Investing amid Uncertainty
The European real estate market is entering a new cycle with a recovery that gained traction towards the end of 2024. Investment was +21.0% higher than in 2023, with increases for most countries. However, recent global financial volatility and geopolitical developments are likely to slow the recovery as we progress through 2025. The continued absence of core investors, a source of confidence and liquidity in the European market, reflects the higher risk-adjusted returns now on offer elsewhere, and the increasingly operational nature of real estate investment. But this masks the divergent performance between the various market sectors.
OFFICES – DOWN BUT NOT OUT
There is still a divergence between the performance of the prime segment and the rest of the office market. In the prime segment, demand for space remains strong, vacancy low and the rental outlook is positive. However, fundamentals in the broader market remain under stress. The shift to remote working has played a part; but the current stress goes beyond that. Modern occupiers’ needs have structurally changed, with increased demand for quality buildings and amenities. Most older buildings will struggle to meet this new demand and therefore appear to be obsolete in the current marketplace. Nonetheless, there are good returns on offer for the right product and for investors that are willing to take a more operational approach than in the past. Over the next five years, a bigger proportion of total returns in the sector will come from income, driven by rental growth.
LOGISTICS – SLOWING TREND
Demand for logistics space soared during the pandemic, at the height of the supply chain disruption. Although growing ecommerce penetration in most European economies continues to drive demand for logistic space, we have seen the growth in demand and rents moderate from what were an unsustainable high. Over the medium term we anticipate more moderate rental growth, just above inflation. This is still enough for logistics to generate the highest rental growth of the different real estate sectors. As such, the investment market should stabilise, with the current high risk-free rate limiting any yield compression in most European markets. There remain pockets of opportunity in different regions. The quickening pace of supply chain reshoring will keep the focus on demand in Central and Eastern European (CEE) countries while data centre developments will be worth watching in Southern European countries. Despite the slowdown in rental growth, the long-term drivers of logistics demand, such as ecommerce, remain intact. As such the sector should avoid a prolonged slowdown with the market balance being restored in 2026.
RETAIL – A NEW DAWN
Retail has spent the last decade battling significant headwinds that have right sized the sector to match the demand of the future. We believe the market has troughed and opportunities are now emerging,albeit selectively in terms of both geography and format. Limited rental growth is resuming at the prime end of high street retail and retail warehouses. However, broader yield compression across the sector will take longer. Investors can cautiously re-enter this market of many segments. We see the most compelling opportunities in the retail warehouses, supermarkets and niche high street segments across Western Europe.
