(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).)
This report does not constitute a rating action.
Key Takeaways
- High real interest rates, volatile construction costs, and a potential increase in investors' risk aversion because of recent shifts in U.S. tariffs could slow the recovery in European real estate values.
- However, the current conditions hardly affect European real estate investment trusts' (REITs') access to financing, at least for now. Additionally, more capital could be allocated to European real estate, which is seen as a safe haven, compared with the U.S. Moreover, REITs' property yields have largely expanded over the past two years.
- Therefore, we continue to expect flat valuations over 2025-2026, unless interest rates were to increase significantly above the peak level from October 2023, without being offset by higher cash flows.
- We might reconsider our revenue growth assumptions if macroeconomic or global trade conditions deteriorated significantly. Albeit lower than over 2023-2024, our current revenue growth expectations are positive for all property segments, except for non-prime office.
We expect our revised macro revisions will have limited negative effects on European REITs.
On May 1, 2025, we updated our baseline macroeconomic scenario for the eurozone to incorporate lower inflation over 2025-2026 due to a stronger-than-expected appreciation of the euro and declining oil prices. We do not expect inflation to decline below the European Central Bank's (ECB's) 2% target, because fiscal stimulus will coincide with a tight labor market, which will support price pressures.
We now forecast that the ECB will cut rates in June this year, with the deposit rate reaching 2.00%. We do not expect another rate cut before the end of 2026. If economic growth surpasses potential growth and labor market resilience persists, the ECB could raise rates again in the first half of 2027, with the deposit rate increasing to 2.50% by the end of 2027. We expect German 10-year government bond yields will remain higher than we had previously forecast, at 2.50% in 2025 and 2.60% over 2026-2027.
Volatile real interest rates make it more difficult to forecast property valuations.
Uncertainty about political and geopolitical developments can increase volatility in government bond yields. Real estate valuations are hard to predict in a volatile rate environment, because they are generally reported semiannually and the risk-free rate is based on government bond yields.
Higher rates are unfavorable for REITs. This is particularly the case in a low-inflation environment, as low indexation provides limited support for rental growth. Low-yield assets, such as residential assets, are generally disproportionately affected because their risk premiums--the difference between the risk-free rate and property yields--are tighter and their capacity to increase rents is more limited than some other asset classes.
The price volatility of raw materials might slightly affect construction costs and property valuations.
Since March 2025, the prices of several raw materials that are used in construction--including aluminum, steel, and copper--have been volatile. While an increase in construction costs could harm real estate companies that heavily invest in development projects, it might also inflate replacement costs and, with that, valuations of their existing assets.
Five Reasons For Flat Valuations In 2025
Despite our expectations of more elevated long rates than we had previously forecast, we continue to assume that valuations in 2025 will remain flat across all property segments, apart from non-prime office.
REIT yields have expanded already.
Since June 30, 2022, REIT yields have increased by an average of close to 100 basis points. Some segments, including prime retail and prime offices, experienced a slight yield compression in late 2024 and at the beginning of 2025.
Government bond yields remain below the 2023 peak.
Even though government bond yields have increased year to date, they have not yet surpassed the peak from October 2023. We expect German 10-year government bond yield will remain at 2.50%-2.60% until 2027, which is still below the 3.00% peak in 2023.
Rental growth is robust.
We expect rent increases in 2025 will remain healthy across most asset classes, supported by low supply and the fact that indexation declines at a slower pace than inflation. This is because indexation for the year ahead is determined at the beginning of each year. We also forecast that rent increases will gradually normalize toward the end of this year. This should help mitigate a potential rebound in capitalization rates that could affect valuations.
Funding remains available.
Volume of bond issuances has picked up in 2024. REITs' credit spreads remain tight and are hardly affected by the current conditions. This stands in stark contrast to 2022-2023, when the bond market was not accessible to European REITs. Bank lending conditions and REITs' equity prices improved, while REITs' share price discounts to net asset value significantly narrowed.
Investments are slowly recovering.
Transaction activity is resuming gradually and direct investments into European commercial real estate (CRE) have been recovering since January 2024. According to JLL Research, quarter-over-quarter investments accelerated by 40% in the fourth quarter of 2024, while real estate services company Savills suggests that year-over-year investments increased by 25% in the first quarter of 2025.
Investors' increasing focus on European real estate could mitigate the negative effects of geopolitical tensions on the transactions recovery.
More capital allocations in Europe could offset lower U.S. investments. The risk aversion of investors, notably large CRE investors from the U.S. who are traditionally active in Europe, could delay the recovery in transaction volumes. Transaction activity is an important consideration for real estate companies as it sets a benchmark for their portfolio valuations, which, in turn, affect their loan-to-value ratios.
In general, political and geopolitical tensions lead to a sharp decline in CRE investments (see "Real Estate Brief: How Political And Geopolitical Risks Could Affect European Commercial Real Estate," published Dec. 18, 2024). However, the CRE market in Europe could represent a safe haven for investors because trade policy uncertainty in Europe is currently lower than in the U.S.
Related Research
- Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth, May 1, 2025
- Industry Credit Outlook 2025: Real Estate, Jan. 14, 2025
- Real Estate Brief: How Political And Geopolitical Risks Could Affect European Commercial Real Estate, Dec. 18, 2024
| Primary Contact: | Franck Delage, Paris 33-14-420-6778; franck.delage@spglobal.com |
| Secondary Contacts: | Nicole Reinhardt, Frankfurt 49-693-399-9303; nicole.reinhardt@spglobal.com |
| Marie-Aude Vialle, Paris 33-6-15-66-90-56; marie-aude.vialle@spglobal.com |
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