While the newspapers concentrate on the terrorist threat or the crises in the Middle East, there are other geopolitical developments that have the potential to reshape the world economy and, as a direct result, global property markets.
The old world order, in which developed countries deployed their wealth through foreign direct investment, loans and bond investing into emerging economies has been changed. Economic power has been globally redistributed, and countries such as China, India, Russia and Brazil (the BRIC nations), have emerged as new centres of economic dynamism.
Between 2000 and 2005, the BRIC nations contributed around 28% of global growth in monetary terms, and contributed almost 15% to global trade. Furthermore, according to research carried by Goldman Sachs the BRIC countries are now holding more than 30% of world capital reserves (2005). Currently, the emerging markets and oil exporting countries are financing around 65% of US net international borrowing, for example. The US budget deficit, accounting for roughly 7% of GDP, is mainly due to the level of imports from China. The developed world has reacted by imposing protectionist policies which has been an unwelcome response. Furthermore, these protectionist policies might lead to economic ‘power struggles' which will change the existing channels of global capital.
This article addresses the significance of geopolitical changes, their impact on capital flows and their importance for the global real estate market. The primary impact of emerging economies, and in particular China and India, can be assessed through their profound impact on the commodity markets, especially oil. Much could be said about the pricing consequences of potential political changes, or the shortage of oil arising from a political crisis.
Recently there has been some easing of oil prices, with the price falling to US$60 per barrel in early October. Cheaper oil might help to neutralise the expected global economic slowdown in several ways. It would boost manufacturing hit by higher energy prices. Additionally, it would relieve the pressure on consumers, particularly in the US at a time when many are concerned about a stalling housing market. Cheaper oil would also ease concerns about inflation and so reduce the need for central banks to increase interest rates.
That price relief might prove to be premature. The world still consumes as much oil as it produces. In mid-September, OPEC threatened to cut production without notice if the price fell further. Saudi Arabia, for example, has been selling less oil of late. So, any reduction in supply could send prices skywards again. Additionaly, the relative calm of this year's hurricane season and the reduced risk of an interruption to Iran's oil exports have contributed to the recent fall. But clearly these mitigating factors cannot be relied upon indefinitely.
In any scenario, the property market will feel the consequences. If oil prices start rising again, there is an increased inflationary threat through rising input prices and consequently interest rates may rise. One immediate impact of an oil price rise may be a significant increase in building costs and a consequent reduction in the return to developers. The retail sector will also suffer from reduced consumer demand (higher oil prices will act like a large tax on consumption). Those occupying office space will face falling demand for their products in most instances and will contract space requirements, placing downward pressure on rents. Tourism, together with the logistics sector, will be hardest hit by the impact of rising transport costs.
Meanwhile China and India, the two fastest growing consumers of oil, will continue fighting aggressively for access to remaining oil reserves in Asia, Africa and Latin America. In response, developed economies started imposing protectionist policies to protect their markets. The failure of the Doha negotiations has not helped in improving relationships between developed and developing countries, and protectionist policies have already led to new emerging trade patterns and agreements.
As a response to an increasing number of protectionist policies between the developed and developing world, trade between emerging economies increased from €222bn in 1995 to €562bn in 2004, accounting for 26% of developing countries' total trade (World Bank, 2006). The accelerating transfer to and creation of wealth in the emerging markets created a new dynamic in the property sector.
Thanks to high growth, booming exports and low interest rates, emerging economies have benefited from access to exceptionally low-cost capital. Investors have identified a significant opportunity and are keen to capitalise on it, aware that these conditions may not last. Policy makers in the emerging economies are now competing aggressively to attract more business and economic activity. Arguably, this will lead to overdevelopment if these high growth rates are sustained.
According to DTZ research, if Asia pacific real estate stock maintains its current pace of growth, it will exceed European stock in three years' time and US stock in five years' time. The increasing demand from emerging real estate markets such as China and India will take away significant amounts of money from traditional core markets.
Finally, investors should keep a close eye trained on the political landscape globally and its potential fluidity. The German coalition is encountering substantial tensions as soon as it addresses anything controversial (eg corporate taxation).
Meanwhile, in the UK Tony Blair's days as a PM are drawing to a close and the conservative opposition is enjoying renewed popularity. In France the race for the presidential elections in May 2007 has already begun. And next year attention will be on the US presidential elections.
Ljiljana Grubovic is senior investment analyst at DTZ
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