hecker said.
Behind the inflation risk sits the likelihood that the global economy will become slower and stickier, Hecker said. Friction will increase, caution become the norm, and geopolitical risks loom large in a way they haven’t for three decades.
“We will see investors and business being more careful, there will be more foresight, being more cognisant about the way we invest will be critical,” he said.
“We had a client in the infrastructure sector asking only a few days ago what safe for them will look like. And it depends on different risk appetites, but business will need to find their safe place, and it may not be where it is now.”
Some sectors will be more impacted than others, and property is closer to the inner circle of risk because governments consider land and what gets built on it to be significant, he said.
There’s a strong case to be made for climate change being a more significant risk — it is more pervasive and chronic — but the acute pain caused by the Russia-Ukraine War could look and feel more significant in the medium term, Hecker argued.
Exactly How Much Slower?
The key that unlocks the new mood is that (as a senior European diplomat put it) “Relations with Russia will no longer be determined by trade".
Those interviewed by Bisnow very much agreed with this, but the extent and seriousness of the slowdown left them divided.
“Ukraine provides about 40% of Europe’s wheat basket, so this crisis is going to impact the price of goods, and gas prices will spike, this will definitely impact pricing for average people," he said. "But thanks to Covid a lot of them have accumulated savings, and the banks are in a healthy shape, so we’re better protected from this kind of price shock than in 1973."
The danger is not a mild dose of inflationary pressure, but that governments react inappropriately," he said. Getting interest rate decisions wrong — too much, too soon or not soon enough — comes with risk. Breslauer’s conclusion: “I don’t really see this as a major event in long-term economics, even if it is a spike, and obviously a major issue for the Russia/Europe dynamic.”
On the other side stands professor Vladislaz Zubok, Russian born but London-based professor of international history at the London School of Economics. Zubok said he is “no longer even trying to penetrate Putin’s mind”, but suspects Putin wouldn’t have launched the Ukrainian invasion when he did if he didn’t rate the chances of economic fallout for the West as high.
“Putin saw a moment of extreme vulnerability for the West when it announced its policy of switching to greener energy but still depending on the meantime on Russian oil and gas," he said. "Whether prices grow as astronomically as they did in 1973, we shall see, but it is entirely possible.
“My thinking is we’re going to see a huge spike in volatility, and the economic consequences will flow from that.”
Zubok pointed out that inflation (already present) plus an economic slowdown (everyone agrees that’s a likely consequence) equals stagflation, one of the big terrors of the 1970s. That would leave the property industry with a serious headache. “Stagflation is where all this could lead us,” he said.
Don't Exaggerate The Risks ...
Colliers chief economist Walter Boettcher tends more to Breslauer’s view than to Zubok. “If what’s happening means investors slow down and think more carefully about the income assumptions they are baking into their projects, that’s a good thing,” he said.
“Inflation will spike, in the UK that will probably happen in May, irrespective of the Ukraine crisis, and will start to come down and be contained by mid-2023. I’ve not seen anything yet that suggests that projection will change.”
Boettcher is also sceptical about the 1973 analogy and suggests a different historical perspective: 2014, when Russia invaded the Crimea.
“When Russia invaded Crimea oil was about $100 a barrel, and it was the same price when they invaded Ukraine last week. But by the end of 2014 oil had fallen back down to $50 and will it follow a similar pattern this time? Frackers and other gas suppliers are capable of a rapid response,” he said.
The kind of environment our experts have described is not precisely hostile to real estate but kicks up plenty of reasons for caution, hesitation, longer gestation periods and more finely balanced judgments. It will be a more nuanced, slower-moving international property scene.
This could go on for some time. “Until this began we were in a very low interest rate environment where tech dominated valuations in the stock market. If that changes, I don’t know what that means. I suspect more saving, less spending,” Breslauer said.
“The Ukraine war means in the medium term things will get slower, and maybe that’s not bad because we’ve got some thinking to do. As a minimum I think the outcome of that will be a resetting of values, which could be huge.”
Boettcher agreed. “What real estate is looking at is a slowing of deals, roughly like we saw during the pandemic. Prime will probably be less affected than opportunistic deals. We’ll know in a few weeks or months when buyers and sellers have to make final decisions, and that will depend how things play out in Ukraine.”
... But Don't Ignore The Dangers
The low-wattage property market experts are predicting will be safe but perhaps a bit boring. Not like the last few hectic years, and a culture shock for many.
But boring is OK, isn’t it? The danger, experts said, lies the other way: that things get seriously interesting.
A renewed and entrenched Cold War would power down an already low-energy property market. “I lived in Texas during the Cuban missile crisis,” Boettcher said. “We used to play on the bomb shelters in our gardens. I pray we don’t go back to that.”
According to both Breslauer and Zobok there could also be unwelcome excitement from the Far East. “Money follows power, it has been like that from time immemorial, and if the Ukraine crisis shows the power of the West has declined, then the longer term consequence could be money and power moving to Asia,” Zobok said.
Hecker isn’t convinced. He said the shock delivered by the Ukraine invasions has galvanised the West in a way it hasn’t experienced for 30 years. The process is likely to mean the formation of a coherent shared international perspective — something missing for decades since the Berlin Wall fell. As a result the seepage of power and wealth to Asia seems less, not more, likely.
Meanwhile, Boettcher worried that the scale of Western economic sanctions on Russia could cause serious damage at home. “Governments are tinkering with things that have potential systematic fallout, and we don’t exactly know how that will go. I would like to think they’d already thought this through, but the systemic risk is unknown and unsettling,” he said.
“Keep your eye on the usual things — interbank rates, any sign of lack of liquidity in the banking system, and not just the Russian banking system," Boettcher said. "Today we’re in wait-and-see territory.”
The Russia-Ukraine War is still in its early stage — probably. And for now the best brains can agree that a cautious slowdown, and some potential revaluation of property values and risk appetites, is the most likely outcome.
But wars are unpredictable. Things could get a lot worse before they get better.