Let’s try to summarise what got us where we are today: After a period of relatively smooth sailing, the 2020s started with a bang. Covid hit, and countries put their economies into an induced coma. Sharp slowdown, V-shaped recovery, central banks providing ample liquidity and politicians providing “Stimmie Cheques”. After a wobbly period with Covid restrictions being lifted, enforced, and then raised again, economic life has resumed (at least for now), and people spend the money they could not spend for a while.
At the same time, supply chains are still partly disrupted, and we have to learn a new word with onshoring (or is it reshoring?). If that wasn’t enough, the Russian invasion of Ukraine puts pressure on energy and food prices. All of this and a few other factors created a toxic inflationary brew that took central banks by surprise (remember “transitory”?) and that generations of financial professionals only know from textbooks.
Euro Area GDP Growth Rate
United States GDP Growth Rate
The inflation narrative shook markets, and the FED’s hawkish tone caused highly valued risk assets to sell off. That was that. Now we are in a situation where the main narrative keeping investors busy is changing from inflation to recession. Whatever your opinion on the stickiness of inflation or the FED’s neutral rate, the market has already done part of the FED’s job. Financial conditions indices are at multi-year lows, and liquidity has dried up. The FED was targeting demand destruction, and it got it. Confidence and other forward-looking indicators are not looking good.
So even if the White House and FED-Chair J. Powell deny that we are in a recession, we pretty much are. The next question is how long and deep it will be and how it will manifest itself in different countries.
What to do in REIT land?
REIT investors’ age-old reflex is to sell highly levered Swedish retail and office stocks and buy the companies that all those Belgian dentists hold (and never sell!). While this might not be a bad strategy, there is more to consider. What factors influence REIT tenants’ earnings streams? Can we say something about the resilience of a REITs’ rent roll by assessing the geographical (national, regional, sub-regional and micro-market) exposure of those REITs and overlaying them with factors that correlate with the resilience of a tenant’s income stream?
Six factors pointing to resilience in real estate markets during declining growth
Our European Portal comprises a multitude of factors, and we picked six that we believe contribute to high resiliency in declining growth. Areas with a highly educated workforce should withstand a recession better than those with unskilled labour, and for regions with a higher score on innovation, the same should hold. Also, areas with good transportation links and infrastructure are set to weather economic storms better than those without reliable infrastructure. On our platform, the economy score for a region comprises nine sub-scores, ranging from the birth of enterprises to GDP per inhabitant, to reflect economic strength and activity. A few subscores are listed for five regions with a high economy score in the table below.
| Region | Country | Birth of Enterprises | GDP/inh | PPS/inh as % of EU average | Gross value added at basic prices | Real growth of GVA | Economy |
|---|---|---|---|---|---|---|---|
| Zürich | Switzerland | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | |
| Stockholms län | Sweden | 6.0 | 6.0 | 6.0 | 6.0 | 4.1 | 5.8 |
| Groot-Rijnmond | Netherlands | 6.0 | 6.0 | 5.8 | 6.0 | 4.0 | 5.7 |
| Helsinki-Uusimaa | Finland | 6.0 | 6.0 | 5.8 | 6.0 | 3.4 | 5.7 |
| Miasto Warszawa | Poland | 6.0 | 4.9 | 6.0 | 6.0 | 6.0 | 5.7 |
Source: KR&A 2022
A high score logically should give a good indication as to how a region should perform during a recession. The table below lists five companies with the highest total score.
| Property company | Country of Listing | Education | Innovation | Consumer Income & Wealth | Infra & Transport | Labour market | Economy | Total |
|---|---|---|---|---|---|---|---|---|
| Allreal | Switzerland | 5.3 | 6 | 4.5 | 3.5 | 5.9 | 5.0 | |
| Fabege | Sweden | 6 | 5.6 | 3.8 | 4 | 4.3 | 5.8 | 4.9 |
| CA Immobilien | Austria | 5.4 | 5 | 4.4 | 4.3 | 4.4 | 5.4 | 4.8 |
| Gecina | France | 6 | 5.4 | 3.4 | 4.2 | 4.6 | 5.1 | 4.8 |
| PSP Swiss | Switzerland | 4.9 | 5.9 | 3.9 | 3.4 | 5.6 | 4.7 |
Source: KR&A 2022
Recession in spite of tight labour?
One distinguishing factor for this particular recession is the current labour market. Large parts of the western world go into this recession with an unusually tight labour market. If that remains the case, the recession might be shallower and short-lived. If not, we want to see where weakness starts to develop and, even before that, which areas are susceptible to weaker labour markets. This way, we can identify REITs that have exposure to (potentially) weakening labour markets, whether the impact is direct in the case of office markets or the transmission goes via retail spending or the ability to afford rents.
We can look at detailed labour market metrics on a company level like we did above, or look at the data on a per country, regional (EU+ Nuts3 regions) or municipality level. For example, we picked regional data below and showed the 20 regions with the strongest labour markets and the detailed breakdown of the data on regional wages.
| Region | Country | Labour market | Labour Costs (Wholesale & Retail, yr) | Labour Costs (Warehousing & Transport, yr) | Labour Costs (Postal & Courier, yr) | Labour Costs (Manufacturing, yr) |
|---|---|---|---|---|---|---|
| Barcelona | Spain | 5.0 | 25.149 | 31.183 | 17.793 | 29.567 |
| Lisboa | Portugal | 4.9 | 19.363 | 29.325 | 21.845 | 15.193 |
| Girona | Spain | 4.9 | 25.149 | 31.183 | 17.793 | 29.567 |
| Lleida | Spain | 4.9 | 25.149 | 31.183 | 17.793 | 29.567 |
| Tarragona | Spain | 4.9 | 25.149 | 31.183 | 17.793 | 29.567 |
| Madrid | Spain | 4.8 | 31.499 | 38.646 | 19.847 | 36.79 |
| Bonn | Germany | 4.7 | 41.212 | 37.748 | 37.199 | 51.019 |
| Köln | Germany | 4.7 | 41.212 | 37.748 | 37.199 | 51.019 |
| Manchester | UK | 4.7 | 34.77 | 45.749 | 36.574 | 44.39 |
| Rhein-Sieg-Kreis | Germany | 4.7 | 41.212 | 37.748 | 37.199 | 51.019 |
| Städteregion Aachen | Germany | 4.7 | 41.212 | 37.748 | 37.199 | 51.019 |
| The Hague | Netherlands | 4.6 | 45.283 | 57.136 | 52.269 | |
| Leiden en Bollenstreek | Netherlands | 4.6 | 45.283 | 57.136 | 52.269 | |
| Almería | Spain | 4.6 | 21.486 | 26.452 | 19.167 | 26.465 |
| Bergamo | Italy | 4.6 | 35.671 | 30.145 | 29.177 | 35.916 |
| Brescia | Italy | 4.6 | 35.671 | 30.145 | 29.177 | 35.916 |
| Cádiz | Spain | 4.6 | 21.486 | 26.452 | 19.167 | 26.465 |
| Córdoba | Spain | 4.6 | 21.486 | 26.452 | 19.167 | 26.465 |
| Düren | Germany | 4.6 | 41.212 | 37.748 | 37.199 | 51.019 |
| Essonne | France | 4.6 | 44.653 | 38.789 | 56.105 |
Source: KR&A 2022
A few of the strongest labour markets currently are in the south of Europe, which might come as a surprise, but some of these regions boost very high economic growth and accompanying labour tightness, which might strongly deviate from national statistics.
Even though labour market statistics are somewhere between a coincident and lagging indicator, trends are not as fickle as other economic indicators, like confidence. Close monitoring of these trends can enable investors to assess and anticipate the severity of a recession and adjust their portfolio allocations.
REIT investors often instinctively know what kind of rotations to apply in their portfolios in an economic slowdown. However, alternative data analysis deepens the substantiation for a REIT’s rent roll assessment or can uncover misconceptions and cause corrective actions.
