European real estate market outlook Q1 2026

European economic outlook

Activity

Robust industrial production and retail sales data for November suggest the Eurozone economy enjoyed a relatively strong fourth quarter. And favourable revisions to the back data hint at the economy gathering some momentum towards the end of the year, even if Purchasing Managers’ Indices were a touch weaker over December. A modest tailwind from fiscal easing should help the economy maintain this momentum into 2026. But stimulus could take longer to affect the real economy than hoped, especially in Germany. Overall, we expect growth to accelerate to 1.5% in 2027, up from 1.2%, as fiscal easing starts to build. 

Inflation

Inflation came in bang on the European Central Bank’s (ECB) 2% inflation target in December. But base effects should drag it below the target in January. Over the medium term, however, inflation is on track to settle near target. That’s because the price of services is likely to increase at an above-target rate throughout 2026, as indicated by ongoing strength in underlying run rates. Fiscal easing should eventually push up prices, if only modestly. We therefore expect inflation to return to target by the end of 2026.

Policy

Upward revisions to the ECB’s growth forecasts quashed expectations for further cuts. Indeed, market pricing now reflects our view that the ECB’s next move is a hike. A debate over the timing of this return to hikes is now opening up. We think that the effects of fiscal easing could take longer to show up in the real economy than some expect. We therefore don’t see a hike until 2027. But an earlier move cannot be completely ruled out. Over the near term, the outlook is clearer; rates will probably be held in February.

Eurozone economic forecasts

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

European real estate market overview

The European real estate market is entering a new phase in its cyclical evolution. Political shocks weighed on market sentiment in 2025, ensuring the pace of recovery slowed to a more modest rate than expected prior to the Trump presidency. Political turbulence has kept economists and investors guessing about the next intervention and its impacts on inflation, interest rates and geopolitical relationships. 

Aberdeen Investments’ multi-asset house view maintains a risk-on outlook for 2026, with most asset classes expected to outperform cash. Global real estate was upgraded to +2 overweight in December. MSCI reports global real estate returns at 5% per annum as of September 2025. The UK and Europe led with 6.8% and 6.1%, respectively, while Asia-Pacific achieved 1.6% in the third quarter (in US dollar terms). As geographic and sector returns align positively, the overall asset class outlook has improved.

The MSCI Pan-European Index returned 6.5% in local currency terms for the third quarter of 2025, matching the previous quarter. Despite market stagnation in late-2025, returns stayed strong, reflecting real estate's resilience and stable valuations near cycle lows. Real estate remains a defensive asset with growth potential if economic conditions improve as expected.

The key question now is whether the recovery will accelerate. Our leading indicators suggest a gradual improvement. Real estate investment trusts (REITs) are trading at large discounts to net asset value and remain sensitive to interest rate expectations, but the FTSE EPRA NAREIT Index for Europe was up 8% over the year to 19 January 2026. This provides us with confidence in a gradual improvement in performance for the direct market in 2026. Operational performance has remained resilient, with many REITs achieving strong revenue growth through rising rents and stronger occupancy.

Non-listed investors are also feeling more upbeat. The INREV Confidence Indicator continued its sharp rebound in December 2025. The composite score rose to 59.4, just a touch shy of its peak level of 61.5 in December 2024, signalling renewed investor optimism. Financing conditions soared to 71, while economic expectations, leasing and operations, and investment liquidity all improved. Development activity remained in contraction below 50.

Another key recent dataset also came from the INREV Investor Sentiment Survey, released on 16 January. The latest survey shows that 38% of non-listed real estate fund investors are looking to increase their allocations this year, a sharp jump from 18% last year. Encouragingly, we should see fewer redemptions, as the share of investors looking to decrease allocations has fallen from 43% to 22% in 2026.¹

Capital markets are gradually improving, with total investment projected at €200 billion in 2025, below the long-term average of €295 billion. Country-level capital flows have recovered to 85% of pre-pandemic levels, except in Germany and the Netherlands. Office investments are especially weak at just 43% of pre-pandemic averages, while industrial (101%), residential (84%), retail (70%), and data centres (143%) sectors are nearing or exceeding historic norms.

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 272% year-on-year, 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.

Sector outlook

Offices

Europe’s office markets remain in a period of transition and polarisation. Total vacancy rates surged again in the third quarter to 15.1% in September 2025. This was unexpected as the curve had been flattening. We think this trend will reverse, as total office space under construction has fallen consistently for the last five years and is now at its lowest level since 2016. New office supply, as a share of total stock, is forecast to fall to 0.6% in 2026 and 2027, just half of the long-term average.²

While the supply side remains in check, demand is muted. Net absorption improved modestly from its lowest level on record in June 2025 at -38,000 square metres to -34,000 square metres in September.³ Weak absorption reflects ongoing tenant consolidation to smaller offices in core locations. In some central business districts, where prime rental growth has been strong in recent years and where supply is tight, grade-B+ offices offer stronger performance potential than prime stock.

Prime rental growth remained stable at a healthy pace of 5.3%,⁴ a level more than double the long-term average. Shortages of high-quality space in good areas remain a key driver of this trend. We have seen cases of companies releasing too much space since the pandemic, so we could see healthy demand in good locations for some time. Some analysis suggests artificial intelligence is reducing demand for some functions, as businesses embrace digitalisation. Risks in this context mean we are increasingly focused on resilience in core locations.

Industrial & logistics

Post-‘Liberation Day’ occupier caution has eased, as businesses begin to make decisions with more confidence about capacity requirements in the coming years. Levels of demand are still low but have stabilised. We expect them to grow in accordance with cyclical improvements in production output, and through new structural demand from nearshoring, e-commerce and supply chain diversification. 

The overall vacancy rate fell 50 basis points (bps) from 6.4% to 5.9% in September 2025, highlighting a possible turning point in recent supply growth.⁵ CBRE estimates that construction output in logistics is set to fall to a nine-year low this year.⁶ Rents increased by 4.8% over the year to September 2025. 

We remain upbeat on the outlook for the occupier market. Tariff uncertainty is never far away, but it has eased. Cyclical manufacturing activity trackers are improving after a three-year dip, and e-commerce has returned to pre-pandemic trend growth rates of 5-10% per annum. 

Furthermore, there are strong long-term structural demand drivers, driven by the necessity for Europe to build strategic autonomy across key economic value chains. Global trade will continue, but Europe needs to take ownership of more components of critical areas of the economy, from pharmaceuticals and green technology to defence and beyond. This will drive additional demand for research and development, light industrial, production, and distribution facilities. 

Retail

Retail has been one of the best-performing sectors in the last year, given its high-income return and supportive fundamentals. Investor sentiment is improving, with investor intentions surging further into positive territory.⁷ With €23 billion invested in 2025, retail volumes are improving. The sector accounted for 16% of the total amount invested in 2025. Retail warehouses are no longer the sole focus of capital, with some shopping centre transactions and high street retail markets back in favour.⁸ 

Household finances remain in good shape, with unemployment still close to cyclical lows and Eurozone real wage growth at 2.6% in December 2025. Consumer sentiment has taken a knock from geopolitical tensions, which is unsurprising given the impact the war in Ukraine has had on real household incomes. 

Recent economic resilience is driven by domestic consumption, which is benefiting retail warehousing performance. Net-operating income has risen steadily for five years, as landlords invest in retail park upgrades and sustainability retrofits. Supply is near record lows and rents are growing in real terms. Retail rents rose 2.9% year-on-year to September 2023, the strongest growth in at least 15 years. 

While retail parks have been performing strongly for some time now and supermarkets have proven resilient during the cycle, other retail formats are now catching up. European shopping centres returned 8.8% over the year to September 2025, sharply closing the gap on 9.2% in retail warehousing. Standard high street retail units also improved, returning 7.2%.⁹

Living

The residential market's long-term 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 supply-side data improved slightly. Vacancy rates, by far the lowest among the sectors, fell 20 bps from 2.5% in June to 2.3% in September. New developments are being absorbed, and most major cities remain undersupplied. Helsinki is starting to see a better balance, too. 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 bps per year over the next four years.

Due to ongoing low supply, residential rents are rising, although growth slowed from 6.7% in March 2025 to 5.7% in September. Residential rental growth is outpacing all other market sectors. Rents are expected to keep increasing in line with real wage growth. Yields have remained stable, with 24% of total investment directed to this sector. This figure matches office investments.

Since our last update, which covered Ireland's proposed policy changes, the German construction “turbo” policy and Sweden’s Presumption Rent Reforms, there have been no new policy changes of note. Sweden’s new policy came into effect on 1 January 2026 as planned. 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, which addresses supply and demand issues in major Swedish cities.

Outlook for performance and risk

Geopolitical risks remain elevated, yet the market is showing signs of renewed optimism as we enter the new year. 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. 

Property-level returns recovered to 6.5%, as of September 2025, indicating early market recovery. We project all-property returns will rise to 7.1% in the next year, which is consistent with previous forecasts. Our three- and five-year annualised return estimates are 8.4% and 8.2%, respectively. Near-term returns will be driven by income, with rental growth and modest yield changes supporting capital growth in 2026 and 2027. The UK, Southern Europe, Sweden, Norway, and the Netherlands are expected to see the highest returns.

The main risks to our outlook are: the potential ongoing disruption from great power tensions, particularly from US foreign policy; a steeper yield curve because of greater sovereign risk and concerns about budget deficits (particularly in France); and an economic slowdown. Higher inflation is not forecast, but could result from some of the risks outlined above. That said, low supply should insulate cash flows from a weaker macro backdrop, and valuations remain close to their cyclical trough.

Core pricing remains appealing at this stage of the cycle due to expected rental growth, indexation, and the higher-risk environment. Yield spreads versus bonds have been stable this quarter. Core-plus and value-add strategies are supported by strong fundamentals, more opportunities, and lower debt costs. Most portfolio issues are asset-specific, not sector- or region-wide. Living, logistics, retail, core offices, and alternative assets are showing strong prospects.