Market Radar Europe: Capital returns to CRE and tourism lifts hotels, but 4M homes still missing

CRE sector performance and outlook

From reset to stability in CRE

European commercial real estate entered 2026 with firmer pricing, broader capital participation, and signs that the reset phase is giving way to stabilisation.

Cushman & Wakefield’s DNA of Real Estate report, covering 46 cities, shows values strengthened through 2025 as prime rents rose and yields compressed across offices, high street retail, and logistics. Prime office rents increased 4.6%, with strong growth in the UK, France, Italy, Spain, and Poland, while yields tightened 9 basis points to 5.37%, marking six consecutive quarters of inward movement. 

High street retail rents climbed 4.4%, led by Bucharest, London, The Hague, and Rotterdam, and recorded the sharpest yield compression of any sector, moving in 11 basis points to 4.76%. Logistics rents rose 3.6%, with Brussels, Paris, Lisbon, Leeds, and Birmingham leading gains, as prime yields edged in 7 basis points to 5.20%.

Savills’ European Office Investment Q4 2025 update reinforces the shift in sentiment. Average prime office yields held at 4.9% in Q4, with compression in Munich, Hamburg, and Prague, while Madrid, Milan, and London are viewed as attractively priced given rental growth prospects. 

Cross-border investment increased from 33% to 41% of total volume between 2024 and 2025, and single-asset deals above EUR 100 million rose 23% year-on-year. Prime rents are forecast to rise 3.7% in 2026, supported by tight labour markets, constrained supply, lease renewals, and fit-out costs that have risen 67% over five years.

Altus Group’s Q4 2025 pan-European dataset, covering funds with EUR 29 billion in assets, shows capital values rose 0.4% in Q4 and 1.9% over the year, marking a sixth consecutive quarter of appreciation. Residential led annual gains at 3.7%, followed by industrial at 2.6%, while retail rose 1.6% and office lagged at 0.1%, reflecting earlier volatility but improving income resilience.

Uneven momentum across Europe

In Portugal, Savills notes Lisbon’s prime office yield at 4.75%, comparing favourably with Madrid and positioning the city competitively ahead of several core markets as confidence and liquidity recover. 

Italy recorded EUR 12.5 billion in investment in 2025, up 23% year-on-year, with foreign capital accounting for 58%, according to Cushman & Wakefield, supported by stabilising yields and improved financing conditions.

Germany remains under pressure, however, with Reuters reporting that Deutsche Pfandbriefbank posted a preliminary EUR 250 million pretax loss for 2025 and warned it may miss 2027 targets, citing continued weakness in German and US CRE markets.

These issues will be top of the agenda at next week's Europe GRI 2026 - Winter Edition, taking place in London on February 25-26.

Tourism rebound drives hospitality

International arrivals into Europe rose 3.2% year-on-year in Q4 2025 and overnight stays increased 3.1%, while travel expenditure climbed 9.7%, according to the European Travel Commission, signalling higher spend per trip and stronger revenue potential for hotel assets. 

Arrivals are forecast to grow 6.2% in 2026, with a 9% rise in long-haul travel, particularly from China and India, reinforcing demand visibility for owners and operators.

Institutional capital is responding to these trends, with City Developments Limited acquiring the 706-room Holiday Inn London - Kensington High Street for GBP 280 million, citing resilient income and yield accretion. 

In Spain, where tourism contributes 12.8% to GDP, the hospitality market is projected to expand from USD 61.6 million in 2025 to USD 84.1 million by 2034, underpinned by infrastructure upgrades and diversified demand.

However, structural pressures remain. HOTREC estimates around 10% of EU hospitality roles are unfilled, highlighting labour constraints that could weigh on service quality, margins, and long-term asset performance despite improving fundamentals.

European living markets

Continent overtakes UK PBSA investment

Investment volumes in the European living sector improved in the second half of 2025, lifting full-year living transactions to EUR 46.9 billion, a 5% increase year-on-year, though still 25% below the five-year average, as tracked by JLL. 

The recovery has been selective. In Q4 alone, EUR 14.7 billion was deployed, but activity remained concentrated in student housing, where deal count nearly doubled and UK PBSA volumes rose 92%, supported by several EUR 100 million-plus forward fundings. 

Continental Europe overtook the UK in full-year PBSA investment for the first time, led by Spain and France.

Traditional multifamily told a different story. Germany and Sweden recorded volumes 75% and 58% below their five-year Q4 averages amid a lack of large portfolio trades. The quarter’s defining transaction was the GBP 629 million, EUR 719 million acquisition of PRS REIT by North LGPS and LPPI, underscoring that liquidity exists, but is highly selective.

4 million missing homes

Beyond investment cycles, the structural imbalance is sharper. Europe faces an estimated 4 million-home shortfall, while house prices have risen by up to 60% since 2015 in some countries, as reported by Euractiv and Environment Energy Leader. 

Annual refurbishment and construction needs exceed EUR 200 billion, particularly as buildings account for nearly 40% of EU energy consumption. Only 14% of cities surveyed consider housing affordable.

Policy efforts now focus on capital mobilisation. The European Commission’s Affordable Housing Initiative and EPRA’s 18 recommendations aim to reduce fragmentation and attract institutional investors in a market still dominated by bank lending. 

At the same time, EUobserver notes that vacant buildings remain under-mapped and lack dedicated funding channels for conversion into affordable homes.

German real estate resurrection?

Germany’s property market is stabilising, but momentum remains selective and restructuring-driven. 

Housing construction permits rose 10.8% in 2025 to 238,500 units, the first annual increase in three years, according to the Federal Statistics Office, signalling a tentative turning point after activity fell to its lowest level since 2010. 

Yet industry forecasts suggest barely 200,000 units will be delivered, far short of the 400,000 required annually to close a projected 1.4 million-home gap by 2030.

On the capital side, growth is coming less from transactions than from structure. INTREAL increased assets under administration to EUR 72.7 billion by September 2025, up 9.2% year-to-date, reflecting rising demand for regulated fund vehicles rather than new acquisitions. 

Lending is returning cautiously, with new business reaching around EUR 37 billion in Q3, up one-fifth year-on-year, but underwriting remains strict and refinancing risk elevated, according to Berlin Hyp.

Investment volumes totalled EUR 33.9 billion in 2025, down 4%, with living assets leading at EUR 10.2 billion, while offices lagged amid scarce large deals, as reported by JLL. A new reform allowing open-ended funds to allocate up to 15% to renewables could unlock billions, adding an infrastructure dimension to Germany’s next cycle.
 

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Look out for a new edition of the GRI Institute's Market Radar Europe next week!