The outlook for the European investment market in the second half of 2025 is cautiously positive. Despite ongoing geopolitical tensions, a stronger performance is anticipated across most European countries
European economy’s path forward: steady but uncertain
Economic activity indicators remain mixed. The eurozone manufacturing PMI edged up to 49.5 in June, indicating that the sector is still contracting, albeit at a slightly slower pace than before. Spain continues to stand out as a positive exception, buoyed by strong orders and confidence, while Germany and Italy face stagnation or decline. Meanwhile, June’s Economic Sentiment Indicator (ESI) dropped to 94, marking a noticeable deterioration in business confidence, largely driven by concerns around capital goods and export orders.
On the inflation front, the outlook is relatively stable. Core inflation remained steady at 2.3%, with a marginal uptick in services inflation offset by further declines in non-energy goods. Falling oil prices, easing wage growth, and a stronger euro are expected to keep cost pressures in check. Crucially, inflation expectations, both in the short and medium term, have fallen sharply. Consumers now expect inflation to remain low, and businesses, particularly in the industrial sector, are reporting declining price expectations, reinforcing the case for further European Central Bank (ECB) rate cuts later this year.
Despite these favourable inflation dynamics, credit conditions remain tight. The recovery in bank lending has lost steam, with May figures showing the weakest growth in household loans since late 2024 and a broad-based decline in business lending. Lending for house purchases is still growing, but slowly, as higher long-term rates and elevated property prices act as constraints. This confirms that monetary transmission is still impaired and that credit will not be a significant driver of growth in the short term.
Europe’s recovery trajectory remains fragile, constrained by persistent global geopolitical uncertainty, structural credit limitations, and an investment cycle dampened by caution
Lydia Brissy, Director, European Research
Trade tensions are now casting a long shadow over the region’s investment outlook. The threat of sweeping US tariffs on EU goods has reintroduced significant uncertainty, just as industrial sentiment was beginning to stabilise. Capital goods orders have declined significantly, indicating that many firms are opting to defer investment decisions. France, in particular, saw a sharp fall in business confidence, with its ESI returning to levels not seen since 2020. Only Italy’s sentiment index held steady, while Spain’s stronger retail and consumption data indicate resilience in domestic demand.
This geopolitical uncertainty comes at a sensitive moment for the ECB. While the June rate cut brought policy closer to neutral, policymakers are signalling a pause in July, citing ongoing volatility and the need for more data. A further cut is likely in September if disinflation continues and growth remains tepid. But the risks to growth are now tilting to the downside, with external trade likely to act as a drag rather than a driver, particularly if US tariffs materialise.
Oxford Economics now anticipates modest GDP growth for the EU-27 and the eurozone, projecting 1.2% and 1.1%, respectively, in 2025, with a slight easing to 1.0% and 0.8% in 2026. A mild rebound is expected in 2027, with growth forecasts rising to 1.8% for the EU-27 and 1.7% for the eurozone. However, Europe’s recovery trajectory remains fragile, constrained by persistent global geopolitical uncertainty, structural credit limitations, and an investment cycle dampened by caution.
Q2: A quarter in two acts
European real estate investment continued to show resilience in Q2 2025, with preliminary figures indicating transaction volumes of nearly €50 billion, representing an 8% year-on-year (YoY) increase. This follows a 13% uplift recorded in Q1, bringing total investment for the first half of the year to nearly €95 billion, up by almost 11% compared to H1 2024.
Q2 unfolded in two distinct phases. The start of the quarter was marked by a noticeable slowdown in investment activity in several countries, as investors adopted a wait-and-see attitude in the run-up to and during ’Liberation Day’. This temporary caution delayed decisions and held back volumes. However, signs of recovery emerged following President Trump’s tariff announcements, with activity gradually returning to pre-Liberation Day levels. Several large deals and portfolios have since entered the market, helping to boost confidence. This notably includes the large Assura healthcare property portfolio in the UK, which is set to be acquired in Q3 for £1.7 billion by KKR and Stonepeak, as well as the Centre Trocadéro in Paris, being sold by Union Investment for a figure thought to be in the region of €700 million, which attracted interest from 12 major institutional bidders such as Blackstone, Tishman Speyer and Hines.
Most countries are on track to post YoY gains in investment volumes for the first half of 2025, with a few exceptions including Norway, the UK, and Austria. However, the pace and scale of recovery vary widely. Germany, for instance, recorded its weakest quarter since 2010, but a notable increase in deals under negotiation and narrowing pricing gaps between buyers and sellers are generating cautious optimism. In France, a similar trend is unfolding, with momentum slowly building, driven largely by sizeable office and retail transactions in prime locations. Spain, Italy, and the Netherlands are likely to post a more solid rebound in H1, supported by sound occupier fundamentals and a return of investor appetite, particularly from domestic private capital.
Across the region, private and domestic players remain the most active, benefiting from greater flexibility and limited exposure to financing constraints. Institutional capital, while gradually re-emerging, remains highly selective and is largely waiting for greater clarity around pricing and yields before re-engaging at scale, though some notable exceptions have started to re-enter the market. In the UK, overseas investors from the Middle East, Asia (notably Japan), and the US are beginning to return, encouraged by attractive yields and renewed confidence in the market’s relative stability. That said, so far, transaction volumes remain muted.
Among sectors, purpose-built student accommodation (PBSA) stands out as particularly popular across Europe. Large portfolio deals are either in progress or nearing completion in markets such as France, Spain, Italy and the Baltic region. The sector continues to benefit from strong occupier demand and investor interest in operational residential assets, although limited supply in some markets remains a hurdle.
Retail and hotel assets are outperforming earlier expectations. Shopping centres and grocery-anchored retail have demonstrated solid performance in countries such as Spain, the Netherlands, and Hungary. Hotels are also enjoying continued investor interest, supported by the rebound in tourism and long-term confidence in leisure travel. In both sectors, clearer post-pandemic trajectories have helped reignite investor interest.
In logistics, investor interest is holding up but is increasingly selective. Core locations with long leases and high-quality tenants continue to attract capital, particularly in markets such as the Netherlands. Yet challenges such as grid congestion and tighter access to development finance are slowing speculative activity.
The office sector continues to face uncertainty. In core markets like France and the UK, a few notable deals and growing interest in value-add strategies indicate a tentative revival, albeit one that remains narrowly concentrated in central, prime locations. Elsewhere, while statistics still point to low liquidity, there are signs of improving clarity on pricing, a growing number of sales pitches, and a tentative return of institutional interest, all suggesting a gradual rebuilding of market confidence.
Progress on the horizon
The outlook for the European investment market in the second half of 2025 is cautiously positive. Despite ongoing geopolitical tensions and a muted Q2 performance, most European countries anticipate a stronger second half. Encouraging signs include a growing number of large assets and portfolios returning to the market, which appear to be attracting renewed interest from investors.
As a result, investment activity is expected to pick up again, albeit gradually. Our forecasts remain largely unchanged from last quarter, with total investment volumes projected to reach €222 billion by year-end, marking a 12% YoY increase. Growth is expected to be driven primarily by markets such as the Czech Republic, Finland, Denmark, the Netherlands, and Belgium, while the traditional core countries are likely to lag behind. This modest recovery will be underpinned by continued macroeconomic stabilisation, ongoing price adjustments, and the progressive return of core capital to mainstream sectors.
For the following years, we anticipate investment volumes forecast to rise by 19% in 2026 and a further 15% in 2027.
Yields: still waiting for the turn
Anticipated yield compression did not materialise in Q2 as expected at the beginning of the year. Instead, prime yields remained flat across virtually all sectors and nearly all European jurisdictions. This stability reflects two key factors: first, the ECB’s eight consecutive rate cuts over the past year, from 4% to 2%, have not fully translated into improved financing conditions or lower yields as initially expected. Second, the ongoing lack of transaction activity continues to mute pricing movements and delay any market repricing.
Hence, we expect European average prime yields to have remained in line with the previous quarter, around 5.0% for both logistics and CBD offices, 6.15% for shopping centres, 5.85% for retail warehouses, and 4.3% for prime high street retail.
Looking ahead, as investor confidence gradually returns and activity picks up, a slow and selective compression of prime yields is expected to emerge in the second half of the year, progressively extending across asset classes and European markets.