It is a messy, complex and dangerous world out there. Particularly if you are not prepared for it. Technology and globalisation have delivered immense benefits to the property industry. But they have also brought global threats closer than ever. So what are the triggers the industry needs to be monitoring? From rising inequality to terrorism, climate change and cyber attacks, EG maps out the global threats that should be on your radar.
Donald Trump
There are no two ways about it, the Republican presidential candidate is somebody the industry needs to be worried about.
The US has consistently been one of the most reliable international investors in UK property. But in his run for the White House, Trump has been hostile towards free trade and labelled China as a “currency manipulator”.
He has advocated a number of regulatory measures, from slapping tariffs on imports from China to the government repaying only some of its debt in an economic crisis.
In the event of a Republican victory, his policies could even escalate into a trade war and break up the trans-Pacific partnership between the US and 11 other American and Asian states which was signed in February 2016, according to the Economic Intelligence Unit.
Miles Gibson, CBRE’s head of UK research, says more than Trump himself, the real threat is what he represents: “Insularity – a catch-all phrase for protectionism, for being less open to the world, less cosmopolitan, less diverse, biting the hand that feeds us.”
He adds: “Global cities are by definition not insular, so if we turn in on ourselves, the chances of us being successful in the future are lower.”
How to protect yourself/your investment Bilateral investment treaties exist between many countries, protecting investors from a wide range of government actions and interference. An EU-US trade and investor mega deal is being negotiated. However, it is facing fierce opposition from some member states, activists and environmental organisations, sparking doubts about whether it will be passed.
Political risk insurance is an alternative solution. It protects foreign investors against risks associated with a host government, including discriminatory regulations against an investor or project, creeping expropriation, or breach of contract.
Insurance can also be obtained for country-level risks that apply to all investors in that country or sector, including war, revolution, mass nationalisations, regulatory changes and currency inconvertibility, according to Ian Roberts, partner at Clyde & Co law firm.
Terrorism
Deaths caused by global terrorism increased 80% between 2013 and 2014 to 32,658, according to the latest Global Terrorism Index, which tracks the number of deaths caused by terror attacks. And the global economic cost of terrorism reached its highest-ever level in 2014 at $52.9bn (£36.6bn) – a tenfold increase since 2000.
The hotel industry is particularly vulnerable. Following the most recent attacks, in Brussels on March 22, the city’s hotel occupancy levels fell 19.6% to 57.7% for the entire month according to STR, an industry data tracker.
Analysts found there was a three-month recovery pattern for hotel occupancy rates following the 2005 attacks in London and November 2015 attacks in Paris. But sustained attacks are likely to cause prolonged occupancy dips as nervous tourists choose to holiday closer to home.
While recent attacks have targeted tourist destinations, another 9/11-style attack could have a disturbing impact on global cities’ financial districts. A study by the National Bureau of Economic Research in Cambridge, Massachusetts, found the 9/11 attack on New York led to an increase in vacancy rates in Chicago Central Business District’s three landmark office buildings – the Willis [Sears] Tower, the Aon Center and the John Hancock Center.
Shopping centres and retail parks are also at risk. Many have already stepped up security measures but these may need to go further if the threat level increases, possibly deterring shoppers.
How to protect yourself/your investment The rise of “lone wolf” attacks have made it more difficult to predict where terrorists might target. MI5 advises all businesses to carry out risk assessments, consider security at the planning stage, keep access points to a minimum and install appropriate physical measures such as CCTV, locks and lighting. A number of governments now provide some insurance cover for property in the event of a terrorist attack. Following the 9/11 attacks in New York, the US government created the Terrorism Risk Insurance Program, which guarantees insurance payments for commercial property owners in the event of a terrorist attack if a company’s losses exceed $200m.
In the UK, Pool Re was introduced in 1993 to help make insurance protection against terrorist attacks viable. It works by having participating insurers, such as ACE, pay losses as a result of terrorism up to a threshold. If losses exceed that threshold, the insurer can claim reserves accumulated by Pool Re.
Chinese economic slowdown
The prospect of a sharp economic slowdown in China was rated the top global risk scenario by the Economist Intelligence Unit in April. Fear of a continued economic deterioration was put down to the ongoing build-up of the country’s debt stock (equivalent to 240% of GDP), downward pressure on the renminbi’s exchange rate against the US dollar, and continued deterioration in the country’s services and manufacturing sectors.
What threat does this pose for property? Domestic uncertainty in China has had the adverse effect of making commercial property investment in developed Western markets an attractive investment. Richard Zhang, head of CBRE’s China Business Team in London, says Chinese investment volumes in London for 2016 could even exceed the £3bn recorded in 2015.
However, there are concerns that the market uncertainty could cause higher medium-term funding costs, which could spill into the commercial property sector.
While many investors are looking to diversify their portfolios with more property assets, others might look to return their capital to domestic markets. Research by law firm Paul Hastings found Chinese authorities might continue to guide investors towards slowing down on overseas investments in the short term.
How to protect yourself/your investment “Property firms and investment companies will need to remain very engaged with Chinese investors because the impact is uncertain,” says Walter Boettcher, director of research and forecasting at Colliers International. “On the one hand, a slowdown could mean fewer Chinese investors. On the other hand, existing domestic Chinese investors may find far fewer opportunities in China, hence would begin greater cross-border investment.”
Grexit
Just when you think Brexit is resolved one way or another, along comes the uncertainty of Grexit. If Greece fails to abide by the terms of its latest bailout, it could eventually depart from the euro, sparking a rebellion across the Continent.
Countries forced to leave the eurozone would suffer large devaluations and be unable to service euro-denominated debts, according to the analysis by the EIU. Banks would then suffer huge losses in their sovereign bond portfolios, resulting in major disruption to the global financial system and plunging the world economy into recession.
“While Grexit is no longer the systemic threat to the eurozone it was four years ago, it would still be a messy and disruptive event,” says Andrew Burrell, head of economics and forecasting at JLL.
“As Grexit would be an unprecedented step, there will be considerable uncertainty in the transition – more even than Brexit. So it is the diffuse effects on business confidence and financial markets across the eurozone that will be most important.”
How to protect yourself/your investment “Nothing that hasn’t been done already,” Burrell says. “Greece is already a no-go obviously. The most vulnerable economies in terms of contagion – Spain, Ireland and Portugal – are much safer now so there is less concern about these exposures.” He adds: “If the exit is well managed with both sides working constructively and support from the IMF for the return of the drachma, this may not be too disruptive, outside of Greece at least. If it is the result of a hasty ejection, it will be far more damaging.”
Rising inequality
Worldwide inequality last year was “at its highest since records began”, according to the Organisation for Economic Cooperation and Development, fuelling uncertainties around economic growth, social cohesion and security.
Property has arguably been integral to the problem. On the one hand, inadequate housebuilding in urban areas has led to huge house price increases, pricing out many and making easy returns for lucky homeowners. Meanwhile, the Panama Papers leak of 11.5m files from the database of offshore law firm Mossack Fonseca shone a spotlight on property’s role in assisting tax avoidance by the rich, powerful and sometimes criminal.
We have all seen the photos of protesters hurling abuse and more at property events. There is public outrage and political discontent with the industry. The government has started recruiting a new crack team of experts to hunt down property developers dodging tax using offshore companies.
While a more transparent system would be supported by many, there is a danger of dramatic regulatory changes being introduced without significant input from the industry, deterring clean foreign investment and creating uncertainty.
Rising global inequality has been linked to the crowds of economic migrants who are fuelling the migrant crisis, putting pressure on the infrastructure of European cities. Swelling migrant camps could be the cities of the future and migrants could be a much-needed workforce.
However, the trend towards countries tightening their borders as a reaction to the crisis is likely to restrict the movement of EU workers on which the construction industry is reliant.
How to protect yourself/your investment Rachel Davies, head of UK Advocacy and Research, Transparency International UK, says: “Layers of secrecy facilitated by the offshore company structure prevent effective investigations by police and checks by those working in sectors such as property.
“This means property in the UK can be acquired anonymously and anti-money laundering checks can be bypassed with relative ease.
“Typically, solicitors are expected to conduct due diligence on the buyers but our research indicates that all sectors are vulnerable to money laundering. Estate agents should apply more scrutiny to buyers and develop information sharing forums with solicitors in case of suspicious activity.”
Cyber threats
Two thirds of UK businesses have been targeted by cyber attacks in the past year, according to the government’s cyber security breaches survey conducted by Ipsos Mori and released in May. While a quarter of businesses had experienced a security breach at least once every month, only one in 10 had formal processes in place for managing such incidents. Yet a single data breach cost a company $3.8m (£2.6m) on average in 2015, according to IBM.
Increasingly reliant on technology, commercial property companies are not immune to the threat. Theft of sensitive information, strategic plans and tenant information are the most visible targets of cyber attacks, suggests the Deloitte Center for Financial Services.
Given significant amounts of cash maintained on the balance sheet as well as large transactions related to acquisitions, disposals and financing of commercial properties, the industry could be particularly vulnerable to financial cyber risk.
How to protect yourself/your investment While phishing, vishing, crypto-viruses and ransomware all pose huge threats to corporate security, cyber-crime is likely to focus increasingly on the Internet of Things, says JLL EMEA’s chief information officer Chris Zissis. The number of devices hooked up to the internet means more and more data can be hacked.
“Property owners and their tenants must do three things: understand the sort of data the IoT generates while it monitors and safeguards buildings, work out which data is of value, and get solutions put in by leading security experts to secure that data,” says Zissis.
Building management systems including CCTV, fire alarms, air conditioning and heating are no longer separate from IT systems and are vulnerable to cyber attacks. Zissis says property firms need to put education schemes in place to increase awareness, responsibility and speed of reaction to any security breach.
Climate change
If the planet warms up by two degrees Celsius, scientists predict it would lead to a 4.6m sea level rise for Copenhagen, submerging 255,000 homes.
At December 2015’s Paris talks, 195 states agreed to aim to keep temperature rises under that level.
As well as physical risks to property, there are likely to be implications for investors in terms of planning, building regulations, carbon taxes and energy certification.
Buildings account for close to a third of CO2 emissions and growing regulation in Europe is changing market conditions.
From 2018, it will be unlawful to let out properties with ‘poor performing’ energy performance certificates. Further natural disasters are likely to increase public support for greater regulation on buildings, as well as affecting property values and insurance premiums in ‘at risk’ areas.
How to protect yourself/your investment Caroline Hill, head of sustainability at Land Securities, says the industry needs to take action to “avert a global crisis”. Land Securities has set itself a carbon reduction target which sets out the pathway required by the CRE sector to ensure global warming does not exceed two degrees compared to pre-industrial levels.
Actions that can be taken include higher design standards to create low-carbon buildings and minimising the use of energy in the construction process. Methods to make existing buildings more sustainable include introducing renewable energy, natural spaces, insulation, double glazing and recycling.
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