Market Radar Europe: Will the Iran conflict derail Europe’s real estate recovery?

Stagflation risks haunt European real estate

The ongoing US conflict with Iran and the effective closure of the Strait of Hormuz have triggered a profound macroeconomic shock, deeply unsettling the European real estate market. 

The crisis has accelerated a broader structural shift in global finance, with trust in the US dollar waning to the extent that central bank gold reserves have eclipsed valuation-adjusted USD reserves, which currently sit at approximately USD 4 trillion. 

Across Europe, the economic fallout is acute. EU officials warn of a lingering stagflation risk, and the European Commission is preparing to downgrade growth forecasts while raising inflation projections. 

Fearing a self-reinforcing inflation spiral driven by surging energy costs, both the European Central Bank and the Polish central bank have adopted a cautious stance, holding interest rates steady to monitor the volatile geopolitical situation.

With global energy markets severely disrupted, German Chancellor Friedrich Merz has conditionally offered to support a UN-mandated mission to secure sea lanes in the Strait of Hormuz, underscoring the severity of the supply constraints. 

For European real estate, soaring oil prices have increased supply chain costs in the logistics sector. Simultaneously, retail properties are threatened by a consumer shift towards non-discretionary spending, and offices are experiencing a near-term resurgence in remote work as employees seek to avoid rising commuting expenses. 

While the capital markets in Europe enjoyed a strong start to the year with approximately USD 27 billion in investment volumes, shifting interest rate expectations and geopolitical fears are now slowing deal velocity as investors reassess asset resilience and risk premiums.

The flow of global capital into European real estate is facing further headwinds from the Middle East itself. Facing severe economic strain, damaged energy infrastructure, and disrupted regional stability, major Gulf states, including Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar, are reportedly reviewing their overseas investments. 

With these nations considering invoking force majeure on existing contracts and reassessing hundreds of billions in global financial commitments, European markets could lose a crucial source of foreign capital.

However, the geopolitical turmoil has created an unexpected boom in specific pockets of the European residential market. Ultra-wealthy investors and expatriates looking for alternatives outside the war-torn GCC region are seeking refuge in Europe, with Milan emerging as a formidable alternative. 

Capitalising on Italy's political stability and an attractive flat-tax regime that caps taxes on overseas income at EUR 300,000 annually, the Italian financial capital is experiencing a massive influx of global elites. 

This migration is transforming the city, accelerating the development of luxury hotels, private clubs, and high-end galleries, as well as driving a 38% rise in local property prices over the past five years.

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Growth sectors defy macroeconomic volatility

Although geopolitical and macroeconomic volatility threaten to derail European real estate recovery, early 2026 saw record fundraising and a resurgence in infrastructure-led growth. 

A primary catalyst for this momentum is the continent's aviation boom; with 2.6 billion passengers recorded in 2025, airports from London to Istanbul are driving intense demand for surrounding hotels, experiential retail, and distribution hubs.

Further reflecting this renewed confidence, Ares Management Corporation recently raised USD 5.4 billion for value-add strategies, with USD 1.9 billion earmarked for supply-constrained sectors like logistics and multifamily housing. 

The logistics sector remains a dominant force, highlighted by the launch of a EUR 1 billion pan-European joint venture between La Caisse and Prologis. Tenant appetite remains exceptionally strong, as evidenced by supermarket chain Farmfoods securing a record 25-year lease for 800,000 square feet of speculative space at Logicor Park Daventry. 

Meanwhile, the UK retail landscape is being reshaped by a fierce "land grab" between German supermarket giants Aldi and Lidl, who are collectively investing billions to secure prime sites, often in direct proximity to one another.

Mature assets continue to trade profitably in core markets. In London, Great Portland Estates sold the Uniqlo flagship on Regent Street for GBP 52 million, while Patrizia divested the Coda Studios office campus in Fulham. 

This investment appetite extends into Central Europe, where Poland has emerged as a premier destination. Bolstered by low unemployment and the rapid growth of Warsaw, the Polish real estate market is seeing a broad-based recovery with significant international capital flowing into prime office and retail park portfolios.

Mixed signals for UK property markets

The UK real estate market in early 2026 presents a complex picture of resilience, shifting sector dynamics, and sudden geopolitical shocks. While the financial sector experienced a robust first-quarter recovery on the whole, the impacts of the ongoing Middle East conflict have cast a shadow over recent progress. 

This conflict has brought much of the commercial momentum that had been building to a grinding halt, even though the fundamental case for UK REITs remains intact. According to recent data from CBRE, all-property capital values were stable over the first quarter, delivering total returns of 1.4% driven primarily by income.

The macroeconomic fallout from the conflict is weighing particularly heavily on the residential sector, with soaring global energy prices prompting the Bank of England to hold interest rates steady and markets now anticipating further hikes. 

The latest Royal Institution of Chartered Surveyors (RICS) survey reveals that homebuyer demand has slumped as borrowing costs spiral, as both new buyer enquiries and agreed sales fell sharply in March - knocking a cautiously improving housing market entirely off course.

Despite these broader headwinds, landmark transactions continue to close at both ends of the spectrum. In the ultra-prime market, Nick Candy's record-shattering USD 350 million London mansion sale highlights sustained demand for high-end luxury properties. 

In the broader residential market, a GBP 860 million joint venture between Homes England, Capital&Centric, and Swiss Life Asset Managers recently completed its first acquisition in Manchester to unlock brownfield land, deliver over 2,250 rental homes, and drive urban regeneration.
 

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