Living

January 2026 Forecast

Europe's housing shortage to widen this year

Europe's housing shortage will persist in 2026 as building permits and completions remain below target in many countries. Falling household sizes will drive demand for smaller housing units, but there is a mismatch between available stock and household needs. This should reduce voids and support income in residential investment assets with strong single occupancy options.

Midyear review

• Economic disruption arising from the US-Iran conflict has prolonged the challenges around development viability, since higher rates of inflation and a revised interest rate outlook have impacted construction and financing costs. As such, there has been little increase in residential permit issuance this year. Issuance is c. 20% below the 2021 level (pre-interest rate hiking cycle) in France and the Netherlands, 40% below in Germany, and even lower in Finland and Sweden – but Southern Europe is an exception to this trend.
• Low rates of delivery through traditional mechanisms only amplifies the case for institutional capital to support the provision of rental housing at scale. 2026 has seen further deployment of capital to affordable housing and single family build-to-rent (BTR), as institutions seek to raise their exposure to the living sector. We expect these segments to continue their recent growth, supported by policy developments such as the European Affordable Housing Plan, launched last year.

January 2026 Forecast

Rents to increase while affordability is diverging

Supply shortages will lead to further rental growth. Our baseline forecast for multifamily rent growth in Europe this year is 2.4%. Yet the housing cost overburden rate is expected to stabilise or decline, with increases to real wages and changes in rent regulation. Nonetheless, rising demand for subsidised housing signals ongoing affordability pressures for lower-income households.

Midyear review

• Prime market rents for multifamily assets have continued to rise during the first half of the year and our baseline forecast has increased to 3.9% rental growth for 2026 overall. This reflects the more inflationary environment in Europe, as well as the ongoing shortage of rental product.
• Growth in market rents does not translate directly into cash flow growth. Rental income is also affected by contract structures and rent regulations. Following legislation in the Netherlands and Spain in recent years, England is the latest country to change regulation of residential tenancies via the Renters’ Rights Act, effective from May 2026. New leases will be on a periodic rather than fixed-term basis, while rent review and termination provisions have altered, but the Act does not impose rent controls and is not expected to deter professional, institutional ownership of rental accommodation.

January 2026 Forecast

Demand for alternative housing solutions to rise

A combination of supply shortages and affordability pressures will increase demand for alternative housing products in major urban centres. Flex living and co-living schemes will increase choice for renters, while conversions from asset classes such as offices and hotels will also cater to single and dual occupiers.

Midyear review

• Flex living and co-living are receiving more attention from investors and lenders, but the amounts invested into these asset types across Europe are modest compared with mainstream BTR or PBSA. As such, it will take time for these product types to form a significant part of the rental stock in most cities. We therefore expect existing operators to remain selective around locations and formats when expanding in the near-term.
• While the overall provision of flex living and co-living in Europe remains small, Madrid, Paris, and Berlin are key hubs for investor and operator activity. Positive macroeconomic indicators, housing supply shortages, and convenient transport connections have provided strong fundamentals for the growth of alternative housing products in these markets. Tenants have also benefitted from adaptable leases, advanced services, and a strong sense of community.

H2 2026 Outlook

Rental growth should continue to match inflation

Cash flow growth is key to the underwriting of multifamily investments in Europe's main cities. Multifamily assets can deliver this when market-level rents are rising and new lettings capture that growth, or when existing contracts enable rent revisions, although alternative benchmarks or caps might then apply, depending on the jurisdiction. At an aggregate level, rental growth in Europe has been strong since 2021, mirroring the strength of the rate of inflation. Across the locations we forecast, prime rental growth exceeded the inflation rate in four of the last five years, averaging over 5% per annum. However, despite higher inflation rates in H1 2026, we expect both inflation and prime rental growth to moderate over the next five years in line with projected growth in household incomes. This is important since sustainable increases in rental cash flows depend on rising incomes, especially in the key demand segments for build-to-rent accommodation.

From rental growth to asset income

Rental growth prospects vary between markets, and older assets are likely to perform differently to prime stock. Underwriting must also account for variations in regulation across Europe and their impact on revenues and costs. This applies to changes in the regulation of residential tenancies and effects from proposed and potential energy efficiency legislation, which can affect Operating Expenditure (OpEx) through increased compliance costs as well as Capital Expenditure (CapEx) for necessary upgrades to older stock. Higher energy costs have kept energy efficiency in focus this year, with scrutiny on OpEx and the potential for technology to manage energy use and deliver cost savings for owners and occupiers. We expect inflation to moderate next year, which should ease pressures on operating costs, while occupancy and asset performance will benefit in the short-term from the continued squeeze on new supply in many major cities.

Figure 5: Multifamily rental growth and inflation, 2021-2026