How a European recession would impact real estate

Political uncertainty across Europe, as well as Brexit concerns, have impacted the European economy, with eurozone growth slowing to just 0.2% in the second quarter.

But is a recession on the way?

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“There is definitely concern that we are entering a recession from a broader perspective,” said Laurel Durkay, senior vice-president and portfolio manager, global and U.S. REIT strategies, at Cohen & Steers in New York.

“There are individual countries that have been struggling. [But] we believe the duration and magnitude of any recession within the eurozone as it stands today will be shorter and less bad versus other recessions.”

Germany’s economy contracted slightly in the second quarter and is expected to have shrunk again in the third. A group of think tanks and the government cut the country’s growth forecast to 0.8% this year and 1.8% in 2020.

The U.K. economy contracted by 0.1% in August, but an upward revision to the previous month’s growth to 0.4% means the country should have positive growth for the third quarter, barring a sharp September contraction.

Despite the slowdowns and continued Brexit uncertainty, Durkay said in a Sept. 26 interview that “there are still selective pockets of opportunity within many countries.”

Some of the opportunities are within alternative asset classes, she said. “[These] will continue to outperform in light of the uncertainty as it relates to the macro economy, and as it relates to the political situation.”

These assets include defensive sectors like healthcare, self-storage, and industrial and office buildings.

However, it’s important to analyze these sectors by country. For instance, Brexit is negatively impacting U.K. real estate, she said. In particular, the office and retail sectors are underperforming.

“The demand drivers specific to those core sectors have not been as robust as they have been in the past,” she said. “A lot of that is because of the uncertainty as it relates to how the U.K. economy will operate on a go-forward basis in light of Brexit, and the different potential outcomes that could be coming down the pike.”

However, Durkay is “constructive” on offices in France, Germany and Spain.

“When foiled with what we believe is a very challenged office environment in the U.K., we believe there is really significant demand and fundamental support for offices within these European markets,” she said.

Despite the broader recessionary outlook for the eurozone, she said there are still opportunities in specific regions.

“When you look at the real estate demand drivers across many of the individual sectors, there still are robust fundamentals and attractive valuations that we believe present opportunities throughout the eurozone.”

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