Friday Letter: Real estate investors defy the terrorism threat

After the heinous attacks in Paris last Friday the world rallied and showed its support to the people of France. Global markets have also shown defiance. In the first few trading days after the attacks European stocks were up, whilst US equities had their best day in four weeks on Thursday.

The economic rally is somewhat of a surprise as historically terrorist attacks cause stocks to sink. In the first trading week after the 9/11 terrorist attacks in 2001, the S&P 500 index dropped more than 7 percent. One week after the Madrid train bombings in March 2004, Spain’s stock market was down more than 3 percent.

However, economists say the commercial impact of terrorist attacks tends to be temporary and minor. This proved to be true after 9/11 and Madrid as well, despite the initial market shocks.

This week market sources have been saying there could also be a short-term slowdown in the flow of capital to Paris, especially in the retail, hospitality and leisure sectors as investors pause over concerns to consumer spending. But over the medium-terms, it isn’t going to be material.

France is the world’s most popular tourist destination, and Paris shopping and sightseeing understandably went quiet in the direct aftermath of attacks, with many shops and tourist destinations closing for a few days. In fact, tourism represents about 8 percent of the French economy and if fear of additional attacks keeps foreign visitors away and makes households reluctant to spend those sectors will suffer.

That being said, real estate practitioners talking to PERE do not expect the growing threat of global terrorism to impact the property markets. One global real estate investment manager with exposure to Paris said the attacks, and the threat of future acts of terrorism, will not affect how his firm allocates capital or underwrites investments.

Property investing is a long term play and Paris is a staple ingredient of any developed pan-European investment strategy. The French capital city collects the majority of the nation’s institutional real estate investment and so will always be a location where real estate investors will look to deploy capital, as long as the city’s risk return dynamics works for them.

At the moment the Paris market is seen as a relatively expensive market for core assets, and with many strong domestic real estate players in action, it is often seen as a market where investors have difficulty to access assets of institutional quality. This is not likely to change on the back of last week’s atrocities. Investors are unlikely to pull out of a deal in Paris even now.

Which is to be applauded unreservedly: as Khaled Kudsi, senior managing director at Northwood Investors, put it at NYU's Capital Markets in Real Estate Conference on Thursday, the attacks are not out of mind, but everyone must now move on. Otherwise it’s the terrorists who win.