European real estate market commentary - January 2026
Real estate markets across the eurozone are still grappling with muted transaction activity, but resilient economic growth and improving investor sentiment are laying the groundwork for selective opportunities across sectors.
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Economic backdrop
Growth holds up despite persistent uncertainty
Despite ongoing economic, fiscal and (geo)political uncertainty, the eurozone economy remains resilient. Regional GDP growth of 0.3% in Q3 2025 compared with 0.1% in Q2 2025, buoyed by government spending, notably defence expenditure. A rebound in exports was led by machinery, vehicles, and chemicals. Improved external demand was attributable to easing trade uncertainties with terms of an EU-US trade agreement agreed.
The composite PMI for the eurozone further improved during September, October, and November, driven by the service sector PMI signalling further expansion. The December consensus forecast for 2025 GDP growth has been upgraded to 1.4% from 1.2% in September, and 1.0% in June.
Geopolitical and fiscal risks remain high
While the eurozone’s recent economic resilience is encouraging, several risks to the growth outlook remain. The geopolitical situation remains highly fluid with transatlantic tensions carrying the potential to develop into renewed tariff escalation and a rift in the security architecture.
Fiscal positions also remain of concern, as whilst new defence and infrastructure spending should support growth, debt levels will increase. Even with relaxed fiscal rules, most countries have limited scope for substantial stimulus, with questions over long-term debt sustainability. This issue is acute in France, evidenced by its relatively high prevailing government bond yields.
Consequently, monetary policy remains supportive, with inflation at target for over a year. The European Central Bank (ECB) has maintained the key policy rate at 2.0% for the past four meetings, having made seven consecutive rate cuts through to June 2025.
Following the June strategy review, the ECB has already communicated a measured approach going forward, with less inclination to respond to minor deviations from the 2% target, with Christine Lagarde repeating that the ECB is in a “good place”. Current market expectations are that the ECB has ended its rate-cutting cycle, with interest rates most likely to remain unchanged during 2026.
Labour markets remain tight, supporting consumption
Complementing lower interest rates, consumer demand is supported by tight labour markets. The eurozone unemployment rate has been 6.4% since May, having troughed at 6.2% in November 2024. While unemployment has shown a more pronounced rise in Germany and France, there are signs it has stabilised, with labour market conditions translating into real wage growth.
This is buttressing household incomes, though the potential impact on firms’ costs and pricing dynamics may increasingly draw ECB attention, alongside the potential inflationary effects from government stimulus.
European real estate market
Investment activity subdued but fundraising rebounds
European real estate capital markets remain subdued with preliminary figures from MSCI RCA showed approximately €54 billion of investment activity during Q4 2025 representing an annual decline of ca. 15% on the same quarter in 2024. With total investment volumes for 2025 at ca. €188 billion, this is on par with 2024 but remains ca. 30% below the 10-year average between 2012 to 2021.
Fundraising is recovering, although activity is focussed on a small number of large-cap and sector focused private equity real estate groups who successfully secured commitments for new vintages of flagship fund vehicles.
Investor sentiment turns more constructive
Sentiment is improving according to recent surveys such as the December INREV Consensus indicator. All five sub-indicators improved over the prior quarter, with “financing conditions” reaching their strongest level since the survey began in March 2023. The “investment liquidity” indicator also rebounded notably, marking the second-highest reading and returning to levels last seen at the start of the previous year. Conditions for “leasing & operation” remain positive, while the “economy” sub-indicator improved further.
This bodes well for improved investment activity in the coming months. Prime European real estate yields showed selective improvements during the fourth quarter of 2025, with most adjustments where observed, limited to 5–15 basis points according to CBRE.
Owing to the extent of the repricing observed since the spring of 2022, our proprietary market valuation framework is signalling that immediate opportunities can be found across multiple markets and sectors.
Our preferred portfolio positioning has shifted to a more neutral stance across sectors. Going forward, we expect asset and location considerations, for example building sustainability profiles, to have a greater influence on relative performance going forward when contrasted with recent years.
Office demand subdued tight supply supports prime rents
Office demand remained subdued in the fourth quarter. While take-up increased by 12% compared to the previous quarter, it remained more than 20% down on the 10Y-Q4 average. Tight supply, characterised by an ongoing scarcity of modern, Grade A space in CBD locations, alongside persistently high construction costs and capacity constraints, continue to underpin prime rental values. According to JLL, 12 of the 30 major European office markets recorded increases in prime rental levels over the fourth quarter, while 24 of these 30 markets showed an annual increase.
The polarisation in demand and performance in the office sector between “best in class” and “the rest” is expected to persist. Modern assets with good amenity provision in major metropolitan CBDs should continue to perform, and prime assets are potentially offering value. Given the limited of supply of modern space, we also see an opportunity to upgrade and refurbish well-located workspaces in supply constrained major capitals and regional CBDs.
Retail shows signs of recovery
The retail sector has stabilised, with recent valuation datapoints showing signs of a recovery in multiple segments following a decade-long period of adjustment. The sector continues to face pressure from online retail. Despite this, rental levels for many retail formats have likely troughed. Consequently we are increasingly optimistic over prospects for the sector, whilst remaining selective in terms of preferred segments.
Investment outlook
Industrial supported by structural drivers despite trade uncertainties
For the industrial sector, the uncertainty over tariffs and manufacturing weakness seen earlier in 2025 led occupiers to exercise caution, but with recovering exports prospects should improve. Prime rents remained broadly unchanged over Q4 2025 and occupier demand remains well supported by structural drivers such as growing e-commerce penetration and expectations that government-led investment on defence and infrastructure will further stimulate logistics space requirements.
Access to sufficient power, preferably from renewable sources, is also high on occupier agendas, creating scope for owners to garner incremental income from the provision of onsite charging facilities and power generation. Lastly, there is increased obsolescence risk in the sector with an estimated 75% of stock in France being older than older than 10 years (Netherlands 65%, Germany 55%, Source: JLL), with many major occupiers having introduced carbon reduction targets, supporting demand for new and refurbished space going forward.
Living sectors benefit from structural undersupply
The lack of supply of residential space across major Western European markets and continuing urbanisation trends are creating a range of opportunities across “living” segments. We have a focus on undersupplied mid-market rental housing segments. Careful consideration needs to be given to local regulations that are shifting to further protect residential tenants from rent increases.
We also see opportunities in senior housing, student housing in major university locations across the region, as well as parts of the hotel market with a preference for leased assets providing inflation-linked cashflows or operating hotels where the repositioning, restructuring of operations and/or completion of stabilisation activities can drive value creation.
Recapitalisation and secondaries opportunities
Finally, the current environment is catalysing compelling recapitalisation and secondaries opportunities across real estate platforms, funds, and other holding entities. These involve providing flexible capital solutions to established management teams facing time or capital constraints in optimising value. Opportunities are being fuelled by favourable cyclical and structural dynamics – particularly the need to address operational complexity and sustainability requirements, and capital value declines of 20-30%+ that have exacerbated balance sheet and asset funding challenges.
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