Europe’s real estate defence dividend
Europe’s rearmament is reshaping industrial and logistics real estate. Jason Mitchell explores what it means for investors – and where the opportunities lie.
Europe is rearming at a pace unseen since the Cold War, and the effects are beginning to reshape industrial and logistics real estate.
Nato’s European members raised defence spending from 1.4% of GDP in 2022 to just over 2% in 2024, and have committed to a new benchmark of 3.5% by 2035. That trajectory implies well over $1 trillion in additional spending this decade, according to BNPP AM Alts’ Spotlight on Defence: Arming for Growth series, published between March and July 2026.
A significant share of that increased spending is already driving industrial and logistics real estate through signed leases, converted factories, fresh capital raising and completed institutional investment deals.
The opportunity is real, but highly concentrated. Demand is concentrating in a small number of established manufacturing corridors, mostly in Germany and France, with the UK as the third major beneficiary.
Central and Eastern Europe is also attracting greenfield investment thanks to lower costs and faster planning, but with higher execution risk. Drone manufacturing has emerged as the fastest-growing sub-segment. But the investable opportunity is more limited than the headline figures suggest because most of the available space will never come to market.
The scale of the shift, and what it means for demand
Germany, France and the UK – the ‘E3’ – are expected to capture almost 60% of Europe’s additional defence spending this decade under BNPP AM Alts’ baseline scenario, which assumes Nato Europe’s average defence spending reaches 2.9% of GDP by 2030. That equates to more than $1 trillion of additional spending and demand for around 624,000 extra defence-industry workers, creating the strongest property demand in countries with established manufacturing bases.
The way governments finance higher defence spending will determine how much of that demand translates into new factories and warehouses. Germany has exempted defence spending above 1% of GDP from its constitutional debt brake, giving Berlin room to reach Nato’s target by 2029. France’s updated 2024-2030 Loi de Programmation Militaire (Military Programming Law) allocates €436 billion to defence, while the UK plans to increase spending to 2.5% of GDP by 2027 and has set an ambition of reaching 3% in the next parliament.
Britain and France have also signed up to Nato’s core defence spending target of 3.5% of GDP by 2035. Countries such as Italy and Spain are expected to increase defence spending more gradually, concentrating near-term demand in Europe’s established defence manufacturing hubs.
The direction is clear
Three independent estimates of the industrial and logistics impact point in the same direction, even where the numbers differ. BNPP AM Alts puts additional European demand at 16 million sq m of floorspace under its 2.9%-of-GDP baseline – equivalent to around 9% of the past decade’s average annual European logistics take-up.
GARBE Industrial, the German logistics and light-industrial real estate manager, estimates occupier demand potential of between 37 million and 75 million sq m over five years, though its head of research, Tobias Kassner, said only around 20% of that total is likely to be institutionally accessible – the rest will be built or leased directly by governments and prime contractors.
ING’s research arm estimates that defence spending could add 8%-20% to demand for industrial and logistics space over the coming years, describing it as “a steady deployment, not a full-scale invasion of warehouses”.
Despite the differing estimates, they point to the same conclusion: bespoke, built-to-suit facilities remain the preferred choice for the manufacturing sites of defence ‘primes’ such as Rheinmetall, the German defence and automotive technology group, or BAE Systems, the British defence, security and aerospace company.
Those prime contractors sit at the centre of extensive supply chains comprising hundreds of smaller manufacturers and suppliers, many of which occupy standard, modern industrial units. Leasing to those supply-chain companies, rather than to the primes directly, is where institutional capital is most likely to find risk-adjusted opportunities.
Infrastructure is becoming as important as geography. Within five years, power availability could overtake traditional metrics such as clear height and dock-door provision as the main site-selection criterion for defence occupiers, making grid capacity and planning consent key competitive advantages. Defence manufacturers may also find themselves competing with data centres for scarce electricity capacity.
Germany, France and the UK: the industrial core
Germany’s defence industry runs along a north-south corridor. North Rhine-Westphalia is the hub for armoured vehicles, anchored by Rheinmetall and Krauss-Maffei Wegmann. Bavaria and Baden-Württemberg together account for almost half of German defence employment and host sensor and aerospace manufacturers including Hensoldt and Airbus Defence and Space. Kiel and Bremen anchor naval construction.
Europe’s rearmament is also reshaping the automotive sector. German defence companies are trying to repurpose underutilised automotive factories and recruit skilled workers released by the industry’s restructuring as they expand production capacity. The trend highlights how industrial capacity built for the car industry is beginning to be redirected towards defence manufacturing. A €100 billion Bundeswehr special fund and a parallel €500 billion infrastructure programme are supporting the expansion.
France’s defence industry is more concentrated in national champions – including Dassault Aviation, Thales, Safran and Naval Group – which together account for close to 80% of sector turnover. Clusters sit along the ‘Dorsal’ corridor from Lille through Paris and Lyon to Marseille, with an emerging ‘Atlantic Arch’ on the west coast. Bordeaux and Toulouse form the principal aerospace and drone-production axis. Grand Est, bordering Germany, is already a logistics hub for troop and equipment movement to Nato’s eastern flank.
Layered over both countries is GARBE’s logistics-corridor model, which ranks Europe’s main freight corridors by their importance for military mobility. Rotterdam, Antwerp and Amsterdam score highest, forming the connective tissue between Europe’s main defence manufacturing clusters.
Larger spend on defence from the UK?
The political commitment behind that industrial defence expansion is growing. Andy Burnham became British prime minister on 20 July 2026 and named John Healey – who had resigned as defence secretary weeks earlier in a dispute over the scale of the UK’s military investment plans – as chancellor, a move widely interpreted in Britain as signalling a larger increase in defence spending.
BNPP AM Alts data, shared with the media in July 2026, put total UK defence-related real estate demand at around 3 million sq m – roughly 1.7 million sq m manufacturing and 1.3 million sq m logistics – ranging from around 2.8 million sq m at 2.7% of GDP to around 3.25 million sq m under the 2.9%-of-GDP scenario.
UK demand concentrates around established clusters identified in BNPP AM Alts’ own mapping: the South East around the Farnborough-Aldershot corridor, the South West around the Bristol-Yeovil corridor, the North West around Lancashire and Manchester, and Scotland along the Edinburgh-Glasgow corridor, alongside London and Reading for cyber, space and missile-systems activity.
Real Estate:UK, the UK real estate industry body, citing Savills research, also notes that up to around 285,000 sq m of additional defence-related logistics space could be required by 2027, alongside around 242,000 sq m of defence-related office and R&D space by 2033. While smaller in scale, the forecasts point in the same direction.
Drone manufacturing cuts across all three markets. Swindon is emerging as a UK specialist hub, with outdoor testing at the former RAF Wroughton and an indoor drone-testing facility of around 48,800 sq m for the UK Ministry of Defence expected in the town. Helsing, the German AI-enabled defence technology company, has opened a Plymouth factory for autonomous underwater gliders.
France’s Bordeaux-Toulouse corridor is becoming a centre for drone production, while Germany is expanding industrial capacity for drones and other autonomous defence technologies across its western industrial belt.
Floorspace-per-worker requirements vary sharply by output – drones are markedly more space-efficient than submarines, for instance – so the sector’s rapid employment growth converts into smaller, more standardised facilities rather than the very large, bespoke sites associated with naval or armoured-vehicle production. That profile is easier to finance than the rest of the sector, and better suited to the kind of speculative or forward-funded development that institutional platforms are used to delivering.
Central and Eastern Europe: the higher-risk frontier
The picture is different in Central and Eastern Europe, where investment is focused largely on greenfield developments rather than expanding existing capacity.
Rheinmetall has been drawn to the region by lower land costs and faster planning. However, as Thomas Beyerle, professor of real estate economics and research at Biberach University of Applied Sciences, said at an industry webinar in June 2026: “You cannot simply transplant a cluster. What has developed over 30 years cannot be replicated quickly, however generous the subsidies.”
Poland is building capacity around Warsaw and Poznań. Romania’s Mihail Kogălniceanu Air Base is undergoing a €2.5 billion expansion into a ‘military city’ for around 10,000 personnel, near the Port of Constanța, the largest port on the Black Sea.
Lithuania has secured a €540 million European Investment Bank loan for a base at Rūdninkai to host a permanent German brigade, close to the Port of Klaipėda, which sits near the strategically sensitive Suwałki Gap on the Poland-Lithuania border. GARBE’s own corridor scoring gives Klaipėda a rating of 5.4 out of seven and Constanța 4.7 – both well above the European average, if some way behind the Benelux ports.
For investors, these markets offer lower costs but are less established and harder to exit. They are an earlier-stage opportunity rather than an alternative to western Europe’s mature markets.
The market is already transacting
The clearest example so far is Sirius Real Estate’s acquisition, completed in July 2026, of a light-industrial business park in Fulda, Germany, for €49.8 million at a 7.8% EPRA net initial yield. The 57,771 sq m site is anchored by a European ballistic-protection manufacturer supplying the German Armed Forces’ MOBAST programme.
Sirius, the owner and operator of business and industrial parks across Germany and the UK, described the deal as reflecting “government-supported demand for mission-critical defence and security-related products”.
GARBE Industrial has itself signed a 10,000 sq m lease with a direct defence occupier in Germany – one of the first publicly disclosed transactions of its kind – suggesting the market has moved beyond planning and into execution.
A project in Lübeck also shows how defence requirements can reshape development plans. A conventional 30,000 sq m logistics scheme was redesigned to include a separately secured 10,000 sq m unit for a defence tenant. That extra level of security comes at a cost: Savills estimates defence fit-out costs are 20% to 40% higher than for standard industrial units.
The occupier evidence is matched by a shift on the capital side. Until around two years ago, a defence tenant was often an automatic exclusion for lenders. Banks and insurers are now actively financing such assets, provided the product has a clearly defensive rather than controversial-weapons character.
Wider pool of debt and equity
Defence real estate is not excluded under the EU Taxonomy or the Sustainable Finance Disclosure Regulation, because exclusions apply at tenant-activity level rather than property level – a distinction opening the sector to mandates previously blocked from it. BNP Paribas updated its own defence financing policy in 2025 to ease restrictions on lending to Nato-country defence firms.
The result is a wider pool of debt and equity willing to underwrite defence-linked industrial assets, though dedicated listed vehicles remain scarce; most exposure to date sits within diversified logistics platforms such as GARBE and Sirius rather than standalone defence funds.
Dr Kilian Mahler of Periskop Logistics, a logistics and light-industrial investment manager, has suggested a 5% to 10% allocation within a broader logistics fund as an appropriate level of defence exposure. He described such assets as having “many characteristics of infrastructure, with the advantage of higher alternative-use potential”. That thinking is likely to influence how the first dedicated allocations are structured.
The investment case: structure and returns
There are two main approaches. Build-to-suit, owner-occupied facilities leased to prime contractors on terms of up to 20 years can provide government-backed income and are less exposed to economic cycles. However, because the buildings are highly specialised, they may be difficult to re-let if a tenant leaves.
Leasing standard industrial units to the much larger pool of defence supply-chain companies offers better liquidity, although with a less distinctive income profile. BNPP AM Alts’ research concludes this is the more attractive option on a risk-adjusted basis. The attraction is not higher yields but more dependable income, supported by long leases and structural occupier demand.
Defence occupiers are not expected to create an automatic yield premium. Instead, asset values will continue to depend primarily on lease structure, tenant quality and location.
Sirius’s 7.8% net initial yield on Fulda reflects the quality of the income and the length of the lease as much as the fact the tenant is in the defence sector. Some institutional investors still avoid defence tenants for responsible-investing reasons, while highly specialised buildings outside established markets can be difficult to re-let if a tenant leaves. These remain important limits on the size of the investment opportunity, regardless of the headline demand figures.
The next phase
Nato’s 3.5%-of-GDP target will shape the market over the next decade, but the investment opportunities are likely to change as Europe moves towards it. Procurement-led spending on equipment dominates the near term; as capability gaps close, a growing share is expected to move toward research and development – autonomous systems, cyber defence, digitally integrated platforms – favouring science parks, research campuses and technology-focused offices over conventional warehousing.
The European Defence Agency expected EU defence investment to approach €130 billion in 2025, with infrastructure and facilities forming a growing share of that spend as governments address undercapacity at existing sites. A parallel, longer-term opportunity is also emerging in residential real estate around military bases and defence employment hubs, as several Nato members expand personnel and modernise ageing accommodation.
Germany, France and the UK are expected to benefit most from extra defence spending, while Poland, Romania and the Baltic states offer higher-risk, higher-growth opportunities. For investors, the key point is that the biggest headline figures do not translate into the biggest investment opportunities.
Much of the new space will never reach the investment market. The best opportunities are likely to be well-located industrial buildings let to defence supply-chain companies in established manufacturing clusters. These assets are likely to be in strong demand and, so far, are being priced on normal market fundamentals rather than any defence premium.
