Economic and political challenges hit property sector confidence

Real estate markets in Europe remain cautious and, in some areas, sentiment is deteriorating despite further improvements in market performance, according to INREV, the European Association for Investors in Non-listed Real Estate Vehicles.

The INREV Consensus Indicator indicated that sentiment declined from 57.8 to 56.7 in December 2024, the first fall recorded since September 2023.

Each of the index’s five sub-indicators declined, including investment liquidity and financing, which had improved substantially last year. The economic sub-indicator dropped sharply from 47.4 to 44.0 while the leasing and operations sub-indicator fell below 60.

INREV attributed the declines to increasing concern about the subdued economic outlook for most major European economies.

There are exceptions, according to the association, and following strong economic growth Southern Europe leads investment sentiment rankings. Notable was Spain with a record 39% net positive sentiment, followed by Italy with 24%. Investor sentiment towards the Nordics also remains strong at 18%, well above its five-year average.

Residential remains the sector for which there is the most positive sentiment but sentiment toward the retail sector has maintained its momentum, with a net 23% for a second consecutive quarter. Other living sectors, including senior living and student housing, also reflect positive sentiment, though slightly below the long-term averages from the first survey in 2020.

Sentiment towards the industrial/logistics sector has declined from 19% to 12%, a slight dip below the long-term average. Net sentiment toward offices was 0% in March 2025, an improvement of 8% since December 2024. While neutral overall, this represents the highest sentiment level for offices since March 2022.

The decline in investors’ sentiment for some major markets, including the UK, France and Germany, followed a strong end to 2024 for European real estate. The Q4 2024 INREV Quarterly Fund Index indicated a total return of 1.21% for Q4 2024, the highest level since Q2 2022, although capital growth remained weak through to Q4, turning only marginally positive at 0.03% (-0.18%) in Q3 2024. The one year rolling capital growth, though improving, remains negative at -0.59%.`

There were positive returns in all key geographies except Germany, the association said. Assets in the Netherlands, Spain and the UK were the strongest performers in 2024 and one-year annualised returns for the Netherlands (9.32%), Spain (6.68%) and the UK (5.84%) exceeded their respective ten-year annualised averages. Spanish and Italian asset performance reflected stronger economic recovery. However, Germany’s one-year annualised 2024 return of 0.24% contrasted its ten-year annualised average of 6.77%. INREV pointed out that the recent US tariffs may add further headwinds, prolonging the period before a meaningful economic recovery.

Iryna Pylypchuk, INREV’s director of research and market information, said: “Whilst last year ended with all major European markets delivering positive returns, the drop in sentiment and increased sensitivity to risk is likely reflective of the global challenges to security and trade that have dominated the start of 2025. High trade policy uncertainty and further possible impact on exports and investment dampen the likelihood of a significant near-term rebound for most European economies. What was deemed an ‘uncertainty’ yesterday is now at a whole new magnitude.

“The real estate sector is once again reminded that the near-term recovery will be slow and protracted and is not immune from external factors. Whilst the downturn in confidence is modest for now, the bottom-up approach to asset selection and careful tenant quality watch is a must. Counter cyclical tailwind sectors showed through with the strongest and most consistent performance, both recent and historic, but now may also be a good time to explore market bifurcation for potential mispricing and repositioning opportunities.”