While some investors will always find reasons to continue to ‘wait and see’ – citing factors including interest rates staying ‘higher for longer’, inflation remaining historically high, potential political instability, and shaky economic indicators – we believe that most of the lights in favour of investing in European real estate have now turned green.

Falling interest rates and less uncertainty, despite some perceptions

While a continuously uncertain global geopolitical backdrop gives rise to some caution, many of the reasons outlined above are based on misconceptions. Taking the first two points, which are somewhat intertwined, it’s clear that the opposite is true: inflation continues to trend towards target and base rates are on a downward trajectory. The European Central Bank (ECB) lowered rates by 100 basis points (bps) across 2024, and is expected to cut rates a further four or five times in 2025, which would reduce the policy rate to between 1.75% and 2% by 2026. There’s the possibility that it may go even further, especially given fiscal policy is acting as a headwind across Europe. While the Bank of England may be more circumspect, owing to some ‘stickiness’ in UK inflation, it too reduced interest rates in February by a further 25 bps to 4.5%.

In terms of European political volatility, the French Government survived a no-confidence vote in February and passed its 2025 budget, and with Germany’s election now complete, a historic deal to relax tight fiscal rules provides significant upside potential for an economy that has struggled for momentum.  

This links to the fourth point: that economic growth is looking shaky. It’s expected that the European economy will grow this year, although at a slower rate than originally envisaged: the IMF is forecasting growth of 1.0% for the euro area, up from around 0.7% in 2024. Fundamentally, a recovery in real household incomes and easing financial conditions should support some strengthening in domestic demand, including by real estate occupiers. The threat of trade tariffs does provide some downside risk, however much of the region has limited exposure: the US accounts for just 8% of total EU goods exports and around 5% of imports.

Buyers and sellers aligned on price and liquidity returning

Overall, therefore, the wider macroeconomic conditions are fair and, notwithstanding the ongoing situation in Ukraine, the nascent recovery in real estate activity last year indicates that commercial real estate prices are now broadly stable, as buyers and sellers’ aspirations on what is a fair price for assets have largely aligned. In some markets, the recovery is being inhibited by a lack of available stock, opposed to a lack of active buyers. But there is a noticeable uptick in sell-side liquidity, from a range of investor types, which is set to increase the supply of assets in the market. Larger transactions are also becoming more common. The number of portfolio and M&A deals have risen, as both cross border and domestic institutional investors, including returning US private equity buyers, have increased spending, taking back some market share from private investors who had been making up a larger share of the buying market.  

Sentiment is leading the recovery in activity, closely tracking interest rate dynamics through the cycle. The strong correlation between the two is unsurprising; this past real estate downturn remains predominantly a capital markets downturn driven by steep rises in interest rates. This is particularly true of Europe, which hasn’t experienced the level of structural upheaval in the office sector relative to the US. The recent decline in interest rates means that investors can now get accretive debt, even for prime assets, in many continental European markets. The initial recovery in EMEA real estate capital markets should therefore gather momentum across 2025 and - in some markets - this year will provide the buying opportunity of this cycle.

Further information

Contact Rasheed Hassan

Savills Takes Stock: Global Real Estate Capital Markets Annual Review 2025 - EMEA