Momentum is returning to European real estate markets and the recovery is underway – albeit in an uneven fashion.
Capital inflows are increasing and transaction activity is beginning to stabilise. Income will be a crucial driver of performance and active asset management is crucial to grow income streams and protect and increase capital values.
For long-term investors, the current environment offers an opportunity to enter the market at attractive rebased levels and as resilient occupier demand is driving positive rental growth. At Columbia Threadneedle Investments, we see compelling opportunities across commercial and residential real estate.
Commercial real estate: Attractive across asset classes
Following several years of correction, risk aversion is easing. Values are slowly edging up along with fundraising, which is gaining ground. Commercial real estate in Europe is once again presenting attractive entry points across all major asset classes, offering investors diversification and positive performance.
Retail parks remain one of the more robust segments in the market. Supported by long-term leases and defensive business models, gross initial transaction yields in Germany currently range between 5.8% and 6.8%. Supply remains consistent and pricing attractive. European retail parks are also offering value as a central element to their consumer proposition, in a convenient format, and have evolved into semi-quasi logistics hubs.
- High street retail has reached its cyclical low. Rents appear to have bottomed out, creating an opportunity for investors willing to be selective. Looking at Germany, where we see the most diversified high street retail market, gross initial yields in the top cities range between 4.0% and 6.1%, while assets outside these core locations trade at discounts of 30% or more. Occupier demand remains strong: across our retail funds we maintain average occupancy levels above 97%.
- Office markets remain more nuanced, with a valuation gap in the German market separating buyers and sellers – especially for transactions above €50 million. However, we believe that high-quality office assets in prime locations with gross initial yields of around 4.5%-5.5% are available. In addition, prime rents in top European gateway cities continue to rise. Investors should focus on high-quality assets or those that can be refurbished or repositioned to derive in-demand environmental, social and governance (ESG) criteria.
Residential: A proven defensive anchor
Residential real estate continues to demonstrate its resilience. Demand for housing remains structurally strong, driven by demographic trends, urbanisation and a persistent supply shortage, particularly in Germany’s major metropolitan regions. Our 2025 review of investment opportunities found that pricing has stabilised, with average gross initial yields of around 4.0%-4.5%. While the market moved sideways in 2025, signs of upward momentum are emerging, primarily driven by strong rental growth in top locations. Looking ahead, we expect the German housing market to continue to recover, rents to rise, and institutional investors to increasingly return to the transaction market.
A protected niche: European luxury high street
Opportunities are emerging for investors seeking to expand their portfolio over the whole established European market. The luxury high street retail market especially is regaining momentum, with prime rents in key gateway cities such as Paris, London and Milan exceeding pre-pandemic levels. Iconic luxury locations like Passeig de Gràcia in Barcelona, Via Condotti in Rome, and Avenue Montaigne in Paris, benefit from limited supply and competition among international brands. Around 40%-45% of Europe’s prime shopping streets have recorded year-on-year rental growth, driven predominantly by premium and luxury occupiers. Vacancy on ultra-prime streets is close to zero, while average high street vacancy rates have fallen back to 3%-4%.
This makes luxury high street assets defensive holdings – and capital values for best-in-class properties are beginning to rise again, supported by strong rental fundamentals, scarcity of supply and long-term income security. As such they offer attractive prospects driven by demand for luxury, tourism and the lasting appeal of Europe’s most prestigious shopping destinations. A 6.0% annualised total return is expected for prime high street in Europe over the next five years.
Industrial and logistics
Real estate demand remains robust. We are seeing more regionalisation, in particular, with mid-box, modern future-proofed logistics along arterial routes proving popular, as are assets located around infrastructure nodes such as airports and ports.
Positioned for the next phase
With valuations having adjusted, yields for quality products stabilising, and rental growth gaining momentum, European real estate markets are entering a new phase. The gradual return of institutional capital signals growing confidence that the correction is largely behind us. For investors with a long-term perspective, now is the time to act – albeit selectively and with a focus on quality assets, resilient income streams and locations with sustainable demand.
