Publication

Spotlight: European Investment – Q4 Preliminary Results and Forecasts

The robust performance in the final quarter of last year is expected to bring annual investment volumes to approximately €174 billion, aligning closely with our €170 billion forecast and marking a 17% year-on-year increase




2025: evolution rather than revolution

While 2024 may not be remembered as a landmark year, it stands out as a transformative transition year for Europe that will likely leave lasting imprints on the region’s economic and political trajectory.

As Europe adjusted to post-pandemic realities and navigated ongoing geopolitical pressures, stabilising growth while tackling inflation remained a priority. Despite some resilience, the year was characterised by sluggish economic growth. Notably, performance across the bloc diverged sharply, with southern Europe and Central and Eastern European (CEE) countries demonstrating strength, while Germany and France struggled to meet expectations.

The push for energy independence and sustainability continued to dominate the agenda, driven by the imperative to reduce reliance on external sources. This focus spurred significant investments and policy initiatives aimed at bolstering long-term energy security.

Finally, following the European Parliament elections in June, the shift in political balance, with gains for right-wing and Eurosceptic parties, is poised to shape EU policymaking for years to come. Compounding this, the outcome of the US presidential election, with Donald Trump likely to adopt a protectionist stance, is expected to strain transatlantic relations. This could challenge European trade and geopolitical strategies for 2025 and beyond.

Many of the challenges projected for 2025 echo those of 2024, as transitional years often share overlapping themes. In essence, 2025 is set to reflect the outcomes of decisions and strategies initiated in the previous year. While 2024 focused on navigating crises and stabilising economies, 2025 may shift towards implementing growth-oriented policies, such as targeted fiscal spending.

As European governments prioritise deficit reduction, more restrictive fiscal policies are likely to offset the effects of continued monetary easing. A major downside risk for the European economy lies in the outcome of the US presidential election, where potential protectionist trade policies could reshape transatlantic relations and reduce trade volumes between the two continents, placing additional pressure on the bloc’s economy.  Indeed, the eurozone entered 2025 with subdued economic momentum, as key indicators highlighted ongoing weakness. The Sentix index fell to -17.7 in January, its lowest since November 2023, reflecting declining business sentiment. Assessments of current conditions dropped for the second consecutive month, linked to lingering policy uncertainty following the US presidential election.

Survey data, including final PMIs, confirmed sluggish industrial activity, while the services sector showed some recovery from November’s downturn. With industry yet to rebound, eurozone GDP is projected to grow by only 0.2% QoQ in Q1 2025, mirroring Q4's pace. However, growth is expected to pick up modestly later in the year by 1.2% year on year (YoY) in 2025, according to Oxford Economics (1.4% in the EU).

Economic divergence is expected to deepen, with strong-performing regions such as Ireland, CEE countries, Spain and the Nordic region gaining an edge. Meanwhile, Germany is likely to continue recalibrating its industrial model, while France faces challenges from stringent fiscal policies that could dampen both investment and consumer spending.



Winds of change bringing cautious optimism to the investment market

In this subdued economic context, our preliminary data suggests that investment volumes for the final quarter of last year will reach approximately €53 billion. While this figure remains 43% below the average Q4s of the past five years, it represents a 31% increase compared to the same period in 2023. Importantly, it marks the highest quarterly volume since the end of 2022, with nearly all countries experiencing strong investment volume growth compared to Q4 2023, signalling a broad-based recovery in investment activity.

This upward trend began in September, gaining momentum after the European Central Bank's (ECB) decision on the 12th to cut interest rates, which significantly boosted market sentiment across the eurozone. Since then, investor interest has grown steadily, underpinned by improving pricing conditions and an increased supply of assets entering the market.

The increased supply of assets is largely driven by sellers, particularly European open-ended funds, who are pressured to meet redemption requests. These funds are being forced to offload assets to generate liquidity, which has, in turn, fuelled deal activity. Additionally, larger transactions are becoming more frequent, supported by easing bank loan conditions.

Adding to the recovery, a broader range of investors, especially institutional players, are re-entering the market. In some regions, returns on debt financing are becoming accretive, further encouraging investment and solidifying the positive momentum in the market.

The robust performance in the final quarter is expected to bring annual investment volumes to approximately €174 billion, aligning closely with our €170 billion forecast and marking a 17% YoY increase. A notable trend is the increasingly even distribution of investment across asset classes, with the office sector's share expected to drop to a historic low of 22%. Logistics is expected to account for 23%, retail for 17%, hotels for 11%, and the living sectors for 19%.

Looking ahead, investment volumes are expected to reach €214 billion in the coming year. Although this is slightly below the previous forecast (€219 billion, +29%) due to muted economic growth and ongoing trade tension risks, the market continues its steady upward trajectory, with a robust 23% YoY growth. This positive trend is further underscored by a projected additional 25% growth in 2026 and another 20% growth in 2027.

The recovery is anticipated to extend across most European markets as buyer and seller expectations gradually converge. However, Germany and France may continue to lag behind. Cross-border investment activity is expected to increase, fuelled by a revival in intra-European capital flows and continued interest from US investors. French SCPI, as well as German, Israeli, and Spanish investors, are likely to remain active, particularly in Western European office markets. US private equity firms, previously focused on London and Dublin offices, may diversify in markets which offer the prospect of rental growth and possible yield compression.



All asset classes likely to benefit from the modest market recovery

Across all sectors, we foresee heightened interest in well-located secondary assets, particularly those offering opportunities for active management strategies such as repurposing, or repositioning to align with ESG standards. Diversification will remain a priority for investors seeking to mitigate sector-specific risks, enabling all asset classes to benefit from the modest market recovery.

The office sector is expected to regain traction on investment wishlists in 2025. Gradual recovery is anticipated, with core and core-plus investors focusing on super-prime and green-certified properties, while value-add investors target secondary assets in CBDs and other strategic locations. These assets remain attractive, particularly as not all occupiers are willing to pay top rents.

Although challenges persist, much of the negativity around offices seems overstated. Demand is recovering, driven by a resurgent tech sector and companies upgrading spaces to attract talent. Office take-up is forecast to rise by 4% in 2025, nearing pre-pandemic levels. Limited Grade A supply and constrained development pipelines are set to fuel rental growth, with prime rents projected to increase by 2.7% – a clear sign of market resilience.

Easing inflation across Europe is expected to enhance purchasing power and boost retail sales, creating a favourable outlook for the retail sector in 2025. Retail investment turnover is anticipated to grow, underpinned by stronger investor confidence and broader economic recovery. A rising supply of assets and an expanding buyer pool should drive increased transaction activity, though achieving agreement on pricing may continue to challenge deal-making.

In the near term, income returns are expected to remain appealing, supported by improving occupational markets and a limited pipeline of new developments, which should provide stability for investors. Grocery and convenience stores, retail warehouses, and prime high-street assets are set to stand out as particularly attractive investment opportunities.

Hotel investment is expected to remain robust, though with some moderation compared to the exceptional activity of recent years. While European RevPAR is forecasted to grow, the pace of increase will slow, exerting pressure on margins as cost growth continues, though easing. This normalisation in top-line performance is likely to prompt exit decisions from some owner-occupiers, creating opportunities for new market entrants.

Transaction volumes are expected to stay high, supported by more realistic pricing expectations and a gradual decline in borrowing costs, which will enhance liquidity and activity in the market. The sector's strong demand and resilient operational performance are also expected to attract mid-cap private equity buyers, who are likely to play an active role in 2025.

In 2025, the logistics sector is expected to remain an attractive asset class, although capital flows are likely to moderate compared to the exceptionally high levels seen over the past five years. Following the pandemic-driven surge that reshaped global supply chains, the market has entered a period of normalisation. This new, slower activity tempo—evident in reduced take-up and a deceleration in rental growth – is set to stabilise further, supported by low vacancy rates and a limited development pipeline.

However, the geopolitical landscape adds an element of uncertainty. Donald Trump’s second term as US president could disrupt international trade flows through potential tariffs on key trading partners and unpredictable foreign policy decisions.

Investors‘ interest for the living sectors will continue in 2025, driven by strong demand fundamentals. Rising urbanisation, affordability challenges, and tight mortgage conditions will bolster demand for rental properties, supporting stable occupancy and steady rental growth. Limited land availability and rising construction costs may constrain new supply, underpinning long-term rental growth.

 

Institutional investors will target build-to-rent projects, with ESG-compliant assets drawing significant attention. Student housing will attract further appetite, supported by rising international student numbers, with continued strong activity in Spain and the rest of southern Europe. Senior living will also gain traction, benefiting from increased demand from an ageing population, with France a notable location for expected activity.



Broadening horizons: prime yields reach inflection point across sectors

In the final quarter of last year, European average yields remained largely stable, marking the third consecutive quarter of relative stability. Early signs of inward yield shifts, first observed in Q3 within prime logistics and CBD office markets, have since extended to high street retail, indicating that pricing pressures may be beginning to bottom out.  In Q4 2024, the European average prime office CBD and logistics yields stood at 5.0%, prime shopping centre yields at 6.2%, prime retail warehouses at 5.9%, and prime luxury high street yields at 4.3%.

Over the next twelve months, average yields across Europe are expected to remain steady in Q1, with selective compression anticipated in prime logistics assets and, to a lesser extent, CBD offices and retail parks. Conversely, shopping centres may experience a modest increase in yields during the first half of 2025.

As of January 2025, the ECB has reduced its key interest rate to 3.00% and is expected to continue easing throughout the year. Analysts predict further rate cuts of 25 basis points at each meeting until March 2025, potentially lowering the deposit rate to 2.50%. These anticipated rate reductions are set to play a critical role in triggering yield hardening, as improved financing conditions are likely to stimulate renewed investor interest across key asset classes.

Consequently, starting in the third quarter of 2025, we expect prime yield compression to gain momentum, spreading across various asset classes and European markets. This progression signals a positive outlook for investment activity as markets adjust to more favourable monetary conditions.