European real estate market outlook Q4 2025

European economic outlook

Activity

Flash Purchasing Managers’ Indices (PMIs) for September showed the Eurozone economy remains relatively resilient. However, pockets of weakness remain. In France, political risk is weighing on sentiment, and bond markets are likely to treat French bonds more like peripheral debt rather than core debt. However, a deeper fiscal crisis remains unlikely. Risks of an escalation in Eastern Europe also remain remote, despite multiple Russian incursions into the North Atlantic Treaty Organisation’s (NATO) airspace. Indeed, tailwinds from fiscal stimulus on defence and infrastructure spending should start to boost activity from the end of 2026 and during 2027.

Inflation

Inflation currently sits just above the European Central Bank’s (ECB) 2.2% year-on-year (YoY) target and looks set to remain near-target over the remainder of the year. The ECB’s consumer expectations survey suggests consumers currently expect inflation to rise above target to 2.8%. However, we think the large, new-year price rises in recent years are unlikely to be repeated in 2026. This would pull the YoY rate below target over the first quarter of 2026. With monetary stimulus not forthcoming, there is a risk of this undershoot becoming entrenched. But base effects should push up on the headline rate from the second quarter onwards.

Policy

We think the ECB has finished its easing cycle. The policy rate is now at a neutral level and the Governing Council is keen to keep it there for an extended period. A cut into accommodative territory is possible if demand-side risks crystalise. But it’s also possible the ECB starts hiking again by the end of our forecast horizon in response to fiscal easing. Monetary policymakers will be keen to avoid intervening in government debt markets in response to the political uncertainty in France, but liquidity support would be available in a crisis.

Key takeaway

The European economy is showing resilience in the face of persistent downside risks and a series of rolling shocks. Geographic and business-sector disparities are wide, driving polarisation in real estate forecasts too.

Eurozone economic forecasts

 

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

European real estate market overview

The European real estate market continues its gradual and uneven recovery. This trend is reflected in the Aberdeen Multi-Asset Investments Houseview Committee maintaining its “+1 overweight” recommendation for real estate (on a scale where the maximum score is +4) in September – a position it has held for the past year. This moderately positive stance has coincided with a steady improvement in total return performance, particularly in the UK and across Europe.

According to the latest MSCI data, Continental European real estate delivered a robust property-level return of 6.2% over the year to June 2025 [1]. These figures are close to the long-term average, outperforming Asia-Pacific and North America. The figures only slightly trailed the UK, which posted a 6.6% annual return. The pace of returns slowed in the second quarter, given the ‘Liberation Day’ shock, rising bond yields, and higher interest rate expectations. Europe returned 1.4% over the quarter. We expect the third quarter to show a similar outcome, with the market largely moving sideways during a quiet summer.

The key question now is whether the recovery will accelerate. Our leading indicators suggest a gradual improvement. Real estate investment trusts (REITs) have underperformed broader equities, with a total return of -3.6% over the past 12 months, compared with 12.2% for Euro Stoxx. REITs have been highly sensitive to inflation and interest rate expectations [2]. However, operational performance has remained resilient, with many REITs achieving strong revenue growth through rent increases and stronger occupancy.

Perhaps of more relevance in view of the distortion in REIT pricing, the INREV Confidence Indicator rebounded sharply in September 2025. The composite score rose to 56.4, its highest level since before ‘Liberation Day’, which signalled renewed investor optimism. Financing conditions, leasing and operations, and investment liquidity are the strongest components of the index, while development activity and the broader economy lag.

We have also experimented with artificial intelligence (AI)-driven sentiment diffusion indices that have been trained on thousands of internal communications since 2017. In relation to European real estate sentiment, the current index score of 53 suggests a modestly positive near-term outlook. For context, the index peaked at 64 in early 2024 amid rate cuts, falling swap rates, accelerating rental growth, and MSCI’s first positive returns in two years. Six months later, MSCI reported a much-improved 1.8% quarterly return in Continental Europe. September’s score points to a quarterly return closer to 1.4%.

France faces ongoing political and budget challenges that could significantly weigh on markets. Borrowing costs have mainly risen for 30-year bonds, while 10-year yields increased slightly. Despite this, spreads on central business district (CBD) offices in Paris and other core assets have narrowed. Consumer confidence is down, which is reflected in the growing risk of public sector strike action. Limited fiscal room restricts long-term growth, and France has fallen three places in our Real Estate Global Risk Navigator. We anticipate lower, riskier returns from French assets, so investors are likely to remain cautious until a clearer path ahead emerges.

Liquidity in the capital markets is improving slowly. Investment volumes rose 21% over the year to September 2025, although activity was flat over the past two quarters as dealmaking slowed. Total transactions reached €208 billion over the year [3]. We anticipate a stronger fourth quarter because of seasonal factors, but momentum remains fragile as capital raising is still subdued. Notably, Blackstone’s €2 billion acquisition of a French logistics portfolio in September is seen as a positive signal that investors are once again making conviction calls on key thematic trends. This follows its €700 million purchase of Centre d’Affaires Paris Trocadéro, a welcome boost for office sentiment.

Finally, overseas capital flows will be critical against a backdrop of domestic economic pressures. Canadian investors deployed approximately €8 billion into Europe over the past 12 months, up 193% YoY, while Australian pension funds are showing increased interest. Capital that might otherwise have targeted the US could be redirected to more compelling opportunities in Europe.

European real estate market trends

Offices

Europe’s office markets remain in a period of transition, yet there are signs that a healthier balance is returning. Total vacancy rates fell to 14.1 million square metres in June, down from a cycle-high of 14.6 million in March 2025. We think this trend will continue, as total office space under construction has fallen consistently for the last five years and is now at its lowest level since 2017. New office supply as a share of total stock is forecast to fall to 0.6% in 2026 and 2027, a level just half of the long-term average [4] .

While the supply side remains in check, demand has faltered. Net absorption fell to its lowest level on record in June 2025, at -38,000 square metres on average across Europe’s major cities [5]. We put this down to ‘Liberation Day’ uncertainty and ongoing tenant consolidation to smaller offices in core locations. We have seen a particular pause in demand in Paris’s CBD. Rents reached new records again in June, and the macroeconomic outlook suffered from the political uncertainty. Rents and yields are both reported to have softened a touch in Paris’s CBD. Amsterdam, meanwhile, is showing signs of improving towards a healthier demand and supply situation. 

The consolidation trend continues. While net absorption was weak, prime rental growth across Europe’s key cities re-accelerated to 5.1% per annum in June 2025 [6], a level more than double the long-term average. Shortages of high-quality space in good areas remain a key driver of this trend. While tenants continue to downsize, they largely remain affordable. We have seen cases of companies releasing too much space since the pandemic, so we could see a healthy demand picture in good locations continue for some time. Some analysis suggests AI is reducing demand from some functions, as businesses embrace digitalisation. But it’s still too early to underwrite the full impact.

Logistics

President Donald Trump’s second tenure has proven to be a setback for the European logistics sector, which is navigating a soft patch. Demand in 2025 was already running at levels below the pre-pandemic long-term average before ‘Liberation Day’. But since then, tenants have become more cautious and the average vacancy rate in Europe has crept higher to stand at 6.3%, the highest level since 2016. The level is still below the long-term average of 7.9% [7]. 

Yet, the outlook for the occupier market next year could be better than expected. Tariff uncertainty has eased, cyclical manufacturing activity trackers are rebounding after a two-year dip (the manufacturing PMI for the Eurozone increased to 49.9 and capacity utilisation increased for three consecutive months up to 77.7% in August), and construction activity is slowing. New construction is set to fall back to 4% of total stock in 2026, the lowest level since 2013. 

In addition to cyclical demand drivers, we expect the defence sector to be a key driver of additional demand over the next five years. Europe is expected to spend more on defence and NATO members will increase their spending to 3.5% of gross domestic product by 2030. We see this as part of a wider trend of deglobalisation that we believe will support reindustrialisation in Europe. Ecommerce is also recovering after a post-pandemic lull, with the average growth rate forecast to return to 4% per annum [8]. 

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 investor intentions surging further into positive territory [9]. At €21 billion invested over the year to September 2025, volumes in the sector remain modest (41% of the pre-pandemic average), with the retail parks segment remaining the sole focus of most of the active capital [10]. 

Signs of weakening labour markets are starting to weigh on Eurozone consumer sentiment, which has drifted lower over the last 12 months. In France, it has fallen to the lowest level in two years. Household finances are in reasonable condition, and a recent acceleration in nominal wage growth pushed them well above inflation in August.

Investors are focusing on retail parks, given low development levels, supportive fundamentals, and attractive pricing. MSCI data shows net-operating income per square metre increased to €190 per square metre after a 24% drop since 2015. This indicates improved landlord cash flows and cost control. Retail vacancy rates fell to 5% in June 2025, the lowest level in a decade. Retail warehouse vacancy rates remain at record lows of around 3% [11] . Retail rents increased by 2.7% over the year to June 2025, the fastest rate for at least 15 years. 

Living

The residential market's fundamentals are the strongest among all the sectors. Structural demand thematics remain in place and are driving resilient performance. Supply also remains largely in check. These factors are creating strong cash flow dynamics and a range of investment opportunities across the risk spectrum. Investors still favour the sector. 

Last quarter, key data softened slightly. Vacancy rates, although the lowest among the sectors, rose from 1.2% in December 2023 to 2.4% in June 2025. New developments are still being absorbed, and most major cities remain undersupplied – except Helsinki, with a 5.8% vacancy rate. With low construction activity, Helsinki's vacancy rate is expected to halve in two years. Across 30 major European residential markets, vacancy rates are forecasted to drop by about 10 basis points per year over the next four years.

Given the ongoing low supply situation, residential rents are growing. The pace has slowed a little in the latest data, with the annual rate falling from a peak of 6.7% in March 2025 to a rate of 6.2% in June. The quarterly growth rate fell slightly from 1.7% to 1.5% in June. Rental growth remains stronger in residential assets than in any other sector in the market [12]. We expect rents to rise over the next few years, but at a more long-term sustainable rate that’s closer to nominal wage growth. 

Since our last update on Ireland's proposed policy changes, Europe has seen one significant new announcement: Sweden plans to implement Presumption Rent Reform from 1 January 2026. Under this reform, new-build properties can fully track local rent trends, and landlords may adjust rents after renovations within a 15-year period. This policy aims to encourage development and investment, addressing supply and demand issues in major Swedish cities.

As expected, residential transaction volumes are recovering, with €10.6 billion of deals closed in the third quarter of 2025. This represents a 25% increase YoY and an 18% increase quarter-on-quarter. Year to date, residential has accounted for 25% of all European real estate investment transactions, the highest volume across the sectors [13]. Latest surveys on investors' intentions suggest that institutional investors are favouring living, which should drive transaction volumes further. The primary focus will be on rented apartments and purpose-built student accommodation.

Outlook for performance and risk

The market is showing signs of life as we enter the fourth quarter. It’s hard to tell how much of this is the typical fourth-quarter catch-up after a long, slow summer and how much is potentially a more meaningful cyclical uplift. We have seen more interest from investors in the asset class, especially from international capital. Sentiment indices are suggesting a decent recovery in enthusiasm after the raft of geopolitical shocks in the first half of the year. 

With property-level returns recovering to 6.2% over the year to June 2025, we believe the market is already in the early stages of a gradual recovery. The pace is gradual and there are frequent air pockets, which we have predicted for some time. We forecast this dynamic to continue, with all property returns over the next 12 months edging up to 7.1%, in line with our previous forecast from June. Our three- and five-year annualised total-return forecasts are 8.9% and 8.4%, respectively. Returns are income-driven in the near term, with rental growth and yield impact both contributing to improving capital growth performance in 2026 and 2027. The highest returns are expected in the UK, the Netherlands, Sweden, Spain, Portugal and Germany. 

The main risks to our outlook are potential ongoing disruption from trade tariffs and reciprocal measures, a steeper yield curve through greater sovereign risk and concerns about sovereign debt levels, and a much sharper economic slowdown. A recession or stagflation scenario is not our base case. We believe there could be downside risks to interest rates that would support asset values and that could drive yields lower than forecast. Low supply should insulate rents from a weaker macro backdrop.

In terms of strategy, core pricing remains attractive at the base of the cycle, particularly when considering income-growth potential from rental growth and indexation, and the heightened risk backdrop. Yield spreads against bonds have remained stable over the quarter, except in France, where they have narrowed. Core-plus and value-add strategies should benefit from resilient fundamentals, increasing opportunities across the market, and lower debt costs. We favour overweight allocations to industrial, residential, hotels, student accommodation, retail warehousing and core offices, although the spread in performance across sectors is narrowing.