Geopolitical Risk Clouds The Slow Recovery Of Real Estate, ULI And PwC Emerging Trends Europe Report Says

Some conclusions couldn’t be more apt.

On the day the U.S. went to the polls in what was touted to be one of the closest elections in history, the Urban Land Institute and PwC’s annual Emerging Trends in Real Estate Europe report pointed to political instability as the top concern on the minds of European business leaders.

And that instability could hinder the fragile recovery of the sector. 

“Our optimism for 2025 is limited by global geopolitical risks and questions of political stability in Europe,” said one of dozens of anonymous senior leaders interviewed for the report, which surveyed more than a thousand real estate professionals across the continent. 

In addition to uncertain political winds, the 2025 report concludes that despite falling interest rates, capital will be slow to come back to the sector. It also named London as the dominant city for investment and development prospects in Europe and predicted that data centres will be the highest-flying of real estate sectors.

“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 where 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,” ULI Europe CEO Lisette van Doorn said in a statement. 

Of the real estate professionals surveyed, 85% said international political stability was causing them concern, according to the ETRE report, while 83% said the escalation of wars in Europe and the Middle East was a concern. Almost three-quarters said political instability in Europe is a concern. 

“It’s hard for me to avoid being distracted by what’s going on in the U.S.,” one interviewee said. “The country is going to move distinctly in one direction or another, which is going to have an impact outside the nation’s borders.”

Political risk is part of a general fear that economies will recover slowly, with lower occupational takeup and a generally lacklustre real estate recovery, the report says. Seventy-seven percent of those surveyed cited European economic growth as a concern. 

“Economics wise, it feels to me now as though we’re at the bottom of the cycle, and I think we’ll bump around there for a bit just as we did post GFC,” one interviewee said. “I think everyone believes a recovery cycle is linear, and it isn’t. … It’s called a corrugated recovery.”

In Europe and, to some extent, the U.S., growth continues to be the single most important factor set to drive occupational markets, a senior executive at a private property company said.

“We’ve been very lucky that despite the increase in interest rates, we haven’t seen an economic hard landing,” the executive said. “But clearly, as rates continue to stay higher for longer, there is again a risk of lower economic growth.”

Concerns about economic growth aside, European real estate is somewhat more optimistic about the future than at this time last year, when the European Central Bank and the Bank of England had yet to drop interest rates and inflation was at elevated levels.

Of those surveyed, 80% expect business confidence and profits to stay the same or rise in 2025. Around half suggested both will go up, the report says. 

“Inflation seems to be less of a topic these days, and we actually expect construction prices to come down,” the CEO of a pan-European investment manager said. “On interest rates, we are definitely hoping that things will moderate, even if it’s going to take longer than maybe the market is pricing.”

But with inflation still a very recent memory, the bazooka that saved real estate in the wake of the last financial crisis, zero interest rates, can’t be deployed this time around.

“Cheap money got us all out of trouble before, but not this time,” one interviewee said.

About 46% of those surveyed said they thought there would be more debt available for refinancing or new investments, with about a third thinking that debt availability would stay the same, nearly identical to the picture for equity availability.

For that to improve dramatically, real estate will have to get a lot more attractive compared to bonds, either through values dropping further, interest rates falling or rents rising significantly. 

“At today’s value, I don’t think it’s attractive enough,” one interviewee said. 

In terms of where that money is heading, London was the top pick for investment and development, followed by Madrid and Paris. Despite worries about the fragility of the German economy, Berlin, Munich, Frankfurt and Hamburg were all in the top 10. 

“There are two real estate markets: London, and everywhere else,” one interviewee said. “London is the global capital with a bias of allocation and economic agglomeration, while the rest of the UK struggles to raise capital because cheque-writers see risk. Liquidity is king.” 

The London market has repriced more quickly than other European markets, which has brought investors back sooner, the report says.

When it comes to sectors to watch, data centres came out on top, followed by new energy infrastructure, both of which are seen as benefiting from the megatrends of digitisation and decarbonisation. Student housing, logistics and rented residential rounded out the top five. 

“Turning on the ‘fire hose’ of real estate capital will be crucial to ‘build out the railroads of the digital economy,’” a data centre specialist said in the report, identifying a “huge land grab” underway for sites with adequate power supply.

In line with recent years, residential real estate dominated the ranking of top sectors, with senior living, co-living and serviced apartments also in the top 10. 

Bringing up the rear? Suburban office was the bottom-ranked sector, followed by business parks, with city centre offices ranked 23rd out of 28. Out-of-town retail, city centre shopping malls and high street shops also landed in the bottom six. 

The transition away from office and retail real estate is continuing, the authors found, albeit slowly. The sectors where investors would prefer to invest are either expensive, like logistics or residential, or assets are in short supply, like data centres. 

“Office is going through a shakeout, and we are not yet out the other side,” one interviewee said.