Global real estate investment firm AEW predicts a market upswing in its 2025 European outlook, with prime offices and Benelux and France offering the best returns.
Following anticipated central bank interest rate cuts (starting mid-2024), AEW forecasts moderate economic growth and rising government bond yields. While Eurozone borrowing costs are slightly decreasing (from 3.8% in Q3 2024 to 3.6% by the end of 2025), current property yields (5.2%) already offer attractive returns for investors. The UK shows similar trends, though less pronounced.
Furthermore, the projected difficulty in refinancing real estate debt has lessened, with the estimated shortfall reduced to €86 bn over the next three years (from €99 bn previously). This represents 13% of new loans, down from 17%, with German and office-related loans comprising the largest portion of the remaining risk. Italian and Spanish real estate loans show lower refinancing risk than the European average.
Since the COVID-19 pandemic, most European property sectors have seen falling vacancy rates. However, offices remain an exception, with a 9% vacancy rate—significantly higher than the pre-pandemic 5% level in 2019. AEW forecasts that office vacancy rates will peak in 2024 and decline to 6.8% by 2029. In contrast, the logistics sector boasts the lowest vacancy rate at 2%.
AEW projects annual prime rental growth averaging 2.1% across all sectors from 2025 to 2029. Offices lead with 2.6% growth, slightly ahead of residential (2.5%) and logistics (2.3%). Prime shopping centres and high street retail are expected to lag, with only 1.3% annual growth over the same period.
The research forecasts a rise in European real estate transaction volume to €170 billion in 2024 and €200 bn in 2025 (up from €150 bn in 2023), fueled by decreasing price discrepancies between buyers and sellers. Alternative investment sectors have reached a record 18% share of total transactions over the past year.
Prime property yields have leveled off across major sectors since Q1 2024, signaling the end of the post-2021 price adjustments, according to AEW. Looking ahead, prime office yields are projected to fall most significantly (70 basis points) over the next five years, followed by logistics and shopping centres (40 basis points each). Residential and high street retail yields are expected to decline by 30 and 20 basis points, respectively.
AEW forecasts average annual total returns of 9.2% across 197 markets from 2025-2029. Prime office properties are projected to lead with 10.9% annual returns, driven by price adjustments, stronger rental growth, and yield compression. France and the Benelux countries are expected to outperform other regions, with projected returns of 10.3%, slightly ahead of the UK's 10.2%.
This is the first time AEW has included secondary market data in its forecast, analyzing 39 markets. Projected annual returns are 9.7% for prime properties and 9.1% for secondary properties. Secondary properties provide more predictable income (6.7% yield), while prime property returns rely more on capital appreciation due to anticipated yield compression.
AEW's updated analysis shows a favorable outlook for European real estate investors, with 92% of the 168 markets assessed as attractive or neutral. The Benelux region performs best, with 18 out of 20 markets considered attractive. Germany also surpasses the average, with only one of its 24 markets deemed less attractive.
Hans Vrensen, head of Research & Strategy Europe at AEW, commented: ‘Macro-economic and real estate sector fundamentals have improved, with lower inflation and policy rate cuts. Projected future reductions in bond yields are also expected to push down prime property yields and reverse recent capital value declines. Recent financial market pricing incorporates increased concerns for higher inflation and slower and fewer policy rate cuts in the short term. Assuming these concerns materialize in the long term, our downside scenario reflects this and shows a reduction of total return compared to the base case of 0.6% p.a.’
