In the last year or so, geopolitical events including Brexit, the U.S. and French presidential elections, and several terrorist attacks throughout Europe, have rattled the western world. The result has been volatility in every type of investment vehicle, from stocks to bonds to commodity markets. Luxury residential real estate is no exception.
Like other investment types, "geopolitical events affect real estate markets virtually instantaneously," said Paul Habibi, a professor of real estate at the UCLA Ziman Center for Real Estate. "But unlike other investment types, we don’t always see the messaging right away."
What he means by that, Mr. Habibi said, is that with stocks, you can see the knee-jerk reaction to a negative event, like terrorism, or an unexpected outcome, like the Brexit vote, almost immediately, as stock prices drop. A stock market surge can be just as swift when an event like the U.S. election of President Donald Trump inspires investor confidence, he said.
But with real estate, the timeline is stretched out, as the buyer’s decision to purchase a property is the start of a long process, which includes them making an offer, having it accepted, going into escrow and completing inspections and contingencies.
"Thirty, 60 or 90 days after the offer, the transaction closes and records, and the rest of the world knows what just happened," Mr. Habibi said. "This lag factor in real estate markets means that the translation from a geopolitical event to noteworthy data and information is anything but immediate."
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‘Real estate prices are sticky’
In terms of what that effect is, it also has less to do with price than other investment types, and more to do with activity, Yolande Barnes, the director of world research at Savills, wrote in an email.
"Real estate prices are 'sticky,'" Ms. Barnes wrote, "and tend not to adjust quickly to external events."
What does adjust, though, is turnover, as sellers, who aren’t under any financial pressure to part with their property, withdraw from the market, and buyers hold off on making a purchase to wait things out and see what happens.
"In other words, you are more likely to see a reduction in transaction numbers after an adverse event or during a period of uncertainty," Ms. Barnes wrote. "Prices only fall at the point that there are more vendors who have to sell than purchasers who need to buy."
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Mr. Habibi agreed, noting that luxury sellers have staying power that allows them to ride out any volatility from a single geopolitical event or the aggregate impact of these events viewed together. But, he said, "the median earner doesn’t have that same luxury," which can spell calamity for the broader real estate market.
One change that can typically be seen immediately in the luxury real estate market is a drop-off in high-end rentals after an isolated terrorist attack. This is what happened in the French Riviera after the Nice terrorist attack last July, in which 86 people were killed and another 400-plus were injured when a cargo truck plowed into revelers celebrating Bastille Day, said Gillon Hunter, the head of digital at Beauchamp Estates’ Cannes office. "The effect on vacation rentals priced at €15,000 to €150,000 per week was immediate," he said.
But the slowdown of sales in the area has been about other recent geopolitical events, like Brexit, not a fear of terrorism, as no one seems to be changing their travel plans. "Inquiries are up 30% in 2017 versus 2016," Mr. Hunter said, "and prices haven’t dropped." You just have a lot of inventory on the market, he continued, and potential buyers taking their time to decide, which has meant a lag in sales.
The election of the new centrist French president, Emmanuel Macron, is expected to have a net positive effect on the market, Mr. Hunter said, as there has been good momentum and more inquiries since the vote. U.S. buyers backed by the strong dollar are also expected to take advantage of this currency play to purchase second homes in the South of France.
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Difficulty gauging where opportunities will be
But here’s another effect of the current geopolitical uncertainty, which some experts have called the most significant since World War II: It’s hard to predict where the opportunities will be and what will happen next.
Kate Everett-Allen, a partner in residential research at London-based Knight Frank, said that at times of geopolitical crisis, experts do see an increase of capital moving into safe haven markets as occupiers and investors look to shelter funds in tangible assets such as luxury bricks and mortar.
Mr. Habibi is less certain. "When people ask me where the real estate market is going, I tell them it can go in 12 different ways depending on what happens in other countries," he said. "That’s not something that I can predict in a vacuum, and neither can anyone else."
What he is sure of is that in the past decade, there’s been a huge uptick in the interconnectivity between global geopolitical events and what happens in the U.S.
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"Today, there’s a closer relationship between global events, a quicker transmission of information, and more investors with assets spread across multiple countries, in multiple currencies," he said. "This has created a situation where you can’t sneeze in one country without having an effect in another."