Our investment team share their 2025 outlook for European real estate. As values stabilise, we highlight why 2025 could be a promising vintage year and provide an insight into current market dynamics and likely return drivers over the coming months.

Key points

• 2025 is set to be a promising vintage year for European real estate. Values have stabilised, providing opportunities for investors to acquire assets at or close to the bottom of the market.
• Fears of a prolonged higher interest rate environment have negatively impacted sentiment among allocators, but a narrow focus on yields overlooks the strong potential for rental value growth as a driver of performance.
• The supply of best-in-class assets is expected to remain limited due to various factors that continue to constrain new development. This will support further rental growth in the sector.

This is an extract from our team’s longer white paper on the outlook for European real estate. This includes our view across key sub-sectors, including industrial and logistics, residential, offices and specialist areas. Click here to read more.

Those placing money in the European real estate market during 2024 seem to have called the market trough correctly. Despite some challenges, 2024 could prove to be a good vintage and we see potential for 2025 to be a promising year. As values have stabilised, opportunities are now available for investors to acquire assets at or close to the bottom of the market.

At a macro level, growth projections for most European countries are being downgraded and the macro environment is unlikely to be a significant tailwind for the market in the coming months. It is true that economic performance does influence the performance of real assets in the long term, but in this cycle, we do not expect the economy to do much heavy lifting in the early stages of this real estate market recovery.

While macro fundamentals suggest that demand will remain muted in the near term, that doesn’t equate to weak rental value growth, as it is important to also consider the supply side of the equation. For core investors, we believe that shortages of supply will be a key driver of rental growth and performance over the course of 2025. There are three key reasons why supply will likely remain constrained:

• New development failed to keep up with demand for good quality, well-located sustainable assets in the last cycle, largely due to limited availability of funding for speculative development.
• Post-Covid, the cost of development has risen sharply as a result of high inflation in 2022/23, driven by higher materials costs and higher labour costs.
• National government policies have allocated resources away from commercial development and, in some cases, even infrastructure.

For value-add investors, current pricing also offers an attractive entry point into the market. The focus of demand on best-in-class, operationally net zero carbon space provides the opportunity to deliver products that are in short supply into a market where demand is robust. Here, understanding exactly what occupiers are looking for will be important and, in particular, understanding the nuances of demand in different sectors and markets. As interest rates fall from recent peaks, debt should also become more additive to performance for those taking more investment risk.

Risk warning

• Investors should note that the views expressed may no longer be current and may have already been acted upon.
• Past performance is not a reliable indicator of future returns. 
• The value of investments and the income from them can go down as well as up and clients may get back less than they invest. Changes in currency exchange rates may affect the value of investments in overseas markets.
• Investments in private or less liquid assets such as real estate can be difficult to sell, and it may be that investors are not able to redeem their investments when they want to.
• A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to investments without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time.

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