• AEW’s base case projection for prime European real estate returns is at 8.1% p.a. over next five years, driven by solid current income and rental growth
• European real estate recovery is expected to remain on track with estimated prime returns of 7.0% p.a. in AEW’s downside scenario, which has become more relevant following threat of higher US tariffs
• Prime European real estate investment should provide relative stability compared to other asset types

AEW, one of the world’s largest real estate investment and asset managers¹, today releases its 2025 Mid-Year European Outlook, which examines the potential impact of US tariffs on prime real estate sectors and markets.

AEW’s 2025-2029 base case projection for prime real estate returns across all European markets is 8.1% p.a., down from 9.2% p.a. in September 2024. This latest base case forecast is based on macroeconomic forecasts that factor in the impact of 10% US tariffs. However, recent announcements on potentially higher tariffs have triggered a new record level of global trade policy uncertainty. Planned US tariffs are expected to lead to lower GDP growth across Europe, higher inflation and bond yields, assuming they are still in place after the 90-day pause. As a result, AEW’s downside scenario has become more relevant, in which case the sector’s recovery is expected to remain on track with prime returns estimated at 7.0% p.a. for 2025-29.   

In the base case scenario, the UK is projected to deliver the highest 2025-29 prime return of 9.8% p.a., followed by Benelux and CEE markets. In line with AEW’s 2025 European Annual Outlook, US tariffs are unlikely to change the projection that prime office markets will generate the highest 2025-29 returns of any sector at 9.5% p.a.

Hans Vrensen, Head of Research & Strategy Europe at AEW, commented: “While the situation is evolving, if higher than expected US tariffs are confirmed, our downside scenario becomes more relevant. Regardless, our projected outlook for prime European real estate returns across all sectors is that they remain resilient. In effect, we expect any impact on returns from tariffs to be mitigated by solid current income and rental growth prospects. In the context of wider financial market volatility, prime European real estate investment should prove to be a safe haven relative to other asset types such as stocks and bonds. Despite the uncertainty on tariffs, we expect that the European real estate recovery will remain on track and investor sentiment and liquidity will continue to improve after the significant 2022-24 re-pricing.”

US tariff uncertainty increases geopolitical and macroeconomic risks

Recent announcements on expected US trade tariffs have increased trade policy uncertainty. Once higher tariffs are confirmed, the long-term impact on bond yields is unclear since fewer policy rate cuts are more likely as inflation increases. Tariffs are expected to decrease trade, aggregate demand and consequently the output and investments in the directly affected and adjacent industries, as well as increase the risk of global supply chain disruption.

Limited supply in prime real estate sectors continues to support rental growth

AEW’s latest 2025-29 base case forecast for prime rental growth across all sectors comes in at 2.0% p.a., a modest downgrade from 2.1% in its September 2024 base case projections. Residential takes the top spot with an above average 3.1% p.a. prime rental growth over the period due to a downward revision of the supply of new residential units which is anticipated to amplify existing shortages.  

Average rental growth across all prime sectors ranges from 1.7% p.a. and 2.2% p.a. for the downside and upside scenarios respectively. Prime shopping centres and high street retail have projected base case rental growth of 0.9% and 1.0% p.a. for 2025-29, respectively. Prime office rents are forecast to experience growth of over 2.6% p.a., coming in second position across sectors. As before, secondary rents remain under pressure as many occupiers prefer prime offices.

Strong investment sentiment and transaction volumes pick up

Evidence suggests retail and office-focused manager sentiment has recently turned positive following the strong momentum seen earlier in both residential and industrial. Variation in sentiment across sectors has narrowed mostly due to the long overdue improvement in retail. Past changes in managers sentiment can be tied to actual transaction volumes across European markets². Based on this improved sentiment, AEW expects 2025 deal volumes to recover. Given the significant repricing and improving investor sentiment, for full year 2025 AEW estimates €200bn in investment volumes.