Positive sentiment in European real estate grows while challenges remain from uncertain geopolitical and economic backdrop, say ULI & PwC

London, 05 November 2024. The outlook for the European real estate market is cautiously optimistic despite growing geopolitical uncertainty and concerns about economic growth, with London, Madrid and Paris emerging as the standout performers, according to a new report by PwC and the Urban Land Institute (ULI).

Emerging Trends in Real Estate^® Europe 2025 outlines how market players believe a new normal is emerging as valuations have come down and interest rates regain some level of predictability in a market characterised by higher inflation and interest rates, and geopolitical and economic uncertainties.

This led to more than 80% of survey respondents expecting business confidence and profits to stay the same or rise in 2025, with around half predicting increases in both.

However, there are strong caveats to this overall optimism, and sentiment remains clouded among the 1,143 respondents. In addition to concerns about economic growth, there are fears of growing geopolitical uncertainty, with 85% citing political instability (up from 74% the year before) and 83% the conflicts in Europe and the Middle East as sources of considerable volatility.

There is recognition that European real estate sentiment is, in large part, still influenced by interest rate policies in the US and at home and shifting political order in Asia. Adopting a three-to-five-year view, some leaders believe that recovery could take longer than experts have previously predicted.

European and global economic growth are among the chief business concerns for 2025, with 77% and 62% respectively either “very concerned” or “somewhat concerned” about these factors.

Lisette van Doorn, CEO, ULI Europe, comments: “This year’s report holds a mirror to an industry that, despite its much-needed optimism following the last three years, still faces a complex and volatile environment in which fragile growth prospects and geopolitical turbulence are expected to continue to affect business confidence and whether players will be able to unlock the opportunities appearing.”

Gareth Lewis, Director, PwC adds: “In a new normal of higher interest rates, the buzz word is “operational” real estate as a route to creating value. This puts a lot of the burden of achieving growth assumptions onto the shoulders of occupiers and their ability to sustain those rent increases underpinning investment models. This may explain the elevated concerns we’ve seen in this year’s research around economic growth, European competitiveness and changing occupier demand.”

In tandem with an uncertain geopolitical and economic landscape, real estate business issues that continue to stifle development include the impact of increased regulation, which at 74% percent now ranks as the top real estate business concern in EMEA, and construction costs and resource availability the number two concern, at 70%. ​

Emerging Trends in Real Estate^® Europe 2025 also reveals that reduced tenant demand remains an issue for 44% of survey respondents, although that has fallen from 48% last year, and 42% of respondents are still expecting challenges to the occupier markets, even after a three-to-five-year window of recovery.

This year’s survey highlights that ESG remains one of the most significant challenges for real estate both in the short and long-term, with more than 70% of respondents concerned about environmental issues in 2025, and 72% flagging this as an issue for the next five years. Many admitted they are struggling to keep competing environmental concerns top of the agenda, and the survey interviews also reveal a degree of industry ‘pushback’ over ESG.

Other trending topics include artificial intelligence (AI), with nearly half of survey respondents or their companies having used AI in the past year. The vast majority expect AI and machine learning to have an impact on all areas of real estate over the next five years.

Digital risks however also constitute a major industry concern, with 59% of respondents naming cybersecurity as a top business concern, ranking fourth overall, with digital transformation (42%) and AI (35%) also among the top industry concerns. Over a five-year period, this risk rises as a priority among 63%, becoming the second most important business issue.

The availability of capital remains critical in a real estate market where investor interest is subdued following global uncertainty, the reality of a new “economic normal” and the evolving needs of real estate occupiers. Despite value falls in real estate, many institutional investors continue to contend with denominator effect issues around slower revaluation of real estate which may prevent further investment opportunities. There is also a sense among respondents that real estate investment generally still must prove its worth next to other more secure asset classes such as long-term bonds.

Among the sectors to watch, data centres ranked first in the overall investment and development prospects for European real estate, followed by new energy infrastructure, student housing and logistics. This reflects investors continuing to focus on major trends including demographics, digitalisation and decarbonisation, and a real estate industry looking to chart new horizons. However, lack of suitable stock continues to be an issue for many sectors including in logistics, storage and various forms of housing, and some are concerned that prices are inflated by overoptimistic growth assumptions. Finally, the outlook for office and retail investment remains subdued following continuing caution about the impact of structural change.

London and Paris continue to dominate European real estate investment, ranking first and third respectively for overall prospects for 2025. London retains the top position for a fourth consecutive year, and despite slipping to third place, Paris remains a strong market boosted by Olympics-driven investment and major infrastructure projects being planned. In the first nine months of 2024, these two cities combined accounted for 11% of total European transaction values, or around €14 billion of investment, according to data from MSCI. Madrid's rise to second place highlights the appeal of strong macroeconomic factors and quality of life.

Elsewhere in the top ten, the German cities of Munich (5), Frankfurt (8) and Hamburg (9) have all risen in the rankings, with Berlin (4) maintaining its position. Additionally, Lisbon (10) has dropped two places, though Milan (7) and Amsterdam (6) have both secured strong positions.

Finally, while physical climate risk and real estate’s transition to net-zero carbon emissions have proven recurring issues previously, this year’s report also examines the far-reaching implications for real estate insurance and finance from these twin challenges.

As real estate faces increased risks from the rising frequency and severity of extreme weather events alongside the transition to net zero, the impact on the industry is becoming clearer in terms of financial costs and business interruption, and nearly two-thirds of respondents expect an increase in insurance costs over the next five years. While the issues around the insurance and financing of real estate from climate risks are widely acknowledged, the report found that current levels of industry awareness and collaboration do not reflect the scale and urgency of the challenge.

Jean-Baptiste Deschryver, PwC EMEA Real Estate Leader, comments, "While geopolitical and economic uncertainties continue to dominate discussions, it's encouraging to see a sense of cautious optimism returning to the European real estate market. Within this however, the industry must grapple with significant challenges, from ongoing instability and regulatory burdens to ESG demands and the rise of digital risks. Success will belong to those who can adapt, innovate, and embrace new technologies and sustainable practices."

---

About the Urban Land Institute

The Urban Land Institute is a non-profit education and research institute supported by its members. Its mission is to shape the future of the built environment for transformative impact in communities worldwide. Established in 1936, the institute has over 48,000 members worldwide representing all aspects of land use and development disciplines. In Europe ULI has almost 5,500 members across 15 National Council country networks.

For more information on ULI, please visit https://europe.uli.org

About PwC’s real estate practice

PwC’s real estate practice assists real estate investment advisers, real estate investment trusts, public and private real estate investors, corporations, and real estate management funds in developing real estate strategies; evaluating acquisitions and dispositions; and appraising and valuing real estate. Its global network of dedicated real estate professionals enables it to assemble for its clients the most qualified and appropriate team of specialists in the areas of capital markets, systems analysis and implementation, research, accounting, and tax.

Press contact

Kasper Demol – kasper.demol@pwc.com – +32 472 586 376

About PwC

PwC’s purpose is to build trust in society and solve important problems. PwC is a network of firms in 151 countries with more than 364,000 people who are committed to delivering quality in audit, advisory and tax services. Tell us what matters to you and find out more about us at www.pwc.com.

‘PwC’ refers to the PwC network and/or one or more of its member firms. Each firm is a separate legal entity. See www.pwc.com/structure for more detailed information.

© 2024 PwC. All rights reserved.