Private assets

2025 European real estate market: are you ready for the next up-cycle?

December 19, 2024 - 3 min read

Hans Vrensen, Head of Research & Strategy, AEW

What are the key trends that could affect European real estate markets in 2025?

The outlook for European real estate is getting better. We've had a very tough time over the last two years. We've lost about 20% in capital values, accumulative. So now the outlook is becoming better because of three reasons.

If we start with the first one: macroeconomic drivers are becoming more favourable, mostly because inflation has come down. Interest rates are cut. And that means that for real estate, which is a very capital-intensive industry, borrowing money is becoming cheaper. And that means that liquidity will come back to the market. Capital values will also start to recover. We are starting to see that now slowly happening. So that's really the first reason why we're seeing a better outlook.

The second reason is more fundamental. If we look at the occupier side of the market, there's not that many empty buildings in Europe. So compared to the U.S, where perhaps the situation is a little bit different, our vacancy rates are quite modest because the supply is constrained. So, there's not a lot of new buildings that we've been putting up. That means that rental growth - because vacancy is low - rental growth is still quite positive.

And the third reason is - because of those first two reasons - investors are becoming now more positive. So that sentiment is turning inverted, becoming more proactive and optimistic, mostly about sectors like logistics and residential, but now also in offices, which has been trailing a little bit.

Lastly, is the end of the refinancing issues that the market has been facing, capital values coming down by 20% means that refinancing is more difficult. Those issues are starting to recede now.

What segments of the European real estate markets are likely to have the most opportunities for investors in 2025?

Based on the repricing that we've seen across the sectors in Europe over the last two years, we think prime offices are the most attractive, at the moment. They've repriced the most and there is still positive rental growth in the prime segment. So prime, I say prime again because, there's a bifurcation between prime and secondary quality building. So, for prime, we are quite positive.

On the other sectors, I would say logistics is probably our second pick. The megatrends of e-commerce, and even if we see more trade barriers coming through, that will basically mean that supply chains will be more localised, and the demand for logistics warehouses will still be strong. So, logistics is our second pick, but that's already repriced a little bit. So, yields have come in already a little bit.

As far as geographic picks, based on our analysis, we see France, Benelux, and the UK as very, very close together, very strong returns of just over 10% across all the different property types in those countries. So, those would be our top picks geographically speaking.

What risks or challenges could influence real estate markets in 2025?

I would highlight three risks.

The first risk is, obviously, the risk of geopolitical uncertainties. There's been a lot of elections in this last year. There's been a lot of promises made by politicians across the world, not just in Europe, but also abroad. And those promises will result in new policies, but it's uncertain how those will pencil out. So, I think what I see as a risk is that investors will pause to get certainty on those policies. Now, bond markets and other financial markets are instantly pricing those risks. So, we can take our lead from those markets. But our investors are investing for the long term. In liquid markets you can buy and sell any day. So that's really a big risk for us that that investors will pause and perhaps delay their return into the market.

I guess the second risk is really related to the effect of those policies when they become clear. Will we see higher inflation again? That's a big concern that is currently being priced into some bond markets. And if inflation goes up, that will have some repercussions for real estate as well, because that means that, if some of the rate cuts will move away, interest rates will go up again. Interest rates are a very key driver for real estate for investors.

And a third risk I would say, is the reverse. If we see more positive trends around the world - we have seen the ceasefire in Lebanon overnight as far as the news goes - if we see new political movements, other wars across the world where we see, perhaps, some settlements, that could be a positive upside that people are currently not thinking about. And they might wait too long to take advantage of the opportunity that's already there.

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