European real estate is entering a new cycle driven by income growth, quality, and sustainability. As rates stabilise and fiscal investment gathers pace, confidence is returning to core markets. With AI, energy resilience, and occupier consolidation reshaping demand, selectivity and discipline will be key to navigating this evolving landscape.

Key points

• European real estate is entering a new phase driven by rental growth and asset quality rather than yield compression or sector rotation.
• Performance will diverge at the asset level, with sustainable, prime, and energy-efficient properties best positioned for outperformance.
• Fiscal stimulus, stabilising rates and renewed global capital inflows, particularly from Japan and Canada, are supporting a gradual recovery in confidence and liquidity across European markets.

After several years of volatility marked by pandemic disruption, inflation and aggressive rate hikes, European real estate is showing signs of renewed stability. The European Central Bank’s 200 basis points of cuts over the past year have brought an end to the tightening cycle, while bond yields have steadied about 300 basis points above their pandemic lows. Growth remains modest, with GDP expected at 1.2% in 2025 and 0.8% in 2026, but fiscal expansion, led by Germany’s €1 trillion defence and infrastructure package, is providing a material tailwind. This investment should lift both domestic and regional demand, supporting sectors tied to construction, logistics and industrial production.

The easing of trade tensions and monetary stabilisation have improved sentiment. Yet this recovery differs from the post-GFC rebound; yield compression is no longer the primary driver of returns. Instead, performance will depend on income growth, quality and sustainability.

A new cycle in focus

The new cycle is characterised by asset-level divergence. In the past, sector selection largely determined returns. Now, performance will hinge on micro-location, building quality and environmental credentials, as occupiers consolidate into sustainable, high-specification space. ESG standards are shaping both tenant demand and capital allocation, forcing investors to take a more forensic view of each asset’s long-term relevance.

Artificial intelligence is emerging as a powerful structural force. The most immediate beneficiary has been the data centre sector, where surging demand has diverted land from logistics in cities such as London, Frankfurt and Amsterdam. However, AI’s influence will extend far beyond that. Automation and predictive logistics will reduce warehouse labour dependency and shift location dynamics, while in offices, the technology may constrain employment growth but also create higher-value roles. The pattern could mirror the internet era where disruption was followed by reinvention.

Offices are seeing the first tangible improvement in sentiment since 2021. Yields in London and Paris have compressed, transaction volumes are rising, and vacancy rates have stabilised. Prime rents are growing 3-4% annually in leading markets. Even previously weak submarkets such as Canary Wharf and La Défense are attracting renewed corporate interest. Investors are returning selectively, focusing on value-add opportunities in energy-efficient and net-zero carbon buildings.

Logistics, while less buoyant, remains fundamentally sound. Vacancy rates have risen to 6.7%, but the focus has shifted from expansion to efficiency. Occupiers are consolidating into prime, energy-resilient facilities, favouring assets that integrate renewable power or storage solutions. The residential sector remains the strongest structural story, supported by low construction activity and persistent undersupply. With building permits at 20-year lows, prime rental growth of around 3% annually to 2030 appears well supported.

Positioning for the next phase

European real estate enters 2026 on firmer ground. Monetary easing, fiscal stimulus and growing cross-border investment are driving renewed confidence. Notably, Japanese and Canadian investors have increased allocations to Europe, attracted by more compelling relative value and stabilising returns. Liquidity is improving, and sentiment is turning cautiously positive.

The next phase will demand selectivity and discipline. With yield compression largely exhausted, returns will rely on income growth and operational strength. Assets that combine prime location, sustainability, and secure tenant demand will outperform, while secondary and inefficient stock risks obsolescence.

Despite lingering macro risks, the trajectory is clearer than it has been for years. Europe’s property markets are shifting into an income-led, fundamentals-driven cycle, one shaped by quality, adaptability and sustainability rather than leverage or momentum. For investors able to identify these characteristics early, the opportunity set across European real estate looks increasingly attractive.

Risk warning

• The value of investments and the income from them can go down as well as up and investors may not get back the amount invested.
• Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.
• Our Real Estate strategies invest directly in property and land. These can be difficult to sell so you may not be able to sell / cash in this investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer's opinion rather than fact.
• Our real estate strategies are subject to sustainability risk, which, if it occurs, it could cause an actual or a potential material negative impact on the value of the investments.
• For strategies that invest in overseas markets, changes in currency exchange rates may affect the value of an investment.

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