Opening the Urban Land Institute’s European conference in Milan, Italy, on June 12, former Portuguese Prime Minister José Manuel Durȃo Barroso focused his remarks on the impact of geopolitics on modern real estate. He said the topic would not have attracted much attention at previous conferences. But he said ongoing volatility in the global political environment will continue to be felt across the real estate industry.
Durȃo Barroso told delegates: “I believe our international geopolitical situation is indeed very polarized, fragmented, very volatile … unpredictable and dangerous. We are living in very difficult times that I believe are going to continue. So we have to factor in the geopolitical situation, in our decisions, for our societies and for our economies.”
The sobering comments reflected the growing concerns among many real estate leaders about the uncertain global political climate, with important strategies and decisions hanging in the balance. In ULI’s Global Outlook Emerging Trends in Real Estate 2024 report, released in March, leading industry figures flagged political instability—including the forthcoming U.S. presidential election—as an important factor in their strategic plans. In Milan, when delegates were polled for views of the most significant influences on European real estate, geopolitical tension ranked second behind interest rates, followed by climate change and environmental regulation.
Durȃo Barroso noted that the industry has weathered many challenging events since the Global Financial Crisis of 2007-2008. He lamented that the “world will never be the same” after Russia’s invasion of Ukraine in February 2022. He said the war was a moment of “historical significance,” with traditional considerations of market efficiency and competitiveness now overtaken by concerns of national security and resilience.
“Many found we were so dependent on Russian supplies of gas, and Europe has adapted remarkably in a very short period, but with some costs,” Durȃo Barroso said. “We see policies that are increasingly protectionist and increasingly nation-based, once again, giving more attention to issues of resilience or self-reliance, instead of opening to the rest of the world. For us in Europe, that poses a problem, because we Europeans are basically in favor of open societies and open trade.”
The war against Ukraine was a key factor in a rapid spike in inflation in 2022, pushing up prices of energy, food, and other basic commodities. Headline inflation increased from 0.3 percent in 2020 to 2.6 percent in 2021, and to 8.4 percent in 2022, much of it driven by the Ukraine conflict. The ramifications have been acute for real estate borrowers, as a hike in interest rates to curb inflation precipitated an unexpected increase in the cost of debt. For many property companies, the surge in spending sparked a crisis and required refinancing at much higher rates.
Loan losses for Europe’s real estate lenders remain challenging, according to figures from investment manager AEW. It estimates a 7.5 percent default rate, and a 2.5 percent loan loss rate, on the $730 billion (€572 billion) of loans originated in the 2018-21 period, equating to $54.2 billion (€42.5 billion) of defaults and $18.5 billion (€14.5 billion) of losses over the next three years.
Durȃo Barroso who received the Nobel Peace Prize in 2012, noted a win for Donald Trump in the 2024 U.S. elections would have ramifications for European security, while Trump’s protectionist stance could lead to further inflationary pressure on the region.
“Europe is, to a large extent, dependent on the U.S. for its security,” he said, adding that Trump’s reelection was a “matter of concern” because Trump has shown more sympathy toward Russia than toward Europe.
As a result, Durȃo Barroso said, Europe was building defense capabilities outside of NATO. Durȃo Barroso told the delegates he met Putin on 25 occasions during his political career and said Putin’s aggression to the West was driven by “resentment” over the fall of the Soviet Union. Putin believes “Ukraine is an artificial creation of Europe and the CIA and should not exist as an independent state,” he said. “We should be prepared for the long term.”
Durȃo Barroso’s opening speech was followed by Janet Henry, chief economist of British bank HSBC, who also sounded a note of caution on a potential second Trump administration, particularly its possible affect on interest rates, trade, and immigration. “If the U.S. gets a Trump victory, and that is where the probabilities are leaning,” Henry said, “the problem is more damage could be done through executive orders on immigration and trade protection, if he goes ahead and imposes tariffs on everyone.”
Against such a backdrop, only modest GDP growth is expected for the region this year and next, according to the European Commission; the euro area is forecast to grow at 0.8 percent in 2024. Durȃo Barroso urged business leaders to seize the opportunities now emerging from the “huge scientific and technological revolution.” He said generative artificial intelligence is now able to multitask and perform advanced, out-of-the box functions, he said, changing how consumers interact with goods and services.
“Human beings are understanding there is a form of [computer] intelligence superior to them,” Durȃo Barroso said. “AI is able to solve problems that we could not solve as humans, and it’s going to change everything.” But Europe, he warned, was “lagging behind” the U.S and China, which are both investing heavily in AI. “So we need to wake up and call for more competitiveness in Europe.”
