Is Europe’s Real Estate Cycle Back on Track?

On the occasion of MIPIM, Thierry Bernard, Global Head of Real Estate, shares his perspective on the European market, and Grégoire Hennekinne, Head of Real Estate APAC, outlines the Australia launch.

There are signs of a nascent uptick. Investors are showing renewed interest in Europe, particularly in logistics, residential, and hotels, as our research colleagues have well explained and as market observations confirm. European and U.S. dynamics differ: investment has restarted in the U.S., the U.K., and Spain, while France and Germany have yet to regain momentum.

About two years ago, we felt we were nearly there - the rates had returned to acceptable levels with a prospect of declines, and asset values had fallen. A genuine tremor appeared. Then, to some extent, geopolitical and macroeconomic shifts occurred: the Trump era brought volatility and sovereign debt dynamics accelerated with defense and infrastructure spending announcements. That reactivated market activity and reined in long yields.

High-level sentiment shifted: the sense that we were on the right phase flipped to caution, and thus a noticeable slowdown, especially in France and Germany. The U.K. has fared somewhat better because valuations typically correct more rapidly there, making a return easier. Spain has emerged as an economic darling. The United States remains robust despite global uncertainties.

Recovery traditionally begins with value-add investors. This tends to depress valuations, as value-add returns are often around 20% internal rate of return, whereas core investors target 5-6%. We observe that even core assets end up priced with a discount due to ongoing value-add activity, prompting some sellers to delay exits. In short, the market, across asset classes, grinds to a halt until core investors re-enter and restore coherent price levels between buyers and sellers.

If we want the market to truly restart, core investors need to re-engage after having weathered multiple setbacks in recent years. They slowed due to several factors happening in parallel: rising rates reduced the value of fixed income within portfolios, lifting overall exposure to other classes - particularly real estate - thus nudging core allocations toward their upper limits, necessitating a pause. Typical core investors hold 10–12% in real estate.

Additionally, as core investment in real estate - particularly offices - faced difficulties, core investors had to manage provisioning, dispositions, and other remedial actions. Notably in France, where a large part of their business is life insurance with SCPI exposures, to which they provide liquidity; redemption requests from policyholders accelerated the impact, as they found themselves needing to reallocate a substantial portion of assets via SCPI.

As for open-ended funds, the dominant exposure remained in the largest real estate asset class - office - at about 40–50%, with retail around 20% and the remainder in other activities. As core investors paused, value levels lost resonance.

They need conviction that pricing is right, clarity on rate stability, and visibility for future rate trajectories. For a while, investors believed rates would remain favorable; then this decoupling occurred. If sovereign rates edge higher - and mid-swaps follow to some extent - absorbing this reality is essential.

We are beginning to see early signs of revival. Some institutions are considering reallocating capital to real estate, although non-CBD offices may take longer to return. We also observe private individuals re-entering open-ended funds like SCPI, provided new funds are launched. I believe conditions are nearing a restart.

As with any cyclical market, some lag is inevitable. Liquidity is returning, albeit more for mid- to small-sized assets; large assets require a longer consolidation period. When core investors re-enter, they will seek larger assets, particularly as they have substantial equity volumes to deploy.

On the lending side, the market has tightened as office volumes contracted. Everyone is chasing a similar set of opportunities, steering toward residential, logistics, and alternative assets such as hospitality, purpose-built student accommodations (PBSA), etc;..  This pressures yields, margins, and increases leverage.

Additionally, the emergence of debt funds - already well established in the U.S. - is intensifying competition in Europe, pushing leverage higher and compressing spreads.

Consequently, we face a delicate balancing act, as debt funds tend to push leverage higher to meet their returns, while traditional lenders seek lower leverage transactions. In this context, we stand out by tackling complex topics with a risk premium, which we understand and can manage.

The case for Australia rests on diversification and client service. Markets move at different paces; diversifying risks is prudent for a global bank, especially in real estate. Most importantly, we aim to support our global clients - present and expanding - on the ground. The real estate franchise was the only business line not present in Asia-Pacific. Australia’s resilient economy, closely tied to mining, appeared to be a natural entry point in the region.

Indeed, Australia presents a stable economy with growth around 2% per year, healthy macro indicators, and a debt-to-GDP ratio of about 30%. For the past two years, the real estate market has been reviving, driven by an initial drop in rates by the central bank and a flood of foreign capital, notably Asian capital, which views Australia as a safe-haven economy with strong fundamentals.

Moreover, the legal framework is reasonably approachable for Europeans, and our local project-finance footprint provides a solid base to begin from.

We adopt an incremental, staged approach: starting with simpler deals, such as club deals, to learn market dynamics and the participant landscape - before scaling in line with our O2D business model.

We will start by partnering in co-arrangements and co-underwriting with locally established banks, leveraging the work done by our coverage, which has extensive contacts with key players and major real estate investors in Australia.

Australia’s real estate market is expected to continue developing in 2026, aided by further rate reductions from the central bank anticipated toward year-end. In 2025, institutional real estate transaction volumes reached AUD 50 billion (about EUR 30 billion), up 6%.

We expect growth in the real estate investment market to be between 2% and 5% in 2026, with valuations rising - notably in offices and retail. Logistics has grown significantly in the last two years, leading to a stabilization of valuations.

Institutional residential is in a development phase due to Australia’s strong demographic growth - about 2% per year - creating substantial housing demand, though there are administrative and financing barriers to construction.

Other alternative asset classes are continuing to emerge, notably data centers, which saw major deals in 2024. This market is a crossroad between real estate and infrastructure, with its multi-tenant concept being very real estate-oriented, and we will approach it collaboratively between our two business lines. Student housing is another alternative asset class that is expanding significantly in this country.