The pace of economic activity has been slowing throughout much of Europe in recent months and we now expect that the Eurozone fell into recession during the final quarter of 2011. This second recession is expected to be relatively moderate and short (lasting only two to three quarters). We believe that a gradual solution to the Eurozone crisis will emerge, following which Europe will enter a period of slow recovery.
Eurozone is forecast to contract by 0.7% in 2012. Within the currency area, we expect to see a significant divide in performance between the core and periphery countries – with Germany, Finland or Austria experiencing marginal growth and Greece contracting 6.5 percent. The European economy and financial system is highly integrated and interdependent, and so no country is expected to be immune from the current downturn.
In parallel with the economic environment, real estate capital markets were looking particularly bullish towards the end of the second quarter of 2011. It also seemed evident that investors, faced with increasingly aggressive pricing for core properties, began to look for alternative opportunities higher up the risk spectrum.
This emerging optimism changed course rapidly during the summer as it became clear that the economic distress in Europe had not abated but was poised to move to another more significant level, even threatening the viability of the common currency. Once again, risk aversion has spiked, investor sentiment has weakened and the focus has moved back to core, prime quality assets with secure income.