← Real Estate Without Borders
Real Estate Without Borders
The Surprising Markets Benefiting from Geopolitical Tensions and Capital Flows
00:23:07
Loading summary
Transcript27 lines
- [00:02]
A
All right, welcome back to Real Estate Without Borders. I mean unfortunately, seems to be a little bit of a geopolitical show as of late. There's a lot of stuff going on and this stuff impacts property markets a lot. Fortunately or unfortunately, we're going to be chatting a little bit about that. Going to try and give it a little bit more like technical and theoretical discussion around sort of like safe haven markets currency on like petrodollar. I know especially with conflict in the Middle east, like a lot of capital from the Middle east flows into real estate in markets around the world. So either this episode or next episode, we're going to kind of talk about what those places are and what could be the biggest sort of like net beneficiaries of capital flows in or out of those markets. So anyway, Cam, how's it going, man?
- [00:55]
B
Yeah, good. We missed each other last week because of the holidays, but it's nice to be back.
- [01:00]
A
Yeah, for sure. You mentioned before you were doing some research and reading on the petrodollar and what are you most excited to discuss for this week's episode?
- [01:09]
B
I'm not fully finished the book yet, I'm in the middle of it. But I'm reading a book called Our Dollar your Problem, which goes into, let me see here. Which dives into, in depth about how dollar took dominancy over petrodollar basically being the reserve currency around the world and what it means. You know, it's funny that you mentioned kind of talking about this and it's been topic on the news for the last little bit, especially what you're seeing happening over in the street.
- [01:39]
A
Yeah.
- [01:40]
B
And people starting to lower their, their reserves. You're not seeing it too, too much as of late as reflected onto the value of the US dollar because that's actually increased since this whole conflict has started seeing long term trends. It's probably realistically next to impossible. We can dive into what it means a little bit more for it to be completely removed out of it because there's no real good replacement. But no interesting. I think what we wanted to do was go over a depth of what's been happening for the last little bit and where we've been seeing it and sent over some interesting points. What was the first one you wanted?
- [02:24]
A
Yeah, I think a big one is like what ends up being the safe haven markets. Right. So like what, you know what, you know, we've got a lot of capital, you know, a lot of oil wealth in Gulf states, you know, Saudi Ron, Dubai, Qatar, et cetera. And like does A destabilization happening in the Middle east make them compelled, make them feel compelled to start moving capital into other places like the US or Canada or London is a big one obviously for like a lot of oil wealth and global capital, even Asia a little bit. You know, there's some commercial real estate components as well. Things being really impacted in the logistics and industrial space as a result of oil price inflation. So I mean we can, you know, I don't know if we really need to give people like a history lesson on. Most of this stuff's pretty fresh. But basically we've got this, you know, you know, this kind of fragile cease fire happening right now. Doesn't really seem like it is a real ceasefire. We've got oil basically going from like 70 to 120 a barrel. That obviously pushes into inflation. You know, there's, there's volatility in the market and people start to think about, you know, in property markets and in stock markets rotate, you start to see rotation into kind of some of these safer assets. So what, when we think about that, what, what are those safe assets? I'm curious to hear what you, you know, for you, either on the currency side or on like where are people moving capital? Right? Is it going into USD, is it going into US real estate? Iran specifically. And I think like, if we get time, I'll go through the list. But you know, a lot like Iran has one of the largest diasporas in the world. It's a very populous country and Iranians in many cases have moved in historically in large groups to places like, I think Canada has one of the largest Iranian diasporas. There's a London and then in, in like California and the US as well. So I'm interested to see if, if you see sort of another wave of that taking place as capital starts to move around. So what do you, what are you seeing? Like is there, like where's, where's money want to go right now?
- [04:33]
B
We've, we've mentioned it before. So it's not to kind of keep going back to it, but it's tried and true for the last whatever number of years, like 50, 60 years, it's falling into the US and the dollar is by and large the strongest safe haven area to go into. So you've seen that increase and you can really kind of correlate the two. If you look at it compared to Canadian Moon specifically because we have a huge amount of our economy tied into oil. So generally oil prices spike should strengthen significantly. Right. Because it's still one of our largest exports. But in relation to that. USMCA or the 2.0, because it's probably easier, at least in my mind rather than around the country and that negotiations coming up and just putting some downward pressure on it. But ultimately the oil price spiked and the US dollar still increasingly by 2% over the month of March give us huge fortunes. Because your point, where do people go when there's conflicting risk? It's anything within the United States, whether it be etc. So you can see those kind of strength that's behind it. Another one which we've talked about before would be yen. That's considered safe haven. Japan, yeah. But those markets, Europe, you know, Korea, Japan are heavily reliant on oil from that region. So President Trump, Donald Trump's comment and said we don't actually need these, these oils to facilitate like this doesn't affect us. We'd probably fall in the same market. And it gets more complicated than that because if the price of oil goes up, it's. Everything gets more expensive, which you're seeing in cpi. But those places are starting to see a lot of risks and the market had concerns about where the economy is going to move to because of the rapid inflation they'll see from their oil basically and their energy resources being restricted more heavily than what's readily available within our own markets. So you're not seeing the strength in the yen that you might expect things along those lines. I think interestingly enough, one of the things that was really good as well is the amount of fertilizer that comes out of that region. Also right from an inflation standpoint, we'll talk about inflation a fair amount because inflation, even from an investment standpoint, whether it be on international real estate purchase or obviously on just your own mortgage and can change what the Fed rate BoC does, the Fed does, which can also then reflect what you can invest into. And you're seeing inflation start to start to climb up and a lot of it coming from these oil shocks and whatnot. But those still haven't. It's a lagging indicator. So those still haven't seen the full brunt of it. So the expectation is that it continues to climb over the coming little bit. There's one economist that said, you know, they expect marches CPI index to probably the best one the next coming months. It wasn't particularly strong.
- [07:52]
A
Yeah, it always begs the question. It's a chicken and egg problem when you see these oil price shocks. If you go back and look at historic recessions, they're almost always preceded by an Oil price shock or if you look at oil price shocks, they're almost always guaranteed to deliver a recession. So you get this short term inflationary spike and then that causes demand destruction and people can't afford to buy stuff because everything just went up in value and consumption goes down. And then you get a recession trailing as a result. And so it become a bit of an economically turbulent period of time. I look at places that produce oil that aren't in the Middle East, Canada and the U.S. kind of easy ones to point to. Different type of oil. US has some of the lighter types of oil, but Canada is a good example of heavy crude. Not really used for fuel. It's more like plastics and gasoline and whatever Canada typically sees a little bit of strength in the currency ramps up oil production because the oil becomes economical again. Fertilizer could be another good example where you get places like I believe Saskatchewan is the largest potash producer in the world by an absolute massive margin. A lot of that goes to India, et cetera. So there's probably bull cases on the industry side for Canada to do decent and even the US to do decent by redomesticating a lot of these things. When your price curve goes up for the good, it becomes more economical, ironically, because you would have thought it would be cheaper just to produce stuff in your own country anyways rather than shipping it. But it becomes more economical to start thinking about goods onshore. So. And historically there's always this kind of criticism or skepticism or conspiracy around governments starting wars to stave off recession organically. The economy wasn't maybe in an excellent position anyway. It's like, is that a way to really run the economy hot? Right. You get the military industrial complex gets to pump a bunch of cash out. It can eventually drive rates down. We've obviously seen rates come in your mortgage rates in the U.S. i think mortgage rates jumped for five straight weeks. So that's kind of killed your spring market market in the US Construction costs rising from energy and supply chain hits. And already it was very deep in a buyer's market with high inventory and not a lot of transactions. Just interesting to see what that ends up translating to in the US So from your lens, if you were to watch it play out, probably inflation first and then kind of just too much pressure on the consumer and you get a recession thereafter.
- [10:36]
B
Yeah. I mean Canada and the States are two entirely different standpoints. But we've being up in Toronto, we've got our own concerns. One of the things outside of, you know, that's been trailing since last year, probably a little bit before. Unemployment's still high. We just put out employment numbers today and I think they were actually semi decent. We didn't contract and you're seeing a lot of revisions in the state from employment data as well, which obviously jobs aren't being created. That'll create long term effects on employment. Not a good thing for a working economy. But everybody's going to be a little bit cautious because USMCA or kuzma, whichever way you want to put it, it's starting up its renegotiations and I think that's going to create more and more concerns and turmoil. Who knows if people will have enough time to actually focus in on it with everything else going in, going on now. But we're still in an interesting spot here where we're starting to try and decouple ourselves a little bit from the United States to get rid of some of those risks. But that's not a quick process you're talking about on shoring. The United States is a great trading partner and they're also so close. Right. So yeah, as good as it is to diversify and I think it's great. You know, it works wonders for what I work in because it exposes people to other currencies and stuff along those lines. We're starting to see separation, less of a full reliance on them. You know, what was this? Looking at our merchandise exports to other countries other than the United states was up 24.8% month over month, which is something that came across today, which I thought quite interesting. And exports the United States declined 6.6%. That's the largest drop since the pandemic. So you are seeing kind of the work of decoupling moving on. It's got a restrict profit margins and stuff along those lines because again it states is an easy trading part from an economic standpoint, Canada is probably not in the strongest place. With all said the oil market could boom but no one's going to go in without some certainty of elevated oil prices before you're going to start investing in a whole bunch of infrastructure. It's not like, oh it's up to 110, let's go build a new plant. So that would be a lagging effect. Foils at 110 and everything else is probably going down. So what, what would that. I don't know. It's been a busy couple weeks, that's for sure.
- [13:17]
A
Yeah, I think the interesting piece to me as well is also like, you know, these conflicts in the Middle east, like do they do. We have historic comps on them triggering outward migration. And how does this happen? And so, you know, like, it doesn't seem like this war is getting less intense. I think that it's probably going to continue escalating. So you sort of see this like immediate displacement. People move within the country to safer regions and then you start to see like a bit of a regional spillover, which is large neighboring countries start to absorb the bulk of a lot of this. So I'm thinking back to case studies would be like the Afghanistan war, so 1979 to present the Iraq war in 2003. So we can look at those Syria, 2011. Right. And the question is, where do they go and where does their money go? Because especially in Middle Eastern cultures, I think real estate's a pretty palatable and attractive asset class. And Iranian Americans and Iranian Canadians are some of the most active and wealthy real estate developers that have built some of the first wave of immigrants from Iran in the 90s, 70s, 80s, 90s, now run some of the biggest real estate companies in North America. So I think that that's worth paying attention to as well. So if you go to Afghanistan, you know, 6 to 7 million Afghans were displaced at peak, primarily went to Pakistan and Iran. And then secondary markets were sort of your Germany, Canada and the U.S. and if you look at the, the Iranian diaspora, its largest presence is actually in the U.S. so you've got 50 or, sorry, 570,000 Iranian Americans as of 2021. And then it would be Kuwait. So that'll probably be the most immediately impactful. Where you'll see it there, Kuwait's like about 400,000, UAE about 350,000, Germany about 340,000. And then you get to Canada about 280,000. So you would assume your second wave effects after people have moved to those neighboring countries just for short term weighted out thinking we'll probably see some migration to some of those places. Iraq War, similar phenomena. Four to five million people displaced. First wave went to Syria and Jordan and then later to Europe and North America. Europe was very much Germany and Sweden there, where you would see that. Syria I think a little bit different because probably a slightly less developed economy when things first started, but 13 million people displaced, which was the largest since World War II. And a lot went to Turkey. And you're hearing a lot of that in Iran as well. Like a couple of people that I've spoken to sort of like go to Turkey especially. Turkey's economy is like, you know, they saw that huge deflation or so huge inflation, their currency has been. Been smoked. So it's not like a, it's not a hard place economically for people to, to move to. Then Lebanon and Jordan and then globally again, like sort of a Germany, Sweden, Canada, happened in that, in the Syria one. Roughly. Like if you look back at these historical comps, about 80 to 90% of the people actually like stay in the region. So like within the Middle east, but you're still going to get like 10% of that, of the, of whoever did get displaced is still a huge number of people going to North America, Europe, you know, the Anglosphere. So I'm interested to see that impact.
- [17:00]
B
Who knows if there's statistics on it, but ultimately wealth does provide flexibility and relocation. So it'd be curious to see, you know, the divide between it being refugee status or self migration.
- [17:15]
A
Yeah.
- [17:15]
B
And what the wealth status would come from. I'd happen to guess that individuals going into whatever London and areas like that probably have the means to be able to do so. Yeah, I guess declaring refugee status. So from an investment, real estate standpoint, who knows what he could leave from those ones.
- [17:37]
A
Yeah, it really, I think it depends on how much of a hedge they have against the local economic impacts. Because, you know, in the short term you see GDP contraction, you see currency collapse, you see capital flight, you see real estate crashes. So for people who, you know, like it's too late for people if their primary exposure is to the local currency. And you saw that with Russia and the Ukraine as well. Like Russia, the ruble. Right. Got smoked. And so we see a lot of Russian capital migration as well. If they don't have the buying power, you know, their global buying power just got diminished massively, then it's, it's, it's not even if it's compelling, it's difficult still.
- [18:11]
B
Yeah. You flagged Turkey. Their currency has been.
- [18:15]
A
Yeah.
- [18:16]
B
Not in a good spot for some while.
- [18:17]
A
Well, they had like a coup and then the huge earthquake. Right.
- [18:20]
B
I think. Yeah, that was. Maybe they had another one. There was that one years ago. But no, it's down like 35% or they've got 35% bond yields to try and inflate their currency so it doesn't continue to collapse. But even India is seeing difficult times from a currency perspective and they're sitting. They've lost about 5.5% of net value of their currency since January 1st. In January, I could see it making sense from the Gulf energy crisis recently, but just from the start of the year, I'd have to kind of look into a little bit further as to what's happening with that one. But you are seeing weakness globally. Really?
- [18:55]
A
Yeah.
- [18:58]
B
So, yeah, yeah.
- [19:01]
A
I think the other piece is like, where does the money go? Not just the people. So, you know, you see refugees going regional, but money tends to go a bit more global because they feel they sense this destabilization in the, you know, maybe they want to stay physically closer so that it's easier to come back or they can still go do things if they need to. But so like, your regional safe havens would be like Dubai, Istanbul, Doha, you know, proximity, familiarity, easier entry, same language, customs, et cetera. But capital tends to go to these sort of global safe havens. And this is where, like, who are the real estate winners of some of these things? You start to see London, Toronto, Vancouver, New York City, Berlin. A lot of the bigger, more stable core markets around the world start to actually attract a lot of capital, which is interesting because most of those have blown off a lot or are starting to roll over. And now this could actually present a little bit of demand to help
- [19:56]
B
kind
- [19:56]
A
of stop that from happening. You get stable banking, education systems. There's diaspora networks that already exist, especially if we're thinking of us. Most of this show is people in the US thinking about investing outside of the us but the other piece is if you're listening to the show and you own in the us I think the largest in a city, the largest Iranian diaspora in the world is in la, so California, Southern California probably will see quite a bit of this take place and then you kind of see like some emerging and alternative plays. I'm just kind of going down the list of like biggest cities where we're seeing Iranian capital flow to right now. Milan in Lisbon actually showed up on the list. So if you think about sort of like those Euro European plays where maybe you're going to get. You're not spending a ton of money for this Anglosphere realty real estate that's already overpriced. And a lot of that's because of, I mean, we've discussed this on the show a couple of times, but tax advantages, the lifestyle arbitrage, right? Like you get, you know, the Italian brand, you get, you get sun. You're on the Mediterranean. Closer still geographically as well. Like, you know, a flight from, from Iran to Europe is, is half the, the flight from, from there to North America.
- [21:03]
B
I think it's one of those. You're talking about the proximity of it, and I think that's always a huge thing for anybody you Talk with friends, family, people in the business. And you see North Americans typically purchase kind of within our own time zones. Right. Because you don't want you get disconnected. Even with Europe 7, 5 to 8 hours in you're talking to people where they want to invest or where they want to go fight away from the winter here. And those places are great for key Americans. It's like how do I keep in touch? I think that's probably the same reason why you're seeing those numbers Middle east all of a sudden you get them all the way over to the States. Like that's a full life migration. You're not interacting as much as kind of all more with family. And so yeah, I wouldn't be surprised you see it there. And London will obviously be a key for a while. They saw a huge exodus from tax law changes from real estate value over the last couple years. I can't remember exactly what it was but they switched up their tax negatively affected high net worth individuals. Also high net worth individuals purchasing property, all the things going on. We saw a big push on the Dubai, you know, it is a stable great city with good returns on it. So we wouldn't be surprised if this starts to increase those extra ultra lucky ones again as people take stability willing to pay for it a little bit more.
- [22:36]
A
Yeah, I think you also get a lot of places just not super welcoming. I think the feeling around immigration and capital migration, foreign investors is a lot different than it was back then as well. Canada has a foreign buyer ban. The US is actively deporting people. So I think that piece is also consideration can do it in these countries, right?