European real estate market commentary: April 2025
Economic conditions have declined amid broader market uncertainty related to trade negotiations, though it is too early to gauge the impact on private real estate markets. Despite this, extensive repricing already seen still points to live opportunities across markets and sectors, while tight supply conditions continue to support occupier markets.
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The recovery of the Eurozone economy continues its fragile path, with the future trajectories of economic growth, inflation and interest rates, and the manifestation of 'stagflationary' risks, now also dependent on the outcome of trade negotiations with the US, following the introduction and subsequent suspension of significant tariffs in early April.
We note that there remains a great deal of uncertainty around the outcomes of current geopolitical events that has triggered significant market volatility, but we have yet to see any real impact on private European real estate markets at this stage. We are continuing to monitor the situation and how this may impact our investment and asset management activities, including the implementation of budgeted expenditure programs and occupier conditions across industries and sectors.
Economic backdrop
Recent data indicates that Eurozone GDP growth decelerated to 0.2% quarter-on-quarter in Q4 2024, bringing annual GDP growth for 2024 to 0.9%, still slightly above expectations. However, household consumption, a critical driver of recent economic expansion, continued to slow with January marking the fourth consecutive quarter without growth in retail sales, despite rising real incomes as wage growth continued to outpace inflation. This suggests that households are prioritising savings over expenditures amid an atmosphere of heightened uncertainty and softening labour market conditions.
Conditions within the manufacturing sector remain challenged, particularly in France, Germany, and Italy. Despite this, the German and Eurozone manufacturing Purchasing Managers' Index (PMI) notably rallied above the neutral 50-point mark in the first quarter, signalling potential expansion. This improvement appears to be a response to the European Commission's recent relaxation of fiscal rules, which allows for additional spending on defence amounting to approximately 1.5% of GDP.
Furthermore, Germany's easing of the 'debt brake', alongside the announcement of a €500 billion infrastructure and defence fund (equivalent to approximately 12% of GDP), has fostered increased optimism within the manufacturing and industrial sectors of the bloc. Nonetheless, the overall impact on growth remains uncertain, given the typically modest fiscal multipliers associated with defence spending, existing capacity constraints in defence production and the construction sector, and the fact that Germany's €500 billion investment will be spread over the next 12 years.
The most pivotal determinant of future economic growth in the Eurozone will be the outcome of trade negotiations with the United States. The EU has already faced a 25% tariff on aluminium, steel and, notably, automobiles, compounded by additional 20% tariffs on all goods, which were later suspended for a 90-day period. If negotiations do not result in a substantial reduction of these tariffs, economic growth is likely to be negatively impacted.
On a more positive note, monetary policy continues to provide support. Falling Eurozone inflation (HICP), which decreased from 2.5% in January to 2.2% in March, enabled the European Central Bank (ECB) to implement consecutive rate cuts of 25 basis points in both February and March, lowering the deposit rate to 2.5%. Markets are now anticipating further reductions in the coming months, with rates projected to stabilise between 1.75% and 2% by year-end. However, these policy measures will, again, be heavily contingent upon the outcomes of trade negotiations with the US. Longer duration fixed income rates have also seen falls and, notably for real estate, five-year EUR swap rates have declined from a recent March peak of 2.56% to 2.2% as of 16 April. This will be supportive to real estate financing activities.
European real estate market
High levels of uncertainty are likely to impact occupier demand as businesses will likely defer decision-making. Tight supply conditions, particularly for modern office space, continue to support rental levels, though prime office rental growth in Q1’25 was more muted compared to previous quarters with only 12 out of 32 European centres showing increases, compared to 21 in Q4’24.
Competitive tension for scarce high-quality stock in accessible locations remains, reflecting the ongoing polarisation of office demand that will be a permanent feature of the market for the foreseeable future. While aggregate market vacancy rates have generally increased over the past two years across the region, vacancy rates for Grade A space remain significantly lower – and overall vacancy is increasingly consisting of lower-quality, or even obsolete, stock.
Meanwhile supply pipelines are forecast to drop significantly from this year onwards, with net additions declining from levels of 1% of stock over the last three years to approximately 0.6-0.7% this year and beyond. Further increases in construction costs due to tariff-led raw material price inflation and capacity constraints could further curtail new supply.
Prime industrial and logistics rents were largely unchanged over the quarter, too, with only select markets showing growth, often attributable to a new generation of assets entering the market and setting new benchmark rents. Muted conditions in the manufacturing sector and industry is leading occupiers to be more cost conscious and cautious about decision-making. We project rental growth in the sector to be c.2.5-3% pa through this year and next. The recent increase in the sector PMI is encouraging, though the permanent introduction of tariffs would most likely have a negative effect for the sector.
Overall, we believe that in the medium to long-term demand for these assets remains supported by structural drivers such as the ongoing growth in ecommerce, and occupiers focusing on scarce modern stock with features such as renewable power provision and amenities for employees, with a minor yet growing issue concerning aging stock. The current trade situation is also likely to accelerate nearshoring dynamics – even if tariffs are short-lived. On the supply side, speculative development has increased, but higher development costs and restrictive planning environments continue to constrain pipelines.
With consumers prioritising saving versus spending and sentiment remaining low, conditions in the retail sector remain challenging. This, together with the competition from online retail will mean ongoing pressure on store sales and maintain elevated vacancy rates. Furthermore, retailers face pressure on margins through higher staff costs.
Despite these considerations, rental levels for many retail formats have likely troughed and, consequently, we are becoming less cautious over prospects, albeit remaining highly selective with regards to segments. We expect retail parks with a low exposure to fashion, as well as convenience formats including supermarkets, to be able to provide resilient, inflation-linked cashflows. It should also be noted that demand for luxury goods is likely to remain insulated, though investment pricing here is, in our opinion, generally not offering fair value.
Turning to capital markets, investor sentiment surveys such as the March INREV Consensus indicators continue to show improving investor sentiment, although concerns about economic conditions continued to worsen. It should be noted that this survey was carried out before the latest US announcements and resulting market turmoil. It is yet to be seen how investors will react to the renewed uncertainty and there is a chance that over the short-term investment activity will be curtailed while the situation is assessed. There is also the potential for broader portfolio denominator considerations that may curtail new real estate allocations.
This would act to choke the recovery seen in activity highlighted by Q4’24, in which c.€63 billion was invested representing a 43% annual increase. Already volumes in Q1’25 – albeit based on preliminary numbers – appear subdued with just c.€35 billion invested, more than 40% below the first quarter average over the past 10 years.
In terms of pricing and value movements, the unweighted average from CBRE’s Monthly Yield Monitor, covering the 13 largest European countries (including the UK, but excluding CEE), showed some slight yield compression of 5-10 bps for logistics assets, but stability across all other major sectors between Q4’24 and Q1’25. This follows instances of yield compression over Q4’24, ranging from 5 to 25 bps across logistics, offices, hotels and multifamily, reflecting the improvements seen in sentiment and activity prior to recent events.
Investment outlook
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. Several property types, notably the industrial and logistics segments, have rebased to attractive price points, and are supported by strong structural fundamentals despite the current elevated risk for short-term performance. Investors should also be cognisant that history points to the periods following economic downturns delivering above average performance.
Regarding our current asset views, our preferred sectors and portfolio positioning remain largely unchanged, but we have shifted to a more neutral stance across market segments. We continue to favour industrial estates (including outdoor storage facilities), cross-dock warehouses, and urban logistics assets that are benefitting from ecommerce and urbanisation trends. Opportunities are appearing to capitalise on significant repricing through acquisitions, refurbishments and/or development on rebased land values, and there remains an opportunity to capture mispriced reversionary potential in the region as existing leases expire and roll to higher revised rental levels.
The prevailing, and in many cases exacerbating, lack of supply of residential space across major Western European markets, coupled with continuing urbanisation trends, are creating opportunities across “living” segments that provide long-term resilient cashflows. We have a particular focus on undersupplied affordable and mid-market rental housing segments, although 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 selective senior and student housing markets in major university locations across the region, as well as in selective parts of the hotel market. For the latter, we have a preference for leased hotels in main destination locations providing inflation-linked base rents and variable components capturing operating profit, or operating hotels where the repositioning, restructuring of operations and/or completion of stabilisation activities can drive value creation.
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 central business districts (CBDs) should continue to perform and prime assets are potentially offering value. Given the emerging lack of modern space, we also see an opportunity to upgrade and refurbish well-located workspaces in supply constrained major capital and regional CBDs, capitalising on a growing supply shortfall.
The current situation remains dynamic, and the outcome of the negotiations between the EU and the US regarding tariffs will significantly influence future trade flows, inflation, interest rates, broader economic activity, and, ultimately, the operational and financial performance of real estate. Nevertheless, it should be recognised that real estate capital values have been through a period of considerable adjustment and, consequently, we view there to be a limit on how much European private real estate markets could potentially fall further or again, especially in the case of those markets with the most progressed repricing including the UK, Nordics and Netherlands.
Schroders has expressed its own views and opinions in this document, and these may change. Information herein is believed to be reliable, but Schroders does not warrant its completeness or accuracy. The views and opinions contained herein are those of the author's, or the individual to whom they are attributed, and may not necessarily represent views expressed or reflected in other communications, strategies or funds.
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