Capital Markets

Improvement in the European real estate transaction market is set to continue in 2025, as the bid-ask spread converges further. The drivers are more product coming up for sale, improved financing conditions, and a growing appetite for large transactions.

Key Takeaways

1. Investment transaction levels are set to rise further, with buyer and seller expectations converging as more product is put up for sale. The recovery will be gradual, as the interest rate outlook limits the room for materially improved bid prices. There are risks to this outlook that could hamper the recovery, such as slow economic growth and higher than expected inflation.
2. Financing conditions are supportive of higher deal activity. European real estate’s return outlook is compelling, while the cost of debt has come down. This means that positive leverage is possible again, supporting investors looking to re-enter the market.
3. 2025 is expected to see a further return of international capital, supported by comparatively low borrowing costs and a favourable Euro-Dollar exchange rate. There is significant capital on the sidelines, most of which is earmarked for value-add and opportunistic strategies. Investors will want to deploy their capital before values have fully recovered and the window of opportunity has closed.

Transaction market to see continued improvement in 2025

Bid-ask spread to converge further

The real estate transaction market is forecast to expand further in 2025 as the bid-ask spread converges. We believe that upcoming loan maturities and rotation of equity will result in more product being put up for sale. At current discount rates and financing costs, some existing commercial real estate holdings are no longer attractive, motivating sellers to put some of these assets on the market. Highly levered borrowers, and fund sponsors with large redemption queues, will be more motivated sellers than investors with access to longer-term capital.

This process will mostly affect price setting on the sell-side. While buyer sentiment has improved, interest rates are not expected to come down rapidly and, at current hurdle rates, the room for materially improved bid prices is limited. Therefore, the recovery will be gradual, and it will likely take time before investment volumes and capital values return to their previous peaks.

Our scenarios outlined in the Economic Outlook will have a different impact on capital markets than on the property use sectors. The upside scenario, characterised by higher economic growth, will be inflationary and so will reduce the scope for interest rate cuts. Higher rates will slow the pace of recovery in the transaction market.

The downside scenario would see lower economic growth and less inflation, so policymakers will be more inclined to reduce rates to support growth. This is likely to lead to a more rapid improvement in transaction volumes. On the income side – as highlighted in the sector sections – the upside scenario generally means higher rental growth, as a short-term boost to economic growth results in strong occupier activity, whereas the downside scenario would lead to lower income growth due to lower aggregate demand.

Figure 4: Investment volume in Europe by sector and forecast

Debt again accretive to returns

Positive leverage possible again

Well-funded investors with a low cost of capital should benefit from the opportunities arising in this market environment, especially now that positive leverage has become possible again (Figure 5). After c. 24 months of repricing, capital values have stabilised, and five-year forward expected returns look compelling. With the compression of margins and base rates, the total cost of debt is now lower than expected returns, which is favourable for investors looking to enhance returns through leverage.

Return of international capital expected

Cross-border investments saw the quickest decline when the transaction market softened, but international capital is known to be agile and will respond quickly to the improving market outlook. This is helped by the divergence in the monetary policy outlook of the Federal Reserve and European Central Bank, which has resulted in comparatively lower Euro swap rates and a favourable Euro for USD-denominated investors. Over the past two years, large U.S. investors have been successful in fundraising and have substantial dry powder available for international strategies.

A large proportion of this is earmarked for value-add and opportunistic strategies. This capital will need to be deployed before prices fully recover to achieve target levered returns in the mid-to-high teens. A creative route to generating such returns are M&A-type transactions. After virtually coming to a halt in 2023, platform deals saw a strong revival in 2024. We expect to see more in 2025 as the wider M&A market picks up and investors seek to take advantage of dislocation as a result of arbitrage in the pricing differential between public and private markets.

Sector outlook

In general, all sectors are seeing positive momentum with capital values gradually improving from their 2024 troughs. This is supported by deeper bidding pools and a widening range of purchasers resulting in more liquidity.

Living has become the largest asset class in Europe and should continue to attract buoyant interest. Investors are widening their scope beyond multifamily and the group of investors targeting Purpose-Built Student Accommodation (PBSA) is growing, with several platform transactions on the market.

Figure 5: Cost of debt and five-year forward expected property return

Logistics similarly continues to see robust investor appetite and signs from the listed sector are positive. This is the first sector to trade at virtually no discount to net asset value. In their search for scale, investors are increasingly looking at larger ticket sizes and this demand for large transactions will support investment volumes. 

For offices, traditionally the largest sector, sentiment is improving as debt availability has returned and lending margins have recovered. Since occupier demand for prime offices remains strong, there is growing investor appetite to refurbish core plus or value-add assets, to reposition these as core.

The retail market has finally improved after a slow recovery. 2025 is expected to see the return of large dominant prime shopping centre transactions as returns are starting to look compelling relative to other property types. There have already been notable transactions in the U.S., and confidence is spreading to Europe.

The hotel investment landscape is expected to remain positive, supported by growing allocations to the sector, underpinned by strong return prospects. Value-add buyers, in particular, are active, but core capital is expected to return to the market in 2025, bolstered by favourable supply-demand dynamics.

Data centre investment opportunities are on the rise. Some powered shell opportunities have been brought to market over the past few quarters. However, competition has grown for assets in play given strong sector tailwinds and lower borrowing costs. A wider range of investors is trying to enter the sector, but asset acquisition opportunities remain scarce.

Figure 6: Number of European markets recording yield expansion or compression (prime sectors)