Prime real estate returns for 2026 to 2030 across 20 leading European countries will average 8.4%year, with the UK and prime offices leading the charge, according to AEW.
The global real estate investment and asset management giant in its 2026 European Annual Outlook, finds the region's real estate recovering slowly but surely, with liquidity returning and prime yields tightening.
At a presentation at AEW's 8 Bishopsgate offices in the City of London, Christina Ofschonka, chief investment officer, Europe, head of Germany and CEE, said: "The valuation falls are broadly behind us and, as with today, we see the sun coming up at some point. We are taking confidence from and making decisions based on the numbers we are seeing. We continue to focus on logistics and residential, but increasingly we are targeting UK offices and we have been able to convince investors, both domestic and from abroad to back this."
With total returns of 10.3% a year forecast over the period, the UK ranks first in Europe over the next five years, followed by Spain, Central and Eastern Europe and Germany. AEW reports that prime offices offer the highest returns of all property sector types at 9.3% a year, followed by shopping centres, logistics, residential and high-street retail.
Hans Vrensen, head of research and strategy Europe at AEW, said the returns projections were in many ways conservative. "We think it is reasonable as there are three components to the total return – income return, rental growth and yield shift – and we have yield shift as a relatively modest component compared to what it has been historically."
In terms of the the broader macro economic picture, while European gross domestic product growth has recovered, it remains modest at 1.7% a year and is unchanged from AEW’s March 2025 forecast.
Vrensen said that AEW had in part used a "news AI index" to track news stories that pointed to uncertainty in policy across global economies and compared that with business and consumer confidence. As such the group is able to look through short term volatility, he said. "We are seeing that inflation is now under control and interest rates are stabilised going forwards." In terms of looking through short-term volatility and longer term trends, Vrensen said: "In all honesty the recent bond market volatility in the UK has not been that big. There has been no downgrade of UK government bonds. We look at longer-term signals."
Ofshonka said local and near-term changes to policy informed its investment committee decisions alongside the longer-term data it had collated.
Jeffrey King, head of fund management, Germany, said that AEW had been able to take a portfolio approach rather than looking at individual assets when looking to raise new debt and make acquisitions. That had led it to pause and be patient during 2023 and 2024, before raising debt recently for its euro core fund.
"We have been focused on core and core plus investments and income and income growth as the yield shift is we think a smaller share of total returns."
King showcased AEW putting the convictions drawn from its research into practice with last November's £22 million acquisition of 95 New Cavendish Street as a value-add opportunity. King said AEW is eying at least two more London office investments with German capital backing the strategy. "Prime office is definitely back in the mix even though beds and sheds remains the focus."
Looking across the Continent, Vrensen said the European real estate sector continues to show signs of recovery, with prime property yields projected to tighten slightly by 30 basis point 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."
Vrensen said all of these drivers support a recovery in investment volumes.
"The current 160 basis points 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."
Pretty vacant
AEW says declining vacancy rates in European property sectors have continued in 2025, except for offices. Nevertheless, AEW projects that office vacancy has peaked and will reach 8.1% by the end of 2025, decreasing to 6.3% by year-end 2030. It argues that the gap between central business districts and non-CBD offices will ease in the future as new supply remains limited.
Logistics vacancy has edged up to 5.6% in 2025 from a record low of 2.5% in 2022. AEW says with a reduction in developers’ profitability, new logistics supply is expected to moderate, and vacancy is estimated to come down gradually to 4.1% by 2030.
AEW’s base case forecasts show prime cross-sector rental growth at 2.2% a year for 2026-30. Prime residential market rental growth tops all sectors at 3.2% a year, ahead of offices at 2.6% and logistics at 2%. Prime high street retail and shopping centres are expected to have below average rental growth of 1.6% per annum and 1.2% per annum respectively during the next five years.
AEW says commercial real estate finance is becoming more widely available with eurozone borrowing costs remaining favourable. Debt is accretive to equity investors at 3.9% as of the third quarter 2025 compared with the prime cross-sector eurozone property yields at 5.2%. This is also true for the UK, AEW says, 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 for 2026-28 has decreased by 18% to €74 billon compared with its 2023 estimate for 2024-26. As a share of loan originations, the DFG is now 12% for the next three years, down from 13% in 2024.
The French DFG defied the overall European trend, increasing to 20% from 18% last year, in AEW's figures. DFG related to loans backed by UK, Spanish and Italian real estate remains below the European average.
Investment market fundamentals have improved and sentiment towards offices and retail is catching up with the stable and strong sentiment in residential and logistics, AEW says.
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% 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 30 basis points 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.
Return to sender
The average all-sector total return in AEW’s base case scenario is projected at 8.4% a year for 2026-30 across all 196 markets. Prime offices are expected to offer the highest returns of all prime sectors at 9.3% a year 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% a year 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% per annum which is supported by relatively higher current yields and stronger forecasted yield compression. CEE markets rank second with a forecast return of 9.1% per annum, driven by high income return. Spanish markets rank third in AEW’s total returns projections, driven by higher rental growth compared with many other countries.