European economic outlook

Activity

The US’s 10% baseline tariff, in addition to sectoral tariffs, will give rise to a significant negative demand shock for the Eurozone. Worse, trading relations with the US might become even less favourable after the 90-day pause on reciprocal tariffs expires. And compounding the headwinds is a hit to wealth and confidence. These developments prompt us to factor in a further 0.5 [1] percentage point (ppt) shock to gross domestic product (GDP) on top of the 0.7ppt we had already incorporated into our base case. We expect the economy to just about avoid recession, but the risk of a downturn is elevated. 

Inflation

Weaker demand, a stronger euro, and cheaper energy commodity prices will accelerate the Eurozone economy’s already advanced process of disinflation. This will drive an undershoot of the European Central Bank’s (ECB) 2% target. Given the limited scope of the EU’s proposed retaliatory measures and the US’s relatively small share of total EU imports, the potential for this to reignite inflation is limited. We now see the headline rate averaging 1.9% [2] this year and 1.6% in 2026.

Policy

With both growth and inflation outlooks now weaker, the case for more aggressive ECB easing is growing stronger. We expect a 25 basis-point (bp) cut next week. In addition, another reduction in the summer is now likely. However, comments by some Governing Council (GC) officials point to concerns over a rebound in inflation because of supply-side disruption. It’s not surprising to see policymakers remain cautious on inflation, given the recent memory of the 2022/23 overshoot and anticipated fiscal easing. Despite their caution, we think a weak run of data will force a third additional cut later this year.

Key takeaway

Listed real estate has generally outperformed equities since ‘Liberation Day’. We believe the asset class will prove more resilient than most during the period of heightened volatility. 

Eurozone economic forecasts

Source: Aberdeen April 2025 
Forecasts are a guide only and actual outcomes could be significantly different.

European real estate market overview

In March 2025, our Aberdeen multi-asset investments Houseview committee adjusted global real estate to a “+1 overweight” recommendation (maximum score +4). While liquid assets – such as fixed income, equities and real estate investment trust performance – have been volatile in recent weeks, we remain confident of an ongoing recovery in direct real estate total returns in Europe. The downgrade to risk in the houseview affected all asset classes, with cash weights increasing at the expense of risk positions.

While still positive, we acknowledge that the real estate backdrop has become riskier and relative pricing measures have become slightly less compelling in the last quarter. The volatility is evidenced by a sharp fall in global equity markets on the last day of the quarter, with the German DAX losing 2% [3]. The real estate component of the DAX was the best-performing sector on the day. This highlights the sentiment behind real estate as a relative winner in a more benign economic environment. Since then, listed property companies have generally outperformed all equities. 

The equity market sell-off has coincided with lower bond yields, with the German bund having eased off a recent high of 2.9% to 2.5% [4] at the time of writing. The level had briefly drifted to 2% at the start of the year, leaving real estate looking very cheap. However, following the 90-day pause on most tariffs and the focus on China, Europe currently looks better placed. Therefore, a balance of modest growth, gradual rate cuts, and easing inflation should leave European real estate looking better value.

Market momentum in European real estate is gathering pace. MSCI annualised European total returns increased to 4.8% [5] in 2024, the highest level since the second quarter of 2022. The fourth quarter of 2024 returned 1.8%, a notable increase from 1.4% in the third quarter and well above the long-term quarterly average return of 1.3%. Capital growth of 0.6% helped push total returns higher at the close of the year. The Netherlands, Portugal, Sweden, Spain and Denmark outperformed, as did the industrial, hotel and residential sectors. Indeed, some segments covered in the pan-European Pooled Fund Index hit double-digit returns in 2024, with Lisbon, Stockholm offices and Stockholm residential all clearing 10% [6].

The catalyst for improving returns has been a notable improvement in liquidity and capital markets. Investment volumes jumped by 46% [7] in the fourth quarter, compared with the same quarter of 2023; annual volumes were up 15% in 2024, as a whole. This chimes with INREV’s quarterly Consensus Indicator, which showed liquidity and financing as the strongest drivers of improving sentiment since the middle of 2024 [8].

An important feature that underpins our cyclical recovery thesis is ongoing rental growth in good-quality assets. European all-property rents increased by 4% [9] over the year to December 2024, a slight moderation from 4.1% in September. Residential and logistics assets have outperformed, but rents have increased across all sectors. Low supply persists and new construction orders are falling at a steady pace. High construction costs, high development finance rates, and tight labour markets mean we believe that nominal rental growth will beat inflation in 2025 and beyond. 

European real estate sector trends

Offices

Europe’s office markets remain in a period of transition. Total available supply is rising as the market adjusts to flexible working. The recent cyclical weakness in the economy has also weighed on total demand.

Office vacancy rates in Europe increased to 14.8% [10] in December 2024. This was just below the peak level of 14.9% in 2012, when the market was in the middle of the Eurozone Crisis. Most of the new space coming onto the market is older and in weaker locations, as businesses consolidate into their better buildings and vacate surplus offices. However, there are signs that the market is starting to get through this period of consolidation. Of Europe’s top-20 office markets, vacancy rates fell in half of them during the fourth quarter. 

Core central business districts (CBD) are heavily undersupplied and CBD rents are rising at pace. Rental growth in the fourth quarter hit its fastest pace in the last 12 months in seven out of 20 office markets [11]. Rental growth was 11% in London, 9.1% in Paris, 9% in Munich, 8.4% in Amsterdam, and 7.5% in Frankfurt. However, we should note that CBD office rents have a high correlation with stock market performance, so recent volatility is a warning of a potential pause in growth rates.

Investors remain cautious of offices, in general. Average lot sizes transacted in the first quarter of 2025 were €32.5 million [12]. This was down from over €60 million in 2022, reflecting how larger lot sizes remain liquid. Investor demand is improving for some offices, with a sharp 72% increase in CBD investment volumes last year. Average office transaction yields were stable at 6.6% in March 2025, but top quartile yields (indicative of the highest-quality offices) fell sharply to 4.3%, the lowest level since 2022. This reflects investor interest in capturing the strong rental growth in highly liquid assets.    

Logistics

Logistics is likely to be one of the first sectors to feel the effects of the recent geopolitical, fiscal policy and defence spending announcements. The plans for fiscal easing and defence spending in Europe should create a reasonable amount of new demand for industrial and logistics space, particularly in Germany. Supply-chain reconfiguration, resulting from new trade tariffs, could also stimulate new warehouse demand in Europe and the UK. This is likely to be offset by weaker economic growth, overall. Logistics is a sector that has been through several waves of structural change, and this looks set to continue with renewed pace. 

Logistics rents grew by 5% [13] year-on-year, as at December 2024, representing a slowdown from the 5.7% we reported last quarter. Rental growth is expected to outpace inflation in 2025. Recent increases in vacancy rates have eased and Savills reported a fall in the fourth quarter – the first fall in 18 months [14]. Total vacancy rates fell to 6.1% in the fourth quarter of 2024 from 6.2% the quarter before. 

Sentiment towards logistics remains high. After residential, the sector is the second-most popular allocation. On balance, 35% [15] of investors are looking to increase allocations to the sector. €15 billion [16]  was transacted in the fourth quarter of 2024, the highest fourth-quarter volume since 2021. The first quarter of 2025 is likely to have been slower due to seasonal effects. Therefore, it will be a few more months before any impacts from recent higher interest rates and the uncertainty around trade tariffs are clear. 

Retail

Retail has been one of the best-performing sectors in the last year, given its high-income return and supportive fundamentals. Investors’ attitudes are improving, with the balance now back in positive territory for the first time since 2017. And, at €33 billion [17], it constitutes a growing share of the total capital invested. 

Signs of rising unemployment (from a low base) and weaker consumer sentiment since ‘Liberation Day’ might reintroduce a level of caution. With household finances in reasonable condition, inflation below target in many countries and real wages still rising, it’s likely to take some time for trade tariffs to feed into retail performance data. We believe fashion, footwear and consumer electronics could be more vulnerable to trade disruption, but it’s too early to be sure. Indeed, re-routed goods from China to Europe could create disinflationary pressures in textiles and fast-moving consumer goods. 

Investors are focusing on retail parks, given low development levels, supportive fundamentals, and positive consumer trends. MSCI data shows net-operating income per square metre is rising after a 24% drop since 2015, indicating improved landlord cashflows and cost control. Retail warehouse vacancy rates in Europe fell to a record low of 3.2% in December 2024. 

Retail warehouse yields are setto see compression in the coming months. We have seen strong bidding intensity on recent deals, with MSCI data showing transaction yields falling from 8% in December 2023 to 7.1% in March 2025. CBRE has started to move warehouse yields lower in Europe, starting with Spain (-25 bps) [18] and Germany (-10 bps) in March 2025, although they have cut UK retail park yields from 7.1% to 6.5% in the last 12 months. We expect a similar trend to come through in Europe, too. 

Living

The residential market's fundamentals are the strongest among all the sectors, with vacancy rates in Europe's top-30 cities stable at around 1.6% [19]. This tight market is causing ongoing rental growth in most cities, averaging 6.4% annually as at the fourth quarter of 2024. We project European residential rents will increase by 3.3% annually over the next three years.

Low new supply supports sector resilience, with EU construction orders down 15% year-on-year in February 2025 [20]. Nine out of 12 of the largest residential markets in Europe either had no change or a drop in permits issued for new housing development in 2024 [21]. Data from Green Street shows that the net new housing supply in Europe will be below the rate of household growth until 2028. However, with housing development targets consistently missed, it’s unlikely that 2028 will represent a change in the supply situation.  

As expected, transaction volumes have picked up during the last quarter, with residential accounting for 27% of European year-to-date real estate investment volumes (full-year 2024 was 24%) [22]. Records show an increasing number of deals with volumes above €100 million, indicating improving liquidity. Latest surveys on investors' intentions suggest that institutional investors are favouring living, which should drive transaction volumes further. This is especially the case in the context of greater risk in the economy and residential’s clear defensive characteristics. The primary focus will be on rented apartments and purpose-built student accommodation.

Outlook for performance and risk

The outlook for European direct real estate returns has improved in recent quarters, despite an increase in the risk backdrop. The yield spread against German bunds has been volatile, but in early April it was roughly 240 bps versus the all-property real estate yield. The margin between prime real estate yields and long-term bond yields is now only 30 bps weaker than in September 2024. With income growing through indexation and rental growth, direct real estate remains good value and will draw capital back in during 2025.

We forecast European all-property total returns of 7.4% in 2025 (a slight downgrade versus our December 2024 forecast because of higher interest rates, currently). Our three- and five-year annualised total-return forecasts are 9.3% and 8.8%, respectively. Returns are income-driven, with rental growth and yield impact both contributing to improving capital growth performance. We favour the UK, the Netherlands, Spain, Denmark, and Sweden in the near term.

We no longer anticipate any further falls in prime European all-property values. Secondary assets, particularly weak offices, have not repriced enough and will suffer further valuation declines. The main risks to our outlook are ongoing market disruption from US trade tariffs and reciprocal measures, a steeper yield curve through greater sovereign risk, and a much sharper economic slowdown across continental Europe (as a direct result of the trade war). A recession or stagflation are not our base case, and we believe there could be downside risks to interest rates that would support asset values and could drive yields lower than forecast. Low supply should insulate rents from a weaker macro backdrop.

In terms of strategy, core pricing remains attractive, particularly when considering income-growth potential from rental growth and indexation, and the heightened risk backdrop. However, value-add strategies should benefit from stronger underwriting on exit yields in a lower-rate environment. We favour overweight allocations to logistics, rented residential, hotels, student accommodation, retail warehousing, core offices, and alternative segments like data centres.