European Real Estate: Is the Cycle Stuck in Neutral?

European real estate is moving slowly from recovery toward expansion because rate and inflation uncertainty is holding back transactions, even as healthy occupier markets support rents.

• The Eurozone flash composite PMI fell from 53.1 to 51.9 in October, but remained above 50, consistent with quarter-on-quarter GDP growth of 0.1% to 0.2%.
• Oxford Economics forecasts Eurozone GDP growth of 0.9% in 2026, down from 1.3% in 2025, before an acceleration to 1.2% in 2027 and 1.6% in 2028; German fiscal stimulus should support next year’s growth.
• Renewed inflation has pushed up near-term rate expectations, but Barings expects this pressure to ease in 2027.
• Shortages of high-quality space and a moderating development pipeline should support rental growth, with rents expected to rise by around 3% and more for prime assets.
• Income returns nearing 5% may offset modest capital-value declines caused by higher yields, while property debt returns remain mainly driven by interest-rate movements because margins are stable.

Takeaway: Investors should focus on locations and sectors with strong structural fundamentals, using rental growth, active asset management and selective identification of mispriced opportunities to drive returns while recognising that rate volatility remains a key risk.