European Real Estate: A Cyclical Recovery Shaped by Macro Forces

The recovery in European real estate is being driven by a shift in the macro engine. After years of turbulence, the sector is entering a phase defined by a more predictable, higher-for-longer interest rate environment. The European Central Bank has brought inflation back to its 2% target and is expected to keep its policy rate stable there in 2026. This provides a crucial anchor of stability, reducing the uncertainty that has plagued capital markets for so long. While long-term yields may drift higher, the overall rate backdrop is far more settled than in recent years, supporting a more constructive outlook.

Yet this stability is not a return to the easy-money past. The industry is adjusting to a prolonged period of transition, where historic tailwinds like ultra-low rates and globalisation have reversed or moderated. This has reshaped the investment calculus. A recent survey shows the proportion of industry leaders viewing deglobalisation as a key concern has more than doubled, from 31% to 70%, reflecting heightened geopolitical and trade risks. At the same time, sentiment indicators are showing a fragile but tangible improvement. The INREV Consensus Indicator rose to 56.4 in September, ending two quarters of decline and signaling a move beyond outright caution.

The bottom line is that the cyclical recovery is being built on a foundation of improved financing conditions, not broad-based momentum. The Financing subindicator in the INREV survey hit a record high, with nearly 40% of respondents noting better access to capital from both traditional and non-bank lenders. This is critical, as it allows corporates to rebuild balance sheets and supports the expected rise in transaction volumes. However, the recovery remains uneven and vulnerable. Performance dips, particularly in office-heavy markets like France and Germany, and the sector's outlook hinges on this more stable macro backdrop holding. For now, the engine is running, but it's a different one than before.

The Recovery Mechanics: Liquidity, Financing, and Sector Rotation

The recovery is now moving beyond sentiment into tangible market mechanics. Transaction volumes are accelerating, with fourth-quarter 2025 volumes on track to reach c.€77 billion, a 12% year-on-year increase. This would bring the full-year total to around €215 billion, marking a solid 9% rise from 2024. The trend toward larger, portfolio-level deals is also returning, with several sizeable transactions completing in recent months. This activity is not a broad-based surge but a selective revival, driven by improved financing conditions and a strategic rotation of capital.

Financing is the clear leading indicator of this shift. The INREV Financing subindicator strengthened to 67.3 in September, the highest level recorded since tracking began in 2023. Almost 40% of respondents noted improved access to capital from both traditional and non-bank lenders. This is enabling a dynamic market where lenders are once again active, using refinancing and restructuring to increase liquidity and establish new clearing prices. The result is a more predictable funding backdrop, which is critical for supporting the expected rise in transaction volumes.

Capital is rotating toward defensive, income-generating sectors. Residential remains the dominant force, and offices are showing signs of stabilization, though structural headwinds persist. Logistics, retail, and hotels are in particular demand, benefiting from robust operating metrics and rising demand. This sector rotation reflects a strategic shift toward assets with more resilient cash flows in the current environment. The bottom line is that the recovery is being built on improved financing conditions, not broad-based momentum. The mechanics of liquidity and capital allocation are now aligning to support a more constructive outlook, but the process remains selective and uneven across property types.

Performance, Valuation, and the Path Forward

The recovery's quality is now visible in the numbers. The FTSE EPRA Nareit Developed Europe Index delivered a total return of 21.2% in 2025, a strong performance that outpaced North America. Yet this aggregate figure masks significant sectoral divergence. The rally was powered by defensive sectors like health care and retail, while data centers faced a steep decline of 13.7%. This pattern underscores that the recovery is selective, not broad-based. It is being built on resilient cash flows and strategic rotation, not a universal re-rating.

Valuation confirms this selective opportunity. According to Cushman & Wakefield's European Investment Atlas, 78% of surveyed European markets are undervalued. The dispersion is the story here, with no market considered overvalued. This creates a landscape of sharp contrasts: prime logistics and hotel assets command premiums, while peripheral office and retail parks trade at discounts. The bottom line is that the sector's recovery is in its early innings, with substantial room for price discovery as capital rotates toward higher-quality, income-generating assets.

The path forward hinges on two key forces. The primary catalyst for a sustained, broader recovery is the anticipated rollout of fiscal stimulus for defence and infrastructure. This spending, which should start to boost underlying economic activity from the end of 2026, would provide a tangible tailwind to demand across multiple property types. It could help bridge the gap between the current selective recovery and a more cyclical expansion.

A key risk, however, is that the recovery remains uneven. The sector's outlook is polarized, with core assets in residential and logistics offering clear opportunities, while peripheral properties face structural challenges. This divergence is likely to persist as long as financing conditions remain tight and investor focus stays on quality. The bottom line is that the recovery is real but fragile, shaped by a macro backdrop of higher rates and geopolitical uncertainty. Its duration will depend on whether fiscal stimulus can provide the missing growth catalyst to lift the entire cycle.