How a European Recession Would Impact Real Estate

Text transcript

Laurel Durkay, senior vice-president, portfolio manager at Cohen & Steers.

The political situation in Europe, and specifically in the U.K., has had an impact on how we’re thinking about the broader macro economy and more importantly real estate fundamentals. When you think about how we believe it to be best positioned in the U.K. and broader Eurozone, we really believe that some of the more alternative asset classes, and those asset classes that have more secular demand drivers, will continue to outperform in light of the uncertainty as it relates to the macro economy and as it relates to the political situation.

Specifically when you look at some of the more defensive sectors, such as healthcare or self-storage, or some of the more secularly favoured sectors, such as industrial, you have seen those sectors outperforming. We believe that will continue going forward.

When you think about what’s happening in the U.K., and particularly what’s happening with Brexit, that is having an impact on the demand for some of the more core and traditional real estate sectors.

Specifically, if you look at office and retail that has been underperforming, and the demand drivers specific to those more core sectors have not been as robust as they have been in the past. 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.

When you take a broader view on the Eurozone and how the Eurozone has been impacted by the broader macro economy, certainly there is definitely concern that we are entering a recession from a broader perspective. Certainly there are individual countries that have been struggling.

However, I would say our base case is that 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. And because of that, we believe there are still selective pockets of opportunity within many countries.

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.

We are constructive on offices, particularly in France and Germany, and in 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.