Expo Real: Can German defence spending revive European real estate?

A casual observer might have looked at the crowds of people filling the vast trade halls of Messe München and concluded that the real estate sector must be in full swing. But those in the industry attending the annual Expo Real trade fair in Germany knew full well that the hive of activity on the stands did not reflect what was really happening in the market across Europe.

For the third year in a row, any vision of a full revival in transaction activity had to be projected somewhere into the near future. This year had initially looked promising – before the advent of Donald Trump’s “Liberation Day”. Now all hopes were on 2026.

Preliminary figures from Savills suggest that the third quarter saw €37bn of real estate change hands. This is a slight decrease on Q3 2024, but Savills has also estimated that over the full first nine months of 2025 transaction volumes reached €130bn – a 1.5% year-on-year increase.

Yet investors are still waiting for a more significant supply of assets to come to market, especially in Germany where many have yet to be fully repriced. However, according to Paul Gibson, CIO for direct real estate strategies for EMEA at CBRE Investment Management, “momentum is picking up again”.

He said: “There are more opportunities passing our desk I have heard about in the last week than perhaps we’ve seen in the previous three to six months. So I expect a busier final period of the year and start of next year – than we’ve seen in the last six months.” In Germany, specifically, “valuation issues still have to be worked through”, he admitted. “It’s a slow process, but that’s beginning to happen”.

In fact, Expo Real attendees had more reason this year to focus on the local market. Germany’s €500bn infrastructure and defence spending plan has given it renewed attention among global investors.

However, is the European real estate industry jumping on the ‘German spending’ story in the absence of other positive investment stories to tell? This week, Capital Economics poured cold water on the notion that fiscal loosening in Germany could boost Europe at a time when the US was embarking on a course of (predictably) unpredictable and potentially destructive governmental policies. The consultancy estimates that the US economy grew 0.9% quarter-on-quarter in Q3, while Europe managed less than 0.2%.

“The optimism towards Europe was always misplaced,” wrote Neil Shearing, group chief economist. “Yes, the German government’s decision earlier this year to loosen the fiscal straitjacket imposed by the country’s ‘debt brake’ was politically significant. But, as we argued at the time, the immediate economic impact was always going to be limited.”

Even so, at least three large real estate investment houses are clear about the importance of what is happening in Germany – and the potential for real estate. “People are dramatically underestimating the potential in this market,” said John O’Driscoll, global co-head of real estate at AXA IM Alts. “It does have a multiplier effect on the economy. Germany has a huge programme of investment, and that’s going to create employment, it’s going to create opportunities in services. It’s going to create opportunities in construction and development. And I think that’s really, really underestimated.”

As well as the broad economic effects, there are specific real estate opportunities that might emerge from the creation of new defence hubs in the country. This will invariably involve sensitive and government-led projects, but it could also create opportunities for private capital – for example, to invest in real estate and infrastructure that support those hubs.

“Those defence hubs are not necessarily where the prime real estate hubs are today,” said PIMCO Prime Real Estate’s European CEO, Annette Kröger. “These are different regions that also need that infrastructure. So I think that is an interesting piece to look at – what will be required there and how can we get involved to provide that.”

In 2024, PIMCO Prime Real Estate emphasised the importance of focusing on three ‘high-conviction themes’ of digitalisation, decarbonisation and demographic shifts. This year, it added to its alliterative list with two more Ds: defence and deglobalisation. The obvious areas for real estate investors are housing and logistics.

Asked whether the German defence investment story was in danger of being overplayed, Randy Giraldo, head of Europe at Nuveen Real Estate, ventured: “To talk about it as a fundamental driver of GDP growth is a bit of a stretch.” But its effects are being felt in the logistics market. “It’s real on the ground in logistics in certain parts of Europe now, where we’re seeing take-up and rent growth,” he added.

Nuveen is “more interested” in Germany today than it has been in previous years. It recently acquired a newly constructed logistics property in Kerpen, close to Cologne.

Capital flows and asset class competition

Giraldo predicts 2026 will be a “big year for capital raising” in European real estate. “Real estate will start to see increased flows,” he said. “The total returns will be too compelling.”

This could be helped by capital coming from US institutional investors. Nuveen’s parent TIAA, itself a US dollar-denominated investor, has been looking to shift its weighting in favour of the region. “We’ve seen our balance sheet allocate a disproportionate amount of its money to Europe in the last 12 months,” Giraldo said.

And European real estate could start to become more attractive on a relative basis versus some of its close relatives in private markets. Giraldo said: “We’re seeing softening potentially in other asset classes – on private credit – that will start to make real estate relatively more interesting.” 

Similarly, O’Driscoll said the case for European real estate was becoming more compelling for CIOs and asset allocators looking across alternatives. “You’ve got a very good initial yield, you’ve got positive leverage yield, you’ve got incredibly low supply in all sectors,” he said. “That makes real estate look competitive relative to some of those other asset classes – whether it’s infrastructure, credit.”

What about Asia-Pacific?

Although uncertainty in the US could lead to capital being diverted to real estate markets, the same could be said for Asia-Pacific. Bernhard Karas, managing director of private capital markets at CapitaLand Investment, was at Expo Real to talk to investors in Germany about the Singapore-based firm’s various investment strategies spanning Asia-Pacific.

While he did not believe the current US administration was leading to a marked shift in capital flows towards Asia-Pacific among large investors with existing global portfolios, he did think it could influence real estate investors looking to invest outside Europe for the first time.

“There are some groups that have historically not done a lot of international investing, especially here in Germany,” he said. Among these, there could be some hesitance to commit to the US and in the short-term “prioritise” building up exposure to Asia-Pacific.

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