Rental growth the key driver of the property recovery

The recovery in property values is underway. But we think it will be a weak one, even though several European central banks, including the ECB, are forecast to cut interest rates to a lower level than the market expects. This reflects that interest rates will remain elevated by past standards, keeping the spread between property and bond yields narrow. Rental growth will therefore be the key driver of capital values. But we expect it will only be muted, held back by weak economic growth in much of western Europe, albeit the softer outlook for supply will provide some offset. Strong demand for prime offices means that returns in the sector are set to be similar to industrial in 2025, but we think industrial will regain the lead further ahead. Overall, we forecast euro-zone returns of 6.5% p.a. for retail, 7% p.a. for offices and around 8% p.a. for industrial over 2025-29.

To see how our latest European property forecasts stack up against the other regions we cover and against other asset classes, please see our new Global Returns Dashboard here.