Positive sentiment in European real estate grows while challenges remain from uncertain geopolitical and economic backdrop, say PwC and the Urban Land Institute

The outlook for the European real estate market is cautiously optimistic despite growing geopolitical uncertainty and concerns about economic growth, with London, Madrid and Paris emerging as the standout performers, according to a new report by PwC and the Urban Land Institute (ULI).

The new report Emerging Trends in Real Estate® Europe 2025 by PwC and the Urban Land Institute (ULI) outlines how market players believe a new normal is emerging as valuations have come down and interest rates regain some level of predictability in a market characterised by higher inflation and interest rates, and geopolitical and economic uncertainties. 

This led to more than 80% of survey respondents expecting business confidence and profits to stay the same or rise in 2025, with around half predicting increases in both.

However, there are strong caveats to this overall optimism, and sentiment remains clouded among the 1,143 property professionals canvassed for the report. In addition to concerns about economic growth, there are fears of growing geopolitical uncertainty, with 85% citing political instability (up from 74% the year before) and 83% the conflicts in Europe and the Middle East as sources of considerable volatility.

There is recognition that European real estate sentiment is, in large part, still influenced by interest rate policies in the US and at home and shifting political order in Asia. Adopting a three-to-five-year view, some leaders believe that recovery could take longer than experts have previously predicted.

European and global economic growth are among the chief business concerns for 2025, with 77% and 62% respectively either “very” or “somewhat concerned” about these factors.

Marie Hunt, Chairperson, ULI Ireland, comments: “It is clear from this year’s report that there are signs of improvement on the horizon for the commercial real estate sector following two very challenging years. As interest rates decrease and inflationary pressures ease, there are signs of increased transactional activity and a stabilisation in values on the horizon. We are on the cusp of the next real estate cycle and respondents expect a gradual improvement in conditions over the next 3–5-year period. However, this is against a challenging geopolitical backdrop and we cannot afford to be complacent.”

Joanne Kelly, Leader, Real Estate Practice, PwC Ireland added: “In a new normal of higher interest rates, the buzz word is “operational” real estate as a route to creating value. This puts a lot of the burden of achieving growth assumptions onto the shoulders of occupiers and their ability to sustain those rent increases underpinning investment models. This may explain the elevated concerns we’ve seen in this year’s research around economic growth, European competitiveness and changing occupier demand.”

Dublin: 17th position out of 30 European cities

Dublin ranks middle of the pack at 17th position out of 30 European cities in the Emerging Trends in Real Estate 2025 report rankings for overall investment and development prospects for 2025.  This is still a positive outcome, though a reduction from 13th position last year. Aside from specific economic advantages, interviewees referenced certain infrastructure deficits and the complexity of the planning environment as important factors, however, there are proactive steps being taken by Irish policymakers in this regard. 

Joanne Kelly, Leader, PwC Ireland Real Estate Practice, said: “Provided that Ireland continues to address the infrastructural and planning issues, and ensures stability of tax policy regime, stakeholders expect that Dublin will remain a significant player in the European real estate landscape.  Dublin is in a unique position as the only English-speaking capital in the EU, with its robust economic fundamentals and a young dynamic workforce which continues to attract international businesses and investors.  By prioritising infrastructure, a more resilient and competitive real estate market should continue to grow in Dublin, fostering long term growth, positivity and stability.”

Europe continued: real estate business issues

In tandem with an uncertain geopolitical and economic landscape, real estate business issues that continue to stifle development across Europe include the impact of increased regulation, which at 74% percent now ranks as the top real estate business concern in EMEA, and construction costs and resource availability the number two concern, at 70%. 

Emerging Trends in Real Estate® Europe 2025 also reveals that reduced tenant demand remains an issue for 44% of survey respondents, although that has fallen from 48% last year, and 42% of respondents are still expecting challenges to the occupier markets, even after a three-to-five-year window of recovery.

ESG a significant challenge

This year’s survey highlights that ESG remains one of the most significant challenges for real estate both in the short and long-term, with more than 70% of respondents concerned about environmental issues in 2025, and 72% flagging this as an issue for the next five years. Many admitted they are struggling to keep competing environmental concerns top of the agenda, and the survey interviews also reveal a degree of industry ‘push back’ over ESG.

Other trending topics include artificial intelligence (AI), with nearly half of survey respondents or their companies having used AI in the past year. The vast majority expect AI and machine learning to have an impact on all areas of real estate over the next five years.

However, digital risks also constitute a major industry concern, with 59% of respondents naming cybersecurity as a top business concern, ranking fourth overall, with digital transformation (42%) and AI (35%) also among the top industry concerns. Over a five-year period, this risk rises as a priority among 63%, becoming the second most important business issue.

The availability of capital remains critical in a real estate market where investor interest is subdued following global uncertainty, the reality of a new “economic normal” and the evolving needs of real estate occupiers. Despite value falls in real estate, many institutional investors continue to contend with denominator effect issues around slower revaluation of real estate which may prevent further investment opportunities. There is also a sense among respondents that real estate investment generally still must prove its worth next to other more secure asset classes such as long-term bonds.

Sectors to watch

Among the sectors to watch, data centres ranked first in the overall investment and development prospects for European real estate, followed by new energy infrastructure, student housing and logistics. This reflects investors continuing to focus on major trends including demographics, digitisation, and decarbonisation, and a real estate industry looking to chart new horizons. However, lack of suitable stock continues to be an issue for many sectors including in logistics, storage and various forms of housing, and some are concerned that prices are inflated by over-optimistic growth assumptions. Finally, the outlook for office and retail investment remains subdued following continuing caution about the impact of structural change.

London, Madrid and Paris are top three cities for real estate investment

London and Paris continue to dominate European real estate investment, ranking first and third respectively for overall prospects for 2025. London retains the top position for a fourth consecutive year, and despite slipping to third place, Paris remains a strong market boosted by Olympic-driven investment and major infrastructure projects being planned. In the first nine months of 2024, these two cities combined accounted for 11% of total European transaction values, or around €14 billion of investment, according to data from MSCI. Madrid's rise to second place highlights the appeal of strong macroeconomic factors and quality of life.

Elsewhere in the top ten, the German cities of Munich (5), Frankfurt (8) and Hamburg (9) have all risen in the rankings, with Berlin (4) maintaining its position. Additionally, Lisbon (10) has dropped two places, though Milan (7) and Amsterdam (6) have both secured strong positions.

Financial costs of climate change

Finally, while physical climate risk and real estate’s transition to net-zero carbon emissions have proven recurring issues previously, this year’s report also examines the far-reaching implications for real estate insurance and finance from these twin challenges.

As real estate faces increased risks from the rising frequency and severity of extreme weather events alongside the transition to net zero, the impact on the industry is becoming clearer in terms of financial costs and business interruption, and nearly two-thirds of respondents expect an increase in insurance costs over the next five years. While the issues around the insurance and financing of real estate from climate risks are widely acknowledged, the report found that current levels of industry awareness and collaboration do not reflect the scale and urgency of the challenge.

Joanne Kelly concluded: “While geopolitical and economic uncertainties continue to dominate discussions, it's encouraging to see a sense of cautious optimism returning to the European real estate market. Within this however, the industry must grapple with significant challenges, from ongoing instability and regulatory burdens to ESG demands and the rise of digital risks. Success will belong to those who can adapt, innovate and embrace new technologies and sustainable practices."

ENDS

Notes to editors:

Link to 2025 Emerging Trends in Real Estate® Europe : https://www.pwc.com/gx/en/industries/financial-services/assets/emerging-trends-real-estate-2025.pdf

About the Urban Land Institute: The Urban Land Institute is a non-profit education and research institute supported by its members. Its mission is to shape the future of the built environment for transformative impact in communities worldwide.

Established in 1936, the institute has over 48,000 members worldwide representing all aspects of land use and development disciplines. In Europe ULI has almost 5,500 members across 15 National Council country networks. For more information on ULI, please visit https://europe.uli.org