One year ago, politics loomed large in the picture of 2024: almost half of the world’s population was set to vote in national elections affecting more than 70 countries. As explored in PERE’s coverage, polling in Taiwan, France, the UK, Germany and, most recently, the US carried particular weight for a private real estate industry still grappling with the macroeconomic upheaval caused by interest rate rises in most major economies.

At the close of 2024, the outcomes of these elections are now decided. But far from calming the waters and instilling confidence in the investor community, geopolitical risk continues to restrict capital flows into real estate, and will continue to do so at least into Q1 2025, says Simon Durkin, global head of real estate research at New York-based manager BlackRock.

At the beginning of September, the trajectory of interest rates seemed more certain than it had been at the start of the year and inflation was coming back toward target, Durkin explained. Some three months later, however, “there’s probably more risk in the environment currently than the market was factoring in toward the end of the summer.”

Durkin: investors are pausing to see how the geopolitical landscape manifests

Is this a reaction to the slowdown in the pace of interest rate cuts? “Probably, yes,” Durkin said. “But more importantly, the risk-free rate – as evidenced by the UK 10-year Gilt and US 10-year Treasury – has stayed elevated and hasn’t necessarily fallen in line with interest rates, and that’s simply reflecting increased geopolitical risk and macro uncertainty.”

Together with the ongoing conflicts in Ukraine and the Middle East, geopolitical uncertainty has been stoked by the short-term impact of widespread political elections, which have thrown “some surprises” in the results and a lack of transparency regarding future economic policies. “What might the impact of tariffs be on Europe? What might the impact of tariffs be on global growth? There are still some question marks there,” Durkin said of Donald Trump’s impending second term as US president.

“But I don’t see that all as a downside,” he added. “A pro-growth administration in the US is probably a good thing and the public markets seem to think so. If we see quite quickly the resolution of several conflicts around the world, as has been telegraphed, then that’s got to be a good thing.”

Nevertheless, the risk that import tariffs and other potentially inflationary economic policies under Trump will curtail the US Federal Reserve’s plans to further reduce rates – or even pressure the central bank to reverse course – is causing concern for some in the real estate industry.

Durkin acknowledges that “we don’t really know” to what extent Trump’s policies will be inflationary, but thinks it is “more a possibility than a likelihood” that the Fed will return to a monetary tightening stance. He believes a number of policies touted during the election campaign could potentially be wound back “once there’s a real understanding of the impact on global growth and global markets.”

Delayed return

As markets wait for a clearer picture of Trump’s policies to emerge, the prevailing uncertainty is acting as a drag on both investment volumes and capital flows into real estate, Durkin observed.

We are seeing “early signals” of an uptick in transaction activity as we move into 2025, he said. Indeed, broker JLL pegs global direct investment volume for Q3 2024 at $182 billion, reflecting an uplift of 26 percent year-over-year.

That said, Durkin says deals that were being pushed to get over the line by the end of 2024 might now be delayed where possible into at least Q1 next year while investors pause to “see what the geopolitical landscape is likely to manifest as.”

As a result, he expects to see lower deal volume in Q4 2024 than was forecast at the start of the quarter – although it will still exceed Q3. “I think that strong uptick in investment transactions has simply been delayed by three or four months, and we’ll probably see that as we get to Q2 next year,” Durkin said.

Despite this, he is confident that the transaction market has bottomed out – and to such a degree that investors are not likely to wait around for longer than another quarter before re-entering the market with fresh capital commitments. “We’ve already seen huge valuation adjustments in real estate – prices have moved very quickly and very aggressively. I think that, to some degree, would offset the increase in geopolitical risk. Having been through several cycles myself, it’s a very different investing environment if you’re buying in a rapidly growing market than if you’re investing in a market that’s still declining.”

Despite the impact of additional geopolitical uncertainty, Durkin says the pace of the recovery in transaction volumes and capital raising “was always going to be relatively steady” – not least because today’s macro environment has a different complexion compared with the years following the global financial crisis.

“Within a fairly short period, we can certainly find ourselves in a very different situation from the one that we’re in now with respect to geopolitical risk,” Durkin said. “But we haven’t quite adapted yet to what life in a normalized interest rate environment actually looks like, given that we’ve lived with very, very low interest rates for 12 years and are still dealing with the consequences of a global pandemic.”