The geopolitical crisis may seem to impose a significant threat to unwaveringly escalating and perpetually growing Australian commercial estate (CRE) market, but an analysis of the data of some major geopolitical events that have occurred over the past hundred years shows a little or insignificant impact on Australian CRE market.
Some of the events that have taken place in recent years, like the US activating Article 50, presidential elections in the US, France and Iran, various terrorist attacks and much more. These were thought to have a catastrophic effect on the global economy, and drastic changes were expected. But after the initial inhibition of potential economic impact by the investors, everything came to shape up well.
The strained relationship between the US and North Korea has been much talked about topic in the recent times. It has been waxing and waning for decades now but has become a matter of concern in the present scenario due to the increased missile and nuclear weapon potentials of North Korea. Kim Jong Un, who has been the leader of North Korea since 2011 has displayed his capabilities by launching more missiles than his predecessors Kim 2 Sung and Kim Jong 2 combined.
In the past few weeks, the situation has become tense; as UN Security Council has agreed upon more sanctions on North Korea. President Trump threatened with “fire, fury and power” in addition to his statement, “things will happen to them like they never thought possible” and “military solutions are locked and loaded should North Korea act unwisely”.
Looking back into the history of such conflicts or geopolitical events, which have been resolved before they could turn into actual conflict, it can be observed that while the confidence of the investors was shaken for the short term but there was little or no effect on the Australian Commercial Real Estate market in the long run.
However, a longstanding conflict involving our preeminent trading partners like US, South Korea, China and Japan is expected to have an adverse effect on economic growth and CRE of Australia, but at present stage, it seems to have a little possibility.
On analysing the data of the major conflicts in recent history, it can be established that Australian office revenues (as per data provided by MSCI) have been inveigled more by changes in domestic economy than animosity of other nations such as 9/11 terrorist attack or the two Gulf wars.
Although Gulf war 1, which lasted from August 1990 to February 1991, coincided with the recession in Australia and CRE crash with an increase in vacancy rates of over 20% in Australian CBD office, yields did show an increase. Even after the 9/11 terrorist attacks, office income returns and vacancy rates at CBD office market registered a little change. In the same fashion, there was an inconsiderable difference to yields.
While limited change has been registered in the long run, due to conflicts in recent history, market sentiments have been disturbed in the shorter term. An upsurge could be seen in customer attitude when the Vietnam War ended, and a plunge was recorded at the beginning of Gulf and Falklands wars. Even after the unfortunate terrorist attack of 9/11, a change in the sentiments could be seen. However, these negative emotions were short-lived and cannot be regarded solely as the impact of these geopolitical incidents as they also corresponded with recessions of the early 1980s and 1990s.
The fundamental reason for the attraction of investment in Australian CRE has been comparatively attractive returns as correlated to alternative investment options such as bonds. As the Australian historical CRE yield records are limited as compared to bond data of US government, which is accessible since the 1870s, a conclusion can be sought using the available statistics.
The data shows that amid the major conflicts like World War 1 and World War2, there was a negligible effect on the yields of US bonds. However, a dip in yields was recorded in the months after the commencement of both the Gulf wars and 9/11 terrorist attack. Stable or diminished return in bonds indicates that CRE should have remained comparably inviting to investors. On the other hand, contraction in CRE interest due to economic slowdown could have had an adverse impact on demand.
The available data shows that however there were no long-lasting effects on Australian CRE market but the sentiments of the market were hurt. Vacancies, rental growth and tenant demand depend directly on the growth of the economy, and it can be seen that economy suffered during extended duration of conflicts as indicated by the statistics of Australian GDP from 1900 to 2016.
During the World War 1, GDP fell by an average of 1.4% per annum. The economy was even more unstable during the World War 2, with GDP dipping to 0.3% initially, in 1939 and then recording high growth equating to almost 8.2% per annum from the period of 1940 to 1943. Then the GDP plunged to an average of 4.2% per annum during 1944 to 1945.
During the Korean War, which lasted from June 1950 to July 1953, the GDP real growth was recorded at an average of 3.8% per annum, with the exception of 0.9% in 1952. At the time of Vietnam War, which escalated due to the participation of US and lasted almost 20 years (from 1955 to 1975), the GDP averaged 4.4%.
As mentioned earlier, Australia went through recessions at the beginning of the 1980s and 1990s. These recessions were influenced more by domestic factors than the events taking place in the outside world, such as Gulf and Falklands Wars.
Australia has not known any recession since 1991 as its increased trade ties with China have aided its growth and stability. Where almost all the other progressive economies have had an adverse impact on the changes like 9/11, tech wreck and GFC, Australia has remained unaffected.