European real estate market outlook Q4 2026

European economic outlook

Activity

The Eurozone economy has been more resilient to the energy cost shock than expected so far. However, the worst of the impact could be yet to come. High gas prices are pushing household energy bills up, imparting a real income shock on consumers. Meanwhile, higher costs will form a headwind for industry. Further ahead, fiscal easing in Germany should eventually create a tailwind. This policy’s economic effect comes with a lag, so we continue to expect the economy to grow at an above-trend rate in 2028.  

Inflation

The Eurozone’s inflation rate has risen from 1.7% in January to 3.8% at the recent flash print. And it could still tick up. Expensive gas, combined with low storage levels, will result in further rises in household energy bills. The trend in underlying components is less alarming, but there are now emerging signs of spillovers from high energy costs into services prices. We see the headline rate breaching 4% by the end of the year.  

Policy

The European Central Bank (ECB) hiked for the second time at its most recent meeting. We expect it to take a breather in October, given wider spreads have already imparted tighter financial conditions on many Eurozone economies, reducing the pressure on the ECB to act proactively. But the cycle is likely to resume in December, before a final hike in March takes the deposit rate to 3.0%. The short-run neutral rate may also be above our previous 2–2.25% nominal estimate, implying that policy may need to stay tighter for longer to return inflation sustainably to target.

Figure 1 – Eurozone economic forecasts – base case: “No war, no peace.”

Source: Aberdeen, Haver, September 2026
Forecasts are a guide only and actual outcomes could be significantly different.

European real estate market overview

In our September 2026 Investment Houseview, we downgraded global real estate to a neutral recommendation against the benchmark of cash returns over a 12–18-month horizon. While we remain optimistic on the outlook for the asset class, near-term performance is expected to be impacted by recent material increases in bond yields and financing costs. In the last quarter, the German Bund yield increased by roughly 50 basis points. In Europe, indexation to inflation measures will help offset some of this pressure but the net impact is still likely to be negative for valuations. This draws us back to a low income return forecast for the next 12-month period. This outlook is based on a scenario which our Global Macro Research team call “No war, no peace” to which they allocate a 55% probability. 

While the market rightly remains focused on sectors and risk strategies as ways to drive relative performance, the big shift in the Houseview is a renewed focus on country relativities. France is back in the crosshairs, with the French OAT yield approaching 5%. A tricky near-term political backdrop, concerns around France’s ability to meaningfully reduce its budget deficit, and the presidential election next year leave enough doubt to weigh on the real estate market performance. We have downgraded the outlook for France significantly this quarter.

Germany too has its headwinds, with several open-ended funds reporting deferred redemptions or gating as they battle outflows. However, the German government has materially upgraded its growth forecast for 2026 and 2027. The outlook is the most positive for several years, thanks to improved PMIs, resilient consumption and fiscal stimulus due to kick in. 

Annual total returns for continental Europe slowed to 5.2% in the year to June 2026, bringing the region into line with the global average as regional dispersion widened¹. Performance remains income-led and uneven. Southern Europe and Ireland continue to outperform, while France has declined from annualised returns in excess of 6% one year ago to 4.6%, with Germany returning just 2.9% to June 2026. Southern Europe, Ireland and Denmark led performance rankings.

By sector, retail has been comparatively resilient, but industrial returns have fallen sharply. Headline residential returns flatter the sector, as they are largely driven by privatisation gains in the Netherlands and Denmark². Core private rented residential has continued to deliver low real returns. 

Looking ahead, listed markets point to further adjustment. European real estate investment trusts (REITs) have been the weakest global region, falling by around 15–20% in just a few months as hostilities in the Middle East resumed and rate expectations reset. Residential has been the most downtrodden REIT sector, while retail, healthcare and industrials have outperformed³. With listed values down 12% year on year, this implies direct markets are unlikely to escape the macro backdrop unscathed.

Relative pricing is the crux. The all-property yield spread over German Bunds fell to around 160 basis points (bps) from 220 bps in three months, below the 2% premium investors typically require . Because much of European real estate is indexed, inflation-adjusted spreads look healthier and closer to long-term averages, but this only partly cushions the hit. Green Street's assessment has also shifted quickly: within a month, direct real estate has moved from looking cheap against corporate bonds to closer to fair value, and it would turn expensive if fixed-income rates rose further⁴. Nordic and retail segments carry the most spread protection, while residential, central business district (CBD) offices and Central and Eastern Europe offer weaker value.

Direct valuations have, so far, been broadly stable. Across 384 European segments, 80% of yields were unchanged in the third quarter⁵. Retail is the only sector where more markets hardened than softened, led by Dublin retail parks. Outward shifts are concentrated in France, where regional office yields moved out by around 50 bps over the quarter.

Lender appetite remains intact and margins are flat, but surging swap rates pushed all-in debt costs back above 5% – beyond the 2023 peak and the highest level since our survey began⁶. Residential and logistics continue to attract the most supportive margins, but for now we see leverage as a likely drag on performance for the next six months on our base case.

Deal flow had surged back to life in early 2026, but things have slowed sharply in the third quarter. Transaction volumes are up 7.2% year-on-year, but remain around 20% below the long-run average⁷. Today, processes are longer, bargaining is harder and some deals have been pulled so investors can wait for a stronger signal to proceed. Spain, Sweden and Italy are the most active markets relative to history, while France and Germany remain very subdued. Living has been strong, with €39 billion traded to August, while office activity remains thin.

Buying power is rebuilding from a low base. Green Street estimates around €110 billion is available, with new vehicles launching in living, German residential retrofit and light industrial. The largest ever southern European fund close was reported, which shows investor preference for the region. France is rotating as new-style SCPIs absorb savings inflows, but German open-ended funds face €17 billion of retail outflows with several limiting withdrawals and gating, which could create opportunities for well-capitalised buyers to help create liquidity.

Operationally, the market is holding up extremely well and this gives us conviction in the cycle. Vacancy fell across all sectors in the second quarter, rental growth remains above 2%, and EU construction new orders fell 17.5% year on year in August⁸. Overall, the near-term risk lies in financial maths rather than occupier markets.

Sector outlook

Offices

Offices are a conflicted sector. Fundamentals are improving, with rents rising by 3.6% per annum in the MSCI sample – the highest rate for over a decade. Vacancy (14.2%) is rolling over, and space under construction is 37% below its peak – the lowest level for a decade. CBDs remain tight, with vacancy at around 3% in Madrid, and below 5% in central Amsterdam. In Paris, CBD vacancy has jumped from cyclical lows to around 6% today, with concerns it could leap higher due to lack of demand.

However, rising interest rates are overshadowing sector improvements. CBD spreads have eroded rapidly, and Munich, Paris and Stockholm still look expensive even after adjusting for rental growth. Madrid, Amsterdam and Dublin offer better value. We have downgraded CBD prime and Grade B offices on relative pricing; Grade B also faces higher refurbishment costs and growing concerns about AI eroding graduate roles. Business parks remain structurally challenged. Price discovery in non-core offices continues, and German offices are finally repricing – a process that could go further if more open-ended funds gate.

Offices are forecast to deliver just 1.2% in year one, 5.5% annualised over three years and 6.7% over five years. Almost all the 11 segments forecast to post negative year-one returns are offices. That said, where repricing has already occurred – such as in regional France – selective buying opportunities are emerging. Longer-term AI threatens the demand structure, and we are carefully monitoring demand trends through this lens. 

Industrial & logistics 

Industrial and logistics fundamentals are stabilising after a soft patch. First-half take-up rose by around 19% year-on-year, led by third-party logistics and retail, with Chinese companies and the defence industry adding meaningfully to new demand⁹. Supply has peaked and availability is falling, with the outlook tightening through new completions falling 59% in the second quarter.

Rental growth has moderated, with prime rents up 1.7% year-on-year, but there are renewed signs of life with second-quarter rents rising by 0.9%, the fastest pace in a year. Reversion potential remains significant, particularly in multi-let industrial with NOI having exceeded €100 per square metre. Investment is stuttering, with only Poland and Sweden above their historic average volumes, but softer yields offer a more interesting entry point, particularly for portfolios. 

Reindustrialisation, nearshoring and defence continue to underpin long-term demand. Despite a very weak year-one forecast, industrial is our strongest sector, forecast to return 4.1% in year one and 7.7% annualised over three years, with Italy, Sweden and Poland leading. Dutch and German industrial markets are soft now as pricing pressures and selling appetite fed through into pricing but should be strong by year three based on the recovering leasing fundamentals in the market.

Retail

Retail has outperformed for more than a year and remains favoured in our Houseview. Our base case sees the sector avoiding a painful reversal, although an inflation surge and weaker labour markets remain key downside risks. Vacancy is tight, at just 3.3% for retail warehouses, rents are growing at around 3% per annum across formats, and new supply is minimal¹⁰. Even shopping centres are seeing rents rise after a decade of falling rents. 

Capital is flooding back as buyers from all capital sources are now favouring the sector. Retail investment is above its long-term average in every major market except Germany, the UK and the Netherlands, and competition for retail parks is intense. We have upgraded supermarkets as a defensive asset in a risk-off market, and shopping centres on their attractive yields.

The main risk remains the consumer. Confidence has weakened and households are saving more, although sentiment should improve if energy prices fall sustainably. We prefer stabilised, modern schemes and will watch real household incomes and labour markets closely. Retail is forecast to return 5.7% in year one – the strongest of any sector – and 7.5% annualised over three years, with Spanish, Irish, Danish and German retail parks among the top-performing segments across the Houseview.

Living

Residential remains a high-conviction allocation, supported by persistent housing shortages and resilient occupier demand. Nevertheless, we expect the sector to be most impacted by the higher cost of capital given the much lower yields and income returns in the sector and the sharp deterioration in spreads. 

Across the Euroconstruct sample, completions in 2026–28 are expected to run 12% below the 2020–24 annual average, with Germany, Sweden and Finland down 30–50%¹¹. Rental growth is normalising rather than reversing, and capital remains committed, with €39 billion of living transactions to August, well ahead of previous years. Softer leasing conditions have started to become more commonplace in the likes of Sweden, France and Germany, with rents not moving on quite as fast as those markets had become accustomed to.

However, tight spreads make the sector vulnerable to higher rates, and we have downgraded private-rented sector (PRS) residential on relative pricing. Purpose-built student accommodation and senior living continue to add diversification, with continental provision rates still far below UK levels and not as exposed to the same negative trends seen there.

Politics is now becoming one of the key differentiators. Die Linke's win in Berlin's election keeps socialisation on the agenda, so we are pausing new Berlin purchases until the legal position clears in relation to expropriation. 

Spanish rent control had been largely a Catalan story until now. But the uproar caused by the forced eviction of 87-year-old Maricarmen Abascal has triggered new rules. Spain has enacted immediate rental reforms to come in from 8 October, including tenant lease extensions, a 2% cap on many rent reviews, tighter controls on temporary and room-by-room lettings, stronger tenant break and pre-emption rights, and restrictions on discounted residential acquisitions. More far-reaching proposals, including automatic lease renewals and tenant compensation for non-renewal, remain politically uncertain pending parliamentary approval in mid-November.

French rent controls in nine territories expire on 23 November unless extended. In contrast, Ireland's 2026 reforms are supportive, with new tenancies capped at 2% or inflation, whichever is lower, and new apartments and student housing indexed to inflation only. Ireland’s residential market has performed well in response, recording a much improved 7.9% over the year to June 2026¹².

Residential is forecast to return 1.9% in year one and 5.8% annualised over three years, so selectivity on cities, regulation and stock quality will drive returns.

Outlook for performance and risk

Peak risk has not yet passed. An energy-led inflation overshoot and further ECB hikes are squeezing spreads, while leasing fundamentals hold. We therefore stay cautious and defer adding risk until pricing resets.

Our three-year annualised European all-property total return forecast is 6.6%, down from 7.6% in June, with a five-year forecast of 7.4%. We expect one soft year of 3.2%, as yields move out by around 14 bps and capital values fall by 2.3%, before returns recover to 7.6% in year two and 9.0% in year three. Income of around 5.5% per annum carries performance, with rental value growth rising from 1.8% to 3.5%. Our scenarios range from over 8% under “Peacemaker-in-Chief” to 2.6% in the weakest case.

The sector spread (5.5% to 7.7%) is as wide as the country spread, so sector choice matters as much as geography. Industrial and retail lead over three years; offices and some residential lag. Portugal (8.4%), Ireland (8.3%), Italy (7.9%), Spain (7.5%) and Sweden (7.3%) are ahead, while Germany (6.7%) and France (5.8%) are lagging. 

Debt still enhances returns, lifting three-year returns from 6.6% to 7.5% at 40% loan-to-value, but refinancing should be stress-tested at all-in costs of 5% or more. Our stance is risk-off for now: spend the risk budget on leasing rather than financing; protect income through asset management, renewals, indexation and cost control; and price live deals rigorously. Material over- or underweight positions in sectors or geographies should be reduced to stabilise performance. We will re-risk gradually once rates and pricing stabilise.