The office sector is the clearest illustration of a feature of this cycle: intra sector divergence and polarisation. As a whole, the sector has yet to enter a recovery phase, unlike other property types. However, high-quality offices in supply-constrained submarkets continue to benefit from strong demand, limited availability, and record high rental growth. In markets such as London West End, Paris CBD, and Milan, prime rental growth increased by double digits in 2025. Declining development pipeline is likely to support performance going forward.
Investment sentiment towards the European industrial sector remains strong, although underlying indicators point to a more moderate return profile compared to the previous cycle, in line with a softer economic outlook and slower e-commerce penetration growth. Fundamentals are broadly balanced. Occupier demand has normalised from past peaks, but declining completions should ease upward pressure on vacancy while intensifying competition for modern, sustainable assets, which are expected to outperform. Defence and infrastructure fiscal spending should provide an additional tailwind.
Residential is increasingly attracting investor interest, driven by structural imbalance, persistent housing affordability and availability challenges, and a counter-cyclical investment nature. Demand is expected to remain robust driven by international migration, urbanisation, and positive household formation trends. Conversely, construction activity is likely to remain constrained. We expect stronger performance in markets with limited rental regulation, such as London and Bristol, as well as in cities where rental levels remain relatively affordable, including Berlin and Leipzig.
Market conditions remained positive in 2025, although performance moderated amid a normalisation of occupancy levels, easing pricing power, and more modest travel demand growth in line with its long-term average. In the short term, European hotels could benefit from a reallocation of demand, as holidaymakers shift away from the Middle East towards destinations deemed as safer. However, a prolonged conflict could erode household disposable income and discretionary spending, including leisure travel.
Retail appears to be on a much firmer footing compared to the value degradation experienced in the previous cycle. Indeed, retail assets outperformed all other property types in Q4 2025, closing the year at 7.9% annualised returns, only slightly below the residential sector. However, occupier demand varies significantly across markets and segments, making careful asset selection critical to a successful investment strategy. In Germany and the UK markets we favour retail parks, discounters, and supermarkets, while in Southern Europe we see positive prospects for top tier shopping centre schemes.
While the broader commercial real estate sector experienced a sharp construction activity decline, the data centre pipeline continues to expand. Nevertheless, take-up is set to exceed new supply, and vacancy rates are projected to continue trending lower, underpinned by the rapid adoption of cloud computing and artificial intelligence. Against this backdrop, execution risk is likely to drive a widening dispersion in investment performance due to an increasingly complex power procurement and regulatory landscape.
Market conditions continue to improve following a period characterised by operational pressures, rising insolvencies and restructuring. Recent financial results from care operators indicate that the sector is now on a more solid footing, with positive revenue growth and a renewed focus on cash generation and deleveraging. Total returns remained positive for the fourth consecutive quarter as of Q4 2025, driven by income growth and partially offset by a modest decline in capital values.
Student housing continues to rank among investors’ preferred sectors. Mainland Europe is emerging as an increasingly attractive opportunity, underpinned by stronger operating fundamentals and a more favourable outlook. Markets such as Spain, the Netherlands, and Germany continue to record rising international enrolments, driven by expanding university course offerings, alongside relatively lower tuition fees and cost of living. Conversely, tighter visa requirements for international students and their dependants, alongside mounting affordability pressures cloud the outlook of the UK market.
Footnotes
For our detailed perspective on the conditions and outlook for each sector, please download the full Europe Real estate sector report.
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