Capital Markets

January 2025 Forecast

Improvements in transaction activity

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

Mid-year review

• The market was off to a strong start, with a solid Q1 performance, despite turbulence in fixed income markets in January. In Q2, decision-making slowed after the U.S. reciprocal tariffs announcement on 2 April. However, closing activity picked up in June, with positive investment sentiment in Europe.
• Financing conditions have materially improved. While five-year swap rates mostly moved sideways, this was offset by a compression in margins resulting in lower borrowing costs, especially in Euro-denominated countries.

January 2025 Forecast

Return of international capital

2025 is expected to see a further return of international capital, supported by comparatively low borrowing costs and a favourable Euro-Dollar exchange rate. 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.

Mid-year review

• Cross-regional capital (originating outside of Europe) has seen the fastest recovery. Since the trough in Q1 2024, cross-regional capital flows have increased by 20%, compared to 13% for domestic capital, and 5% for cross-border capital from within Europe. However, the Euro-Dollar exchange rate has become moderately less favourable, which could impact investment in H2.
• The increase in cross-regional capital flows coincides with a resurgence in activity by private equity, with volumes up 25%. Many private equity firms are based in the U.S.
• Listed companies have seen an even stronger resurgence in activity, with volumes up by 144% since the trough. We expect this group to remain active as they benefit from direct access to funding at a relatively low cost of capital in the current interest rate environment.

January 2025 Forecast

Capital values gradually recovering

All sectors are seeing positive momentum, with capital values expected to gradually improve from their 2024 troughs. This has been driven by rental growth and yield stabilisation, with some markets showing early signs of yield compression.

Mid-year review

• Prime office capital values have seen the strongest recovery, and since the trough at the end of 2023, values have increased by 13% as of Q2 2025. The other sectors – multifamily, industrial, and retail – have recovered between 5% and 10% of their value.
• The recovery in values is mostly driven by rental growth. Despite some markets reporting yield compression, the yield impact on values in the first five months of the year is less than 1% at a European level. It is important to note that these values refer to the prime end of the market and the recovery in other segments can be more sluggish.

Sentiment looks to have recovered from initial tariff impact

Promising second half of 2025 expected

Although the market has lost some momentum since the strong end to 2024, we still see a good level of transaction activity in Europe. Investment data for Continental Europe indicates that the market was up by 6% year-on-year in Q2 2025. Given the hit to sentiment following the tariffs uncertainty, this is a positive result, showing resilience and investors’ commitment to getting deals done in the current market environment. Investment activity has weakened however in the UK, where five-year swap rates are c. 200bps higher than in Euro-denominated countries. 

The outlook for H2 is promising, with sales activity expected to pick up as confidence returns, with some investors explicitly expressing positive sentiment towards Europe. 2025 is an important year for loan and equity maturities, which will create considerable transaction opportunities with more product being put up for sale now that demand is rebounding.

Sector outlook

The resurgence in office sales in early 2025 is expected to continue as more investors are pivoting back to the sector. Living is seeing investors enter the sector with a wide range of strategies, such as BTR, platform / M&A transactions, standing assets, and privatisation across all asset types, from student housing to senior living. The retail sector is building on strong momentum as entry yields are favourable, and fundamentals are resilient in the prime segment. Logistics investors will continue to be attentive to the subdued occupier market, with tariff concerns and macroeconomic uncertainty making them more cautious, particularly on secondary assets. Hotels are seeing notable interest in value-add investments due to operational improvement potential. As companies’ spending on AI continues to increase, investors’ appetite for data centres will remain strong.

Figure 3: Capital value change (Index, December 2019 = 100)