European economic outlook

Activity

The Eurozone economy continues to be something of a global laggard, led by weakness in France and Germany. And the headwind to growth from US tariffs could become more severe if ongoing trade talks don’t produce a constructive outcome. Our gross domestic product (GDP) forecasts for this year and next remain subdued. However, the outlook is brighter over the medium term, when fiscal stimulus begins to take effect. Defence spending will form an important component of this, as confirmed by the agreement among the countries in the North Atlantic Treaty Organisation (NATO) for a 5% of GDP defence spending target. We are forecasting stronger growth in 2027.

Inflation

Price growth has now slipped below the European Central Bank’s (ECB) 2% target. Weaker demand, a stronger euro, and fairly low oil prices should drive further disinflation. Given the limited scope of the EU’s proposed retaliatory tariff measures and the US’s relatively small share of total EU imports, we don’t expect the trade war to reignite inflation in the Eurozone. Overall, we are forecasting inflation to remain near or below target for the rest of the year. However, fiscal expansion could push up price pressures over the medium term.

Policy

The ECB’s rate-cutting cycle has nearly concluded, with monetary policy settings now neutral. However, we think that the negative demand shock from US tariff policies justifies some further easing, so we are forecasting a final 25 basis-point (bp) reduction in September. Cuts could be deeper and more urgent in the unlikely event that a 50% US tariff rate is confirmed on 9 July. We think fiscal easing will start to drive a recovery in 2026 and 2027, so we’ve tentatively pencilled in an ECB hike back to a neutral 2% at the back-end of our forecast horizon.

Key takeaway

Near-term risks from tariffs and geopolitics feel like material reasons for tenants and investors to be more cautious. However, there is growing support for a meaningful recovery to follow.

Eurozone economic forecasts

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

European real estate market overview

In June 2025, the Aberdeen houseview committee retained global real estate at a “+1 overweight” recommendation (maximum score +4). While we have seen overall risk aversion remain elevated since ‘Liberation Day’, and the escalation in great-power tensions, we see strong reasons to retain conviction in a gradual recovery for real estate.

There are three main reasons we have retained our houseview recovery base case.

The details of the latest INREV Confidence Index provide good insights into how investors are interpreting the current market conditions. Overall, the index eased for the second consecutive quarter to stand at 52.2, remaining marginally in positive territory (above 50). The key driver of the fall in the index was the liquidity component, which recorded a sharp fall from 63 to 47, dipping into a contractionary level. Leasing and operations (59), and financing (61) were the most positive factors, while the economic indicator also recovered.

While sentiment has remained cautious overall, European direct real estate performance has been improving. According to MSCI, pan-European real estate returns increased to 6.2% over the year to March 2015, outperforming the long-term average of 5.6%. This was heavily skewed by improving performance from retail and residential, which returned 7.1% and 7.2% respectively, while industrial recorded 7.5%. Offices continue to lag with 3.3% returns, although this was a notable increase and closes the gap on the other sectors quite significantly.

Some individual segments in the office and retail sectors from the same index are featuring in the top quartile of strongest performance. The top half of the index is dominated by industrial and residential segments, yet offices in Stockholm, Paris, and Oslo beat the European average. The same for retail in the rest of Spain and in the rest of Portugal.

The reduction in sector performance polarisation is something investors are noticing. Investment volumes are normalising across sectors, with some offices and retail parks now back in favour. Property Market Analysis’s first quarter of 2025 investor intentions survey shows net positive buying intentions over the next 12 months for retail (for the first time in eight years) and for offices (for the first time in four years). Residential remains the preferred sector, with logistics a close second.

Capital has been the missing piece of the jigsaw in the recovery story so far. Investment volumes picked up sharply in the fourth quarter of 2024, but tariffs and geopolitics weighed on this trend. Total transactions reached €150 billion over the year to March 2025, rising 17% over the previous 12-month period. The first quarter of 2025 was 7% higher than a depressed figure in the first quarter of 2024, suggesting a slowdown in momentum. The second quarter of 2025 could be a lot stronger. With cooling tensions around tariffs and geopolitics, confidence could return. There are several large deals at varying stages of conclusion. Trocadero in Paris is nearing a sale, with four final bids reportedly over €650 million. Encouragingly, three of the four bidders represent US capital, with Norges Bank IM the sole European bidder. This signifies that US capital is active.

Offices

Europe’s office markets remain in a period of transition. Supply is rising as the market adjusts to flexible working. The recent cyclical weakness in the economy has also weighed on total demand, while some analysis suggests artificial intelligence (AI) is reducing aggregate demand as businesses embrace digitalisation.

Overall vacancy rates are rising because of tenant consolidation and an increase in completions in 2024. Completions have since dropped to their second-lowest level in five years. Total vacancy edged higher to 8.2% in the first quarter of 2025, gradually closing the gap on the long-term average of 8.6%.

Prime rents are rising, with a record super-prime transaction in Paris’s central business district (CBD) reaching €1,300 per square metre. MSCI reported rental growth for offices slowed to 4.5% in the first quarter of the year, down from a peak of 5.9% in the second quarter of 2024.

Years-of-supply calculations, which measure the time required to absorb current vacancies based on the current rate of demand, have seen a slight increase, indicating overall market softness for offices. However, quality and location remain major factors, and some CBD locations have less than a few months of supply remaining.

Amsterdam is showing signs of improving rapidly towards a healthier demand and supply situation. Typically, when years of supply drops below two years, annual rental growth exceeds 5%. Years-of-supply has fallen for three consecutive quarters in Amsterdam, from a peak of four years in the second quarter of 2024 to 2.6 years in the first quarter of 2025. While prime rents have been rising for some time in Amsterdam in this cycle, a tighter supply situation is important for a sustainable cyclical recovery.

Logistics

The European logistics market is experiencing softer leasing conditions, resulting from slower economic growth and the specific impact of tariffs on global trade and confidence. We expect this to bottom out as the year progresses, with prospects for 2026 and 2027 improving. European manufacturing Purchasing Managers’ Indices are nearing parity after three years of contraction. The German industrial economy is showing signs of reaching a bottom, while fiscal and defence spending should boost a wider recovery in demand.

Despite a recent sustained rise in completions, vacancy rates remain low in an historic context, particularly in prime locations. Rental growth has eased, although it remains up 4.3% year on year. We expect rental growth to recover, with demand improving and new completions in 2025 and 2026 reaching just half the levels that were seen between 2020 and 2023¹.

The rising appeal of industrial property is noteworthy, given the potential reindustrialisation of Europe. This trend is driven by several factors, including the reshoring of manufacturing activities, automation, and the need for more resilient supply chains. As companies seek to mitigate risks associated with global supply chain disruptions, there is a growing demand for industrial spaces closer to home. This has led to a surge in demand for modern, high-quality industrial properties that can accommodate advanced manufacturing processes and logistics operations.

Resilience and greater autonomy need to be carefully balanced with trade relationships, but policy is clearly a driving factor. The reindustrialisation of Europe is also supported by government policies aimed at boosting domestic production and reducing reliance on imports. This includes incentives for companies to invest in new technologies and infrastructure, as well as efforts to create more favourable business environments. As a result, industrial properties are becoming increasingly attractive to investors.

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 now back in positive territory for the first time since 2017. And, with €30 billion² invested over the year to March 2025, it constitutes a growing share of the total capital invested.

Signs of weakening labour markets and weaker consumer sentiment since ‘Liberation Day’ and the start of the conflicts in the Middle East, might reintroduce a level of caution. Household finances are in reasonable condition, but nominal wage growth has slowed sharply and has only modestly exceeded inflation in the most recent data. With tariffs still to be settled at the time of writing, 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 vacancy rates fell to 5.2% in March 2025, the lowest level in a decade. Retail warehouse vacancy rates remain at record lows of around 3%.

Retail warehouse yields are set to 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% in June 2025. CBRE has started to move warehouse yields lower in Europe, starting with Spain (-25 bps)³ and Germany (-10 bps).

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 1.7%⁴. Low supply is causing ongoing rental growth in most cities, reaccelerating to 6.7% annually as of March 2025. We project European residential rents will increase by 3.1% annually over the next three years.

With ongoing rent pressures, there have been a number of new sensible policy decisions announced, particularly in Germany and Ireland. A new policy in Germany, known as the “construction turbo”, focuses on removing barriers to the delivery of new supply. It focuses on simplifying the planning system and reducing project costs for developers. In Ireland, new proposed legislation is focused on nuancing rent control mechanisms to raise the attraction of developing new properties by exempting them from the 2% rent cap. Instead, rents will increase with the Consumer Price Index and can reset to open market rental levels after six years.

However, there are significant ongoing supply shortages, and completions are not expected to meet targets anywhere in Europe for some time. In France, there is an average annual new housing requirement of 400,000 units per annum until 2030, with only 318,000 delivered in 2024. Similar shortfalls are reported across most countries⁵.

As expected, transaction volumes have picked up during the last quarter, with €8.8 billion of residential deals accounting for 30% of European real estate investment volumes⁶. Records show an increasing number of deals with volumes above €100 million, with several large portfolios also in the market. This indicates improving liquidity. The 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

Higher geopolitical risk, trade tariffs, and a weaker near-term economic outlook in Europe are having a notable impact on sentiment. Deal volumes have slowed and greater caution is evident in yield sheets and in some of the more recent performance data. However, real estate investment trusts have recovered all their losses since ‘Liberation Day’ and are trading roughly 4% higher, while showing low sensitivity to new geopolitical tremors. This supports our view that the direct market can expect returns to gradually improve as the year progresses.

We forecast European All-Property total returns of 7.1% over the next 12 months to June 2026 (a slight downgrade versus our March 2025 forecast). Our three- and five-year annualised total-return forecasts are 9.2% and 8.6%, respectively. Returns are income-driven, 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, Spain, Portugal, Denmark, and Sweden in the near term.

The main risks to our outlook are ongoing market disruption from US trade tariffs and reciprocal measures (the 90-day pause on tariffs is due to expire a week after the time of writing), a steeper yield curve through greater sovereign risk and concerns about debt levels, and a much sharper economic slowdown. A recession or stagflation are not our base case. 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 at the base of the cycle, particularly when considering income-growth potential from rental growth and indexation, and the heightened risk backdrop. However, core-plus strategies should benefit from stronger underwriting on exit yields in a lower-rate environment. We favour overweight allocations to industrials, residential, hotels, student accommodation, retail warehousing, core offices, and alternative segments like data centres.