Although immediate tensions in the Middle East seem to have cooled, the recent escalation has left a lasting mark on the near-term outlook for European real estate. According to recent reports from asset managers Aberdeen Investments and AEW, the episode has increased macroeconomic uncertainty and will continue to test the sector’s resilience.
Rising oil and gas prices are feeding into inflation and tightening financial conditions, complicating the outlook for interest rates and economic growth. According to Aberdeen’s Q2 Real Estate Houseview, this has “fundamentally changed the near-term risk profile” for markets, raising the likelihood of adverse scenarios such as a prolonged energy shock or stagflation.
“The longer the duration of the conflict, the stronger the impact on European real estate markets,” Anne Breen, global head of real estate at Aberdeen Investments, tells IPE Real Assets.
For real estate, the situation translates into a more challenging environment for both occupier demand and investor sentiment, particularly in cyclical sectors. Higher input costs are already pressuring tenants in areas such as logistics and retail, while elevated uncertainty risks delaying capital deployment.
“Investors should focus on income as well as tenant resilience at the asset level and invest in countries that are more resilient to energy price shocks,” Breen warns, pointing to Spain, Portugal, the Benelux and the Nordics as relatively defensive regions.
Both Aberdeen and AEW highlight that the real estate asset class is better positioned than during previous shocks. Valuations have already adjusted, yields are higher and leverage is more conservative, limiting downside risk compared with 2022.
AEW’s 2026 Mid-Year European Outlook suggests that even in a downside scenario reflecting a prolonged Middle East conflict, European prime real estate would deliver annual returns of 7.6% over 2026–30, only 110 basis points below its base case of 8.7%. Income returns and rental growth—rather than yield compression—are expected to drive performance.
This reinforces a broader shift in investor behaviour. Income resilience, sector selectivity and asset quality are becoming increasingly critical, with demand focused on sectors offering stable cash flows and limited supply, including prime offices, residential and selective logistics.
“We continue to see growing polarisation at the sector level, particularly within the office segment,” Breen adds. “While the industrial sector continues to be well placed thanks to growing manufacturing needs in Europe, retail assets are expected to be the most impacted, as rising prices are likely to reduce consumer spending.”
This news briefing was published last week. If you would like to receive it regularly, on your ‘IPE Real Assets profile’, go to ‘My Newsletters‘ and select any from the list.
To read the latest IPE Real Assets magazine click here.
