Europe Commercial Property Outlook: Higher interest rates weaken the recovery

Following upward revisions to our forecasts for policy rates and bond yields, we have raised our forecasts for prime property yields in Europe and now expect increases of around 20-25bps by the end of 2026. Meanwhile, despite a slightly brighter economic outlook, we expect all-property rent growth to slow over the next two years, largely due to rising vacancy. This rental backdrop won’t be enough to offset the impact of higher yields, which weakens what was already anticipated to be a sluggish recovery. All told, we expect euro-zone all-property values to rise by only 1.5% p.a. over the next five years. Across sectors, strong demand for prime offices means that returns in the sector are set to outpace industrial in 2025, but we think industrial will regain the lead further ahead. Overall, we forecast euro-zone returns of 6% p.a. for retail, 6.5% p.a. for offices and around 7% p.a. for industrial over 2025-29.