Capital Markets

January 2026 Forecast

Performance driven by income and asset management

Income-led performance rather than yield compression will drive investor interest this year, while rental growth will remain the primary driver of capital value growth. Investors with higher required returns will need to be creative to unlock value, and M&A activity will continue as buyers seek to take advantage of arbitrage opportunities.

• As anticipated, income has underpinned total returns for European real estate so far this year. Rental growth has also generated capital value increases for prime assets in prime locations. Yet capital growth has been weaker than in the immediate aftermath of the market trough. While we did not expect yield compression because of elevated long-term interest rates, some sectors have seen yield expansion in certain locations during H1 2026. This reflects the further pressures on European economies and long-term interest rates because of the US-Iran conflict.
• Reflecting this, our projections for total returns in different sectors are still dominated by income returns. Our baseline scenario for European real estate suggests that a purchase this year should generate annualised net total returns of 6-8% over a five-year holding period. Leverage could enhance these returns if our baseline scenario holds and if debt costs decline but matching either value-add or opportunistic return requirements will necessitate a careful selection of locations and assets, alongside innovative asset management, in the absence of a strong and broad-based recovery in the near-term.

Growing competition in the lending market will maintain pressure on loan margins in 2026. Lenders are looking to increase origination activity, with debt available for a wide range of sectors and investment strategies. The focus on refinancing in recent years should shift to a more equal balance between refinancing and acquisition loans.

• Availability of finance for real estate remains good despite the challenges presented by the revised outlook for inflation and interest rates in Europe. Swap rates increased as market expectations of stable or falling policy rates turned to expectations of rate hikes, with the ECB raising its policy rates in June. Competition between lenders kept margins tight, but the all-in cost of debt rose in H1 2026, creating challenges for borrowers seeking to acquire or refinance real estate. However, we anticipate that debt costs will fall during H2 as the prospect of further rate hikes recedes.

• Meanwhile, lender appetite remains strong. 72% of lenders responding to our European Lender Intentions Survey still expected to increase origination activity this year, although most identified refinancing as the main source of demand for loans. Margin compression has slowed, but terms remain competitive for prime assets, with the office sector seeing notable improvement in loan terms and sentiment. This should increase market liquidity and support investment activity throughout H2 2026, as lenders look to deploy more capital to meet origination targets.

Living has cemented its position as the largest sector (by deal volume) in Europe and is expected to retain that position in 2026. Expansion of the investment market into new markets and formats leaves room for growth. €50-100m deal sizes are performing well at core yields, but larger portfolios are more challenging unless part of a privatisation strategy.

• The living sector attracted €29.9bn of investment in H1 2026, representing a 17% increase on the same period of last year, and accounting for 26% of total real estate investment in the year to date. Belgium, the Netherlands, Southern Europe, and the Nordic markets have seen a sustained increase in investment for living, while single family housing and affordable housing are gaining traction as areas for investment. We also saw an increase in the proportion of larger deals, including platform sales, despite our expectation that mid-ticket deals would dominate.

• Momentum in investment activity has been maintained despite the increase in interest rates during H1, with overall European investment volumes rising by 10% compared with H1 2025. Many institutional investors are still increasing exposure to the living sector, with the long-term investment case based on thematic drivers such as changing demographics and urbanisation. This shift is evident in our 2026 surveys of investor and lender intentions, with more respondents ranking living as their primary target for new investment or lending than any other sector. Therefore, we still expect the living sector to attract the highest share of new investment this year.

H2 2026 Outlook

Alternatives set to attract more investment capital

The real estate investment market has seen a pronounced shift in recent years, with a wider range of asset types, investment structures, and capital sources emerging. Real estate credit will continue to grow as an alternative asset class across Europe, with a rising number of non-bank lenders deploying capital allocated to this sector. Platform sales, recapitalisations, and trading in secondaries indicate a market that is now evolving to unlock capital and enable redeployment at scale after several years of reduced investment activity. Investment volumes have increased in sectors such as healthcare and data centres, which offer diversification and opportunities to benefit from structural demand drivers such as demographics and digitalisation. A record amount was invested in European healthcare last year. Although we don’t expect this figure to be surpassed in 2026, acquisitions in H1 have totalled €5.6bn. The share of alternatives (including healthcare) within investment volumes has risen to c. 12%, and we expect more growth in 2026 as real estate and infrastructure capital competes for exposure in these sectors. Nonetheless, traditional commercial and residential real estate will still see the most investment this year, and we anticipate a rebound in transaction activity during H2 that will leave annual investment volumes 0-5% up on the prior year.

Figure 3: All prime property capital value growth (%)

Investor interest in European offices is returning

Investment activity in the office market has been rising over the last three years, albeit from a low base. €22.6bn of office acquisitions were made in Europe in H1 2026, marking a 13% increase over the same period last year. Larger transactions are becoming more common. Deals over €100m accounted for 49% of total office investment for the year to date, the highest share since 2022. Cross-border acquisitions have also been rising over the last 12 months, with foreign capital continuing to take advantage of lower pricing across many of the continent’s major office markets. Improving investor and lender sentiment towards the sector has been helped by good occupational fundamentals for high-quality space. We expect sentiment to strengthen further, aided by greater availability of debt, and we expect that core-plus and value-add opportunities in major office locations will see further investor interest throughout the rest of the year.

Figure 4: European investment volume by sector