Despite looming uncertainty over US trade policies, prime European real estate is projected to deliver robust returns of 8.1% per annum over the next five years, according to AEW's 2025 Mid-Year European Outlook. The forecast, though slightly down from September's 9.2% projection, demonstrates the sector's resilience even as record levels of global trade policy uncertainty emerge. Under AEW's increasingly relevant downside scenario, which accounts for potentially higher US tariffs, prime returns remain solid at 7.0% p.a. for 2025-29.
The UK market leads the recovery charge with projected prime returns of 9.8% p.a., followed closely by Benelux and CEE markets. Among sectors, prime office markets are expected to generate the highest returns at 9.5% p.a., consistent with previous forecasts. Limited supply across prime real estate sectors continues to support rental growth, projected at 2.0% p.a. across all sectors, with residential property taking the top position at 3.1% p.a. due to anticipated supply shortages.
"While the situation is evolving, if higher than expected US tariffs are confirmed, our downside scenario becomes more relevant. Regardless, our projected outlook for prime European real estate returns across all sectors is that they remain resilient. In effect, we expect any impact on returns from tariffs to be mitigated by solid current income and rental growth prospects," said Hans Vrensen, Head of Research & Strategy Europe at AEW.
Transaction volumes are expected to rebound significantly in 2025, with AEW estimating €200bn in investment volumes for the full year. This optimistic outlook stems from improved sentiment across sectors, with retail and office-focused manager sentiment recently turning positive after strong momentum in residential and industrial markets. The narrowing variation in sentiment across sectors is largely attributed to long-awaited improvements in the retail segment.
"In the context of wider financial market volatility, prime European real estate investment should prove to be a safe haven relative to other asset types such as stocks and bonds. Despite the uncertainty on tariffs, we expect that the European real estate recovery will remain on track and investor sentiment and liquidity will continue to improve after the significant 2022-24 re-pricing," added Vrensen.
People mentioned:
- Hans Vrensen - Head of Research & Strategy Europe at AEW
Companies mentioned:
- AEW - One of the world's largest real estate investment and asset managers
Photo by Suzy Hazelwood: Pexels
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