AEW has released its 2026 European Annual Outlook. The report highlights the recovery in European real estate, noting the return of liquidity to the market and the tightening of prime yields. AEW’s base case scenario projects that prime real estate returns for 2026-2030 across all 20 countries in its European coverage will average 8.4 percent p.a. While European GDP growth has recovered, it remains modest at 1.7 percent p.a. and is unchanged from AEW’s March 2025 forecast.
Hans Vrensen, Head of Research & Strategy Europe at AEW, commented: “The European real estate sector continues to show signs of recovery, with prime property yields projected to tighten slightly by 30bps over the next five years, despite forecasts indicating that bond yields will widen due to ongoing macro-economic pressures. While the impact of global tariffs is now expected to be less negative than initially feared, the European economy still faces challenges due to increasing public debt levels, ongoing trade policy uncertainty and inflationary risks. Our view on prime property yields is driven by solid occupier fundamentals, abundant and accretive debt funding and improved manager sentiment. All these drivers, in turn, support a recovery in investment volumes. The current 160bps excess spread between property and bond yields is projected to remain stable over the next five years, returning to the historic average level in the pre-quantitative easing period. Given this positive momentum, we expect the European property market to become more attractive to multi-asset investors. Our analysis forecasts that the combined impact of market rental growth and yield tightening will lead to prime European real estate returns at 8.4 percent p.a. over the next five years, led by prime offices, with the UK expected to deliver the best returns on average at 10.3 percent p.a.”
Declining vacancy rates to drive prime rental growth
Vacancy rates in European property sectors have continued their post-COVID decline in 2025, except for offices. However, AEW projects that office vacancy has peaked and will reach 8.1 percent by the end of 2025, decreasing to 6.3 percent by year-end 2030, with the bifurcation between CBD and non-CBD offices expected to ease in the future as new supply remains limited. Logistics vacancy has edged up to 5.6 percent in 2025 from a record low of 2.5 percent in 2022. With a reduction in developers’ profitability, new logistics supply is expected to moderate, and vacancy is estimated to come down gradually to 4.1 percent by 2030.
AEW’s base case forecasts show prime cross-sector rental growth at 2.2 percdent p.a. for 2026-30. Prime residential market rental growth tops all sectors at 3.2 percent p.a., well ahead of offices at 2.6 percent and logistics at 2.0 percent. Prime high street retail and shopping centres are expected to have below average rental growth of 1.6 percent p.a. and 1.2 percent p.a., respectively, during the next five years.
Commercial real estate finance is more widely available and remains accretive for equity investors
Eurozone borrowing costs remain favourable and accretive to equity investors at 3.9 percent as of Q3 2025, compared to the prime cross-sector Eurozone property yields at 5.2 percent. This is also true for the UK, but to a lesser extent, as UK swap rates and margins remain higher than in the Eurozone. Commercial real estate financing has become more accessible as debt funds increase their activity and more banks provide back leverage. Increased competition among banks and non-bank lenders is further improving non-financial borrowing terms.
In addition, the refinancing challenge has further eased over the last year. AEW’s latest European Debt Funding Gap (DFG) for 2026-28 has decreased by 18 percent to €74 billion compared to its 2023 estimate for 2024-26. As a share of loan originations, the DFG is now 12 percent for the next three years, down from 13 percent in 2024. The French DFG defied the overall European trend, increasing to 20 percent from 18 percent last year. DFG related to loans backed by UK, Spanish, and Italian real estate remains below the European average.
Improved office and retail sentiment drives recovery in investment volumes
Market fundamentals have improved, and sentiment towards offices and retail is catching up with the stable and strong sentiment in residential and logistics. AEW estimates full-year 2025 and 2026 European real estate transaction volumes at €200 billion and €220 billion across all property types, up from €185 billion in 2024, as bid-ask spreads narrow further. The alternative property sectors have expanded their share of total European transaction volumes to reach 20 percent of total volumes over the last four quarters.
The momentum in property yields shifted over the past year, with prime yields tightening by 10-15bps from their record highs in Q2 2024. Prime yields across all sectors are now projected to move in by just over 30bps by 2030. Prime office yields are forecasted to tighten by 45bps over the next five years from mid-year 2025, followed by shopping centres and logistics at 35bps and 30bps, respectively.
Multi-asset, income-oriented investors typically consider property yields relative to risk-free government bond yields. The current excess spread of property yields over bond yields at 160bps is projected to remain stable over the next five years. This reflects half the 320bps 2009-21 historical average excess spread. However, that period was unusual as quantitative easing (QE) brought bond yields down to near-zero levels. The anticipated excess spread for 2026-30 is in line with the pre-QE historical average excess spread of 160bps.
European prime offices and shopping centres offer the highest returns
The average all-sector total return in AEW’s base case scenario is projected at 8.4 percent p.a. for 2026-30 across all 196 markets. Prime offices are expected to offer the highest returns of all prime sectors at 9.3 percent p.a. over the next five years. Shopping centres, which have been less favoured by investors for a long period of time, are now in second position with an average return of 8.6 percent p.a., driven by repricing, improved projected rental growth and anticipated yield tightening. UK markets are projected to deliver the highest average total return of 10.3 percent p.a., which is supported by relatively higher current yields and stronger forecasted yield compression. CEE markets rank second with a forecast return of 9.1 percent p.a., driven by high income return. Spanish markets rank third in AEW’s total returns projections, driven by higher rental growth compared to many other countries.
