Europe’s Next Real Estate Cycle is Taking Shape

Capital Concentration Shift

For much of the past decade, global investors have gravitated towards the United States. It is a large, transparent market with reliable data and deep liquidity. Many investment portfolios have leaned heavily in that direction, in some cases with allocations approaching 90%. 

But recent events have prompted a shift. Seismic grade policy developments in the US have prompted allocators to rethink the concentration of their exposures. Increasingly, they are rebalancing towards Europe.

This trend has only really gathered pace over the past six to nine months, but it already feels significant. Allocators are not simply diversifying for the sake of it. They are recognising that Europe offers stability, rule of law and predictability at a time when geopolitics and policy uncertainty elsewhere raise questions. 

For investors who had long dismissed Europe as too fragmented, too complex or lacking in liquidity, the balance of arguments is shifting.

Shifting Real Estate Dynamics

At the same time, the dynamics within real estate have changed. For the past three years, private credit strategies have been dominant. Elevated interest rates created an environment where credit returns of 10-12% were achievable with relatively modest risk. 

By contrast, equity strategies struggled to compete. But as rates have begun to stabilise at a new, slightly lower normal, sentiment is moving again. Equity is no longer out of favour. In fact, investors are beginning to view it as the next place where high-returning strategies will emerge.

I have seen this change firsthand. Before the first quarter of last year, US investors in particular could achieve attractive returns at home. The extra spread they demanded to look at Western Europe was simply too high. 

Since then, however, those conversations have evolved. Not only US allocators but also those in the Middle East and Europe itself are reconsidering the relative value of their Stateside allocations. The trigger may have been recent, but the effects appear structural.

Lessons from History

For allocators, the critical question is whether we are approaching a new investment window in European real estate equity. History provides useful comparisons. 

Following the global financial crisis (GFC), the most interesting deals were transacted three to five years after the event. That period produced some of the best-performing vintages. 

We are now two to three years post-pandemic, and many are concluding that this could be another ‘goldilocks’ moment. Strategies launched today will deploy capital at a time when valuations are floored and opportunities emerging, with exits likely to coincide with recovery years.

There are, of course, important caveats. The outlook assumes no further shocks. Another aggressive interest rate hike cycle or a tariff-induced recession would delay the recovery. But if the environment remains broadly stable, the foundation is in place for renewed activity.

Regional Contrasts

Regionally, Europe presents a bifurcated picture. Northern Europe, especially the UK and Germany, face ongoing challenges. By contrast, Southern Europe is benefiting from powerful structural trends. Tourism has rebounded not as a temporary surge but as a lasting shift in global travel patterns. 

Europe already accounted for 60% of outbound travel pre-pandemic, with almost half of that heading to Southern Europe. The pandemic has reinforced these movements. Having long operated in Spain, Portugal and Italy, I have seen the data both before and after the pandemic. It is clear that demand has structurally increased.

Germany, though, presents a different kind of opportunity. The country’s unique insolvency system forces distressed projects to resolve quickly, unlike Spain or Italy where insolvencies can last decades. That dynamic is producing investable opportunities in partially completed projects, something not seen even during the GFC. 

Last year, we acquired a German development platform for precisely this reason. I believe this represents a once-in-a-generation entry point into distress in Europe’s largest economy.

Sectoral Story

Beyond regional focus, the sectoral story is equally compelling. Hospitality and student housing are in clear growth mode, supported by demographic shifts, supply-demand imbalances and changing consumer preferences. 

Residential shortages are acute in almost every major European city. Construction starts are at historic lows, while costs and permitting delays exacerbate the problem. The fundamentals are attractive for investors, even if commercial viability varies by location. 

Community-led retail is also emerging as a promising sector. Well-positioned schemes that are embedded within large residential populations can generate resilient footfall and stable income streams, particularly as consumers prioritise convenience and local amenity. 

Logistics remains interesting too. It became overheated in the last cycle, but that has left well-located assets in the hands of owners who paid the wrong price. As the digital economy expands into every aspect of our lives, the long-term demand for logistics space is not in doubt.

Strategies and Sustainability

In approaching these sectors, our strategy has been to focus on opportunities where the macro tailwinds are certain, but where we can access deals in a differentiated way. Often that means targeting smaller transactions below EUR 50 million. These attract less competition from larger managers and provide us with more room to create opportunistic returns without taking on untested risks. 

While our granular approach avoids the crowds and provides proprietary deal flow, it comes with operational complexity, we have more than 4000 employees in our target countries looking for these transactions. Fortunately, we have been doing this for 20 years and optimised this more labour-intensive business model, making us unique in Europe.

No discussion of European real estate today is complete without reference to ESG. For some investors, it remains a headline topic, but in my recent fundraising tour in the US it was notable that ESG was rarely raised either positively or negatively. In practice, allocators are focused above all on track record, niche expertise and returns. That does not diminish the importance of these issues. 

In our real estate strategy, we prefer to talk about sustainability, as it is more focused on the core challenge and directly linked to asset performance. We integrate it carefully into every business plan because it affects liquidity, exit prospects and long-term value. 

The reality is that compliance does create an additional cost line, and it reduces the number of deals that pass our screening. But as regulation evolves and technology improves, those costs will normalise. In the long run, assets that meet sustainability standards will simply trade more easily, and that is a benefit to investors.

Europe’s Inflection Point

All these factors point to an inflection point for European real estate. Credit strategies remain highly attractive and will continue to see strong inflows. Equity strategies, however, are re-emerging as viable and compelling. Valuations appear to have bottomed, financing is becoming more affordable, and early movers are already stepping into spaces once deemed uninvestable.

The task now is to be selective, disciplined and forward-looking. This is not the time to chase every theme or rely on momentum alone. But for investors prepared to lean into Europe’s structural strengths and take advantage of its cyclical resets, the coming years could offer some of the most attractive equity vintages we have seen since the GFC.
 

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Jay Patel is Managing Director - Real Estate at Arrow Global