Is the Ukrainian Crisis a Scourge of Real Estate Investors?

    While Russia’s invasion of Ukraine has negatively impacted investor sentiment in the financial markets, it may not be all bad news for real estate investments. Find out why.

    Is the Ukrainian Crisis a Scourge of Real Estate Investors?

    If anything has been hogging the news headlines almost every day in the past few weeks, it would be the Russia-Ukraine tensions. And it is not just the humanitarian crisis that has been drawing the world’s attention, but also the severe economic repercussions that have injected much uncertainty into the world economy and global financial markets.

    In particular, the war has mounted higher inflationary pressures on the global economy, which threaten to derail a nascent economic recovery in many countries trying to get back on their feet from the pandemic, and even stoked fears of a stagflation.

    Since the conflict began, worries stemming from a bleak global economic outlook have spooked investors and sent equity markets on a roller coaster ride. Meanwhile, some real estate investors may be wondering if these will also have a ripple effect on the global property market?

    Rising construction costs aggravated by crisis but it’s not all grim

    In the world of real estate, one important concern that has come under scrutiny over the last two years has been the rise in construction costs. And this situation has been exacerbated by the Ukrainian crisis, as Russia and Ukraine are the world’s largest suppliers of numerous raw materials and energy.

    The U.S., for one, has seen construction costs hitting a 50-year high in 2021, on supply chain issues, inflation, and labour shortages, among other issues. In fact, construction costs in 2021 were 23% higher than pre-pandemic 2019, according to data from the U.S. Census Bureau.

    The U.S. is not alone in this, however, as many major cities over the world have also been caught in the same predicament.

    In Singapore, construction costs have also been on the rise, in part due to the conflict. Steel rebar prices have surged 18% since the onset of the Russia-Ukraine tensions in February and the current price is also twice of what it was pre-pandemic. Meanwhile, aluminium prices have also risen by more than 100% since before COVID-19. Other building materials have also become pricier by an average of 10% due to rising energy prices, which have been adding pressure to production, logistics and transport costs to developers, according to the Singapore Contractors Association Ltd. As a result of the soaring raw material prices, construction projects in Singapore are likely to be delayed.

    Russia and Ukraine are the World's Raw Materials and Energy Powerhouses

    What these imply is that developers around the world are likely to become more cautious and may further slow down their pace of construction, possibly affecting the supply of new inventory in the market, particularly in the European Union.

    Keith Ong, CEO and co-founder of RealVantage opines: “The Ukrainian crisis is likely to hit real estate markets across Europe harder than elsewhere in the world, as the European Union is highly dependent on Russia for its fuel needs and a reprieve from the ongoing supply chain disruption is nowhere in sight. These are likely to drive up construction costs and have a significant impact on the continent’s economic growth. For now, we remain cautious about new property development projects within the region, including the U.K.”

    Despite this, we believe that rising construction costs may not be all bad news for the real estate industry. Some existing asset owners may see an increase in the value of their properties or an uptrend in rent, as the supply of new property inventory and demand enters a state of disequilibrium.

    But we believe that this is more likely to occur in real estate markets outside Europe, such as the U.S., Australia, and Singapore, where the economies may be less impacted by the crisis than Europe, and property demand remains robust.

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    Equity market fallout may see flight to quality to real estate

    Equity markets around the world have been going through a rough ride, as the armed conflict cast a pall over market sentiment. Although real estate is lowly correlated with equities historically, a risk-off market could mean that some investors may pull out of riskier assets and allocate their money in investments with more stable returns. One such investment option for investors may be real estate.

    As this flight to assets generating more stable returns continues to pan out amid the uncertainties, it remains to be seen whether real estate will become an investor’s darling. But having said that, we believe that there is potential for astute investors to take advantage of the opportunities in property investments to make the most of their money.

    Strategically, however, we recommend that investors consider real estate projects that are more defensive and focus on core investment opportunities, rather than opportunistic or value add property investments.

    Property investments are an important portfolio diversifier to consider

    Over time, the performance of real estate as an investment asset has been proven to be lowly correlated with stocks and bonds.

    This is clearly illustrated in the following diagram, which shows the correlation between real estate (proxy: NCREIF Fund Index - Open End Diversified Core Equity, or NFI ODCE), stocks (proxy: S&P 500 Index), and bonds (proxy: U.S. 10-year Treasuries) — the lower the coefficient, the lesser the extent an asset class was influenced by price fluctuations in the other asset class it was compared to.

    As you can see, real estate’s correlation coefficients with both stocks and bonds over the 42-year period from 1978 to 2020 were near zero. This suggests that price movements in the equity and bond markets had almost no bearing on the performance of property investments.

    Correlation of Real Estate with Other Asset Classes 1978-2020

    So, in the markets where property values and rents are likely to rise on supply constraints and robust property demand as described earlier, there would be a good reason for you to consider investing in physical properties that are more defensive to mitigate the risks in your investment portfolio, without being overly worried about volatility in the stock markets.

    Build a diversified property investment portfolio the easy way

    One accessible way to invest in physical properties to achieve this objective would be through the route of fractional ownership. This mode of investment involves a much lower barrier to entry for investing in physical properties and allows investors to diversify their property investments across geographies, property types, investment strategies, time horizons and amounts, through an investment portfolio approach.

    Even better, investors would never have to worry about the hassle of having to oversee property and asset management matters on their own.

    So, consider diversifying your investment portfolio with physical real estate through fractional ownership today.


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    Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.