Green light ahead for European property, led by offices

The European property market is poised for an upturn starting in 2025, with a strong emphasis on prime office spaces, according to AEW’s 2025 European Outlook

Real estate - AEW

Projected transaction volumes are projected to rise to €170 bn in 2024 and €200 bn in 2025, up from €150 bn in 2023, as the gap between buyer and seller expectations narrows.

Prime Offices Lead the Charge
Prime office rental growth is expected to be the highest across all sectors, averaging 2.6% annually from 2025-2029, slightly surpassing residential and logistics. While secondary office vacancies are increasing, prime office yields are forecast to tighten by 70 basis points (bps) over the next five years. 
Overall, prime property is expected to deliver a 9.2% annual return across all sectors during this period, with prime offices offering the highest returns at 10.9% annually. This is driven by repricing, improved rental growth, and yield tightening. France is predicted to be a top performer at 10.3% annual return.

REITs and Funds
European REITs, which saw significant declines from late 2021, have rebounded by 22% since mid-2023. This public market recovery is a positive indicator for private real estate, as REITs become more active in acquisitions. Bond and equity issuance by European REITs has also increased in 2024, enhancing their capacity.
Despite positive public market signals, private real estate fund liquidity remains a challenge, particularly for open-ended funds targeting retail investors, which have experienced negative net flows since 2022. While data varies by country, overall net flows in Europe turned negative in 2023, forcing some funds to restrict redemptions.

Occupier Market
Office vacancy rates, currently at 9%, are the highest among tracked sectors, increasing significantly since pre-COVID levels. However, they are projected to decline from a 2024 peak of 8.7% to 6.8% by 2029, driven by demand, reduced new supply, and conversions of older buildings.
Logistics vacancy rates are at a new peak of 5% at year-end 2024 due to increased supply responding to previous e-commerce surges. However, they are expected to gradually decrease to 3.6% by 2029 as supply and demand rebalance.
While institutional quality retail assets show low vacancy rates (3-6%), this likely does not reflect the broader market. Shopping centre vacancies have risen slightly, while high street retail experienced a brief spike during Covid.
High mortgage rates are fuelling stronger demand for rental housing, supporting rental growth across most European markets. While homeownership is expected to rebound from 2025, it will likely remain below historical averages.

Prime Outperforms Secondary 
Prime rental growth is projected at 2.1% annually across all sectors (2025-2029), with prime offices leading at 2.6%. While prime assets generally offer better returns driven by capital growth, secondary assets provide more income certainty. However, secondary high street retail rents are projected to grow faster than prime, at 2.6% annually versus 1.2%.

Alternatives
Alternative property types now represent a record 18% of European real estate investment volumes, up from 7% in 2008. Hotels remain the largest alternative sector, with data centres poised for strong growth. PBSA continues to attract investors due to strong fundamentals and resilience, with a yield spread narrowing compared to prime residential.

Market Outlook 
The market sentiment is improving, with transaction volumes picking up. Prime yields stabilised in Q1 2024 and are projected to tighten across all core sectors over the next five years, partially reversing the significant widening seen since 2021. France is expected to deliver the highest prime total returns (10.3% annually), followed closely by Benelux, the UK, and CEE markets.
Overall, AEW’s outlook suggests a solid period for European property, with 92% of the 168 covered markets deemed attractive for investors. Offices stand out in relative value rankings, with Dutch and Belgian offices, and French logistics and high street retail, showing particularly strong "excess spreads."