European residential market resilient amid geopolitical risks

A new report from AEW suggests that the European residential real estate market is poised for resilience, even if a prolonged conflict in the Middle East leads to a downside economic scenario. 

While moderating mortgage rates have supported house price recovery over the past year, an escalation in the Middle East could drive up energy prices, forcing central banks to raise rates and potentially halting house price growth, thereby increasing demand for rental units.

European house prices began recovering in 2024, with Spain showing particularly strong growth despite higher interest rates. Oxford Economics projects a 4.0% annual increase in the Eurozone and 3.9% in the UK over the next five years. However, a prolonged Middle East conflict could lead to downward revisions if central banks tighten monetary policy.

New housing supply remains constrained, falling short of government targets in many countries, notably Germany and the Netherlands. While France built the most dwellings in 2025, overall European new supply decreased by 17% compared to 2023. Additionally, a rise in short-term rentals (like Airbnb) and private landlord sales to owner-occupiers are further tightening the private rental stock, despite regulatory efforts.

Actual prime residential rental growth in Europe was 3.3% in 2025. Projections for 2026-2030 indicate a 3.2% annual growth in prime residential rents, outstripping projected inflation, even with tightening rental regulations. Cities like Berlin, Madrid, Munich, and Amsterdam are expected to see above-average rental growth, largely because new builds often fall outside strict rent controls.

European residential investment volumes modestly increased by 9% in 2025 to €45 bn, though still below the 10-year average. Residential remains the top-preferred sector for investors, driven by strong fundamentals and stable cash flows. JLL estimates that European living investment could reach €70 bn in 2026. The share of residential in total property investment has doubled since 2008 to 20% in 2025.

The living sector is diversifying, with operated residential (micro/flex/co-living, student, and senior housing) now representing 35% of total residential volumes. Student housing continues to attract a strong appetite due to high occupancy and rental growth. While senior housing has seen fewer transactions due to profitability concerns, demographic trends suggest improving demand. Affordable housing is a smaller but growing sub-segment.

Prime European residential yields have compressed to 3.8% in early 2026, with all markets fully repriced. Prime student housing yields have also compressed due to strong demand, while senior housing yields have moved out, offering higher spreads. Prime residential yields are expected to remain stable over the next five years.

Under a base case scenario, European residential total returns are projected at 7.4% per annum for 2026-2030, primarily driven by current income (4.0% p.a.) and rental growth. In a downside scenario, where a prolonged Middle East conflict leads to higher inflation and interest rates, total returns are projected to be a modest 6.6% p.a., only 80 basis points lower than the base case, highlighting the sector's resilience. London, Warsaw, Berlin, and Amsterdam are expected to outperform the European average.