Impact of Russian Invasion on CRE Markets Likely 'Negligible'

Russia’s invasion of Ukraine this week portends a hike in Western-backed sanctions against the former, but commercial real estate experts say the immediate effect on the sector will be “negligible.” 

“The impact on commercial real estate will likely be indirect, as the effects of the conflict feed through into commodity prices, inflation, bond yields and ultimately perhaps economic growth,” Real Capital Analytics’ Tom Leahy says in a new analysis. “The main mechanism is likely to be through higher energy prices, which add to the inflationary forces already being felt across most European economies.”

Brent crude prices hit $100 a barrel for the first time since 2014 early yesterday, and prices of natural gas in Europe also spiked immediately following the invasion. Russia accounts for nearly 40% of all of the European Union’s gas imports, however, so the effect of reliance on Russian gas for countries like Italy and Germany will potentially be “widely felt,” according to Leahy.

But Leahy says Russian capital has “very little presence” in commercial property markets, with outbound capital flows averaging just $330 million per year over the last five years. Ukraine’s institutional property market is also small and largely domestic.

And while the gap between European property yields and bond yields is above the long-term average, “the spread is already being squeezed by rising rates and an inflationary shock will likely impact property yields, which remain at record lows in many of Europe’s core markets,” Leahy says. 

“Looking further out, property is a long-term investment and a secure income stream from core assets can act as a buffer against volatility in other asset classes and the outside world,” Leahy said. “But Russia’s invasion is another fracture in the post-Cold War settlement and may prove be a harbinger of even more uncertain times to come.”