October 2001

In last month’s column, I talked about the merits of investing overseas (wherever home is for you). My claim was that the strengths of economies, both in absolute terms and relative to other economies, rise and fall like the tide. I then added: “Sometimes there are spring tides, and sometimes there are ebb tides, and occasionally the shoreline gets obliterated by a tsunami”.

Those words turned out to be ghoulishly prescient. The tragic and devastating losses in New York have been felt, directly or indirectly, around the world – a world that many say will never be quite the same again.

Before long, I was being asked, by friends as well as interviewers, what effect the terrorist attacks would have on property markets around the world – in New York, the US in general, and in places like Australia and New Zealand.

No one can know the answers to those questions with any certainty, but that does not need to stop us having an educated guess.

Firstly, let’s talk about New York. It goes without saying that this Power House city will be hurting most from the effects of the attacks. Some have predicted that rentals per square foot in New York will plummet as office dwellers seek premises elsewhere, notwithstanding the need for alternative space for what is left of the companies that occupied the twin towers.

In my view, New York, which has been the world centre of commerce for many years, will continue to hold that title. I believe that after the initial shock wears off, New Yorkers will rally and make the city even better. For some interesting background reading on New York, I thoroughly recommend the book “The Rise and Rise of New York” by Montgomery. You will learn that the events of the last month are not the first time that a plane has crashed into a high rise. In the 1930s, a twin-engine plane crashed into the Empire State Building, at the time the tallest building in the world. One engine careered down a corridor, crashed through a window on the other side of the building, and fell to the street below, while the rest of the plane was left dangling on the side where the impact took place. The incident, however, hardly dampened New York’s growth.

Anyone who has spent any significant time in New York will know that despite the often talked about aloofness of the residents, the city is a vibrant and continuously evolving hotbed for architecture, fashion, publishing, and the performing arts. I believe this will continue.

The same goes for the US in general. Whichever way you look at it, people are still trying to emigrate to the US. Whereas the Berlin Wall was put in place to keep residents in, the (in places) fortified border between the US and Mexico is not there to prevent US residents from leaving!

In the last decade, the population of the US has increased by 13%, a growth rate fueled by both an excess of births over deaths internally, and net migration into the country. As we all know, one of the biggest factors in determining the growth of real estate markets is the growth in population.

Now there may well be a protracted and significant economic downturn in the US economy. However, I believe that we were headed that way anyway, and that the events of the last month will not affect the magnitude of the downturn significantly.

What then will the effect of the terrorist attacks be Down Under?

Initially, the effects will have a severe negative impact because of the fall-off in tourism numbers. The trend for tourists to cancel trips that have already been booked is accelerating, and less obvious but equally important will be the extent to which tourists who have not yet booked will simply decide to stay at home. Already, many hotel, motel and tour operators are starting to notice a major drop-off in numbers. Needless to say this will have a flow-on effect on the entire economy.

To some extent, the world is in limbo, awaiting what will happen next. No one yet knows how the situation will evolve, but I predict that tourism will be down for a long time to come.

However, that is only looking at the tourism side. I frequently talk with people from Europe and the US who express a desire to have a “hide-away”, a small refuge somewhere far removed from major world centres. Many such northern-hemisphere people have already come down to New Zealand or Australia to buy a property. For some the motivation is to be able to enjoy a southern summer while the northern hemisphere is in winter. For others it is the excitement of going further afield than Majorca or Hawaii. But I am sure that for many, it is also the desire to have somewhat of a safe-haven, a place that is physically so far removed from the rest of the world that in the event of a crisis of sufficiently large proportions, they could come to their haven and feel safe.

I know for a fact that some people have already done this. I suspect that as a result of the events in the US this last month, this trend will accelerate. In an ironic way, the isolation of Australia and New Zealand that in the past has hindered trade and tourism, could now turn out to be the very advantage that could spur on phenomenal growth and, more particularly, could reverse the “brain drain” phenomenon that sees large numbers educated New Zealanders leave, to be only partially replaced by smaller numbers of immigrants who failed to be accepted in their first choice of country.

Of course the jury is still out on what the net effect will be, but I am cautiously optimistic that the world will have a new appreciation for what life Down Under has to offer.

Successful investing!

Dolf de Roos.