Weak recovery despite lower interest rates

The extension of the ECB easing cycle into 2026 will support real estate markets. However, a softer economic outlook and the narrow spread of property to government bond yields mean even our upwardly revised expectation for euro-zone capital value growth is just 2.5% p.a. over 2025-29. By sector, we expect the recent strength of prime office rental growth to persist over the next couple of years, despite the weaker labour market, boosting office total returns. However, we think industrial will outperform in the longer term, with solid rental prospects allowing yields to fall. Combined with the sector’s higher income returns, that means euro-zone industrial returns of 8.5% p.a. are set to outperform offices and retail, where we forecast returns of 7.5% p.a. and 6.5% p.a. respectively over 2025-29.