ECB rate cuts also ease European real estate debt

Three rate cuts by the ECB eased the burden of real estate debt. According to the latest Aew Research 2025 Outlook, real estate debt in Europe for 2025-27 has been reduced: from EUR 99 billion, forecast last year, for 2024-26) to EUR 86 billion for 2025-27 . In this context, the refinancing deficit (that part of real estate debt that is difficult to refinance) is now estimated at 13% for the next three years, down from 17% last year. Secured office loans account for 44% of the EUR 86bn debt in 20 countries, followed by retail at 21%, residential at 20% and, for another 15%, other sectors.

"Germany," explained Hans Vrensen,head of research & strategy Europe at Aew, passing through Milan, "confirms itself as a major 'sick person' and continues to rank first with 31 billion euro debt and a difficult-to-refinance share of 19% of total loans in 2016-23. This is the highest share. France follows, with 17 billion and 18% of loans that are difficult to refinance. Italy and Spain's figures are just below the average, at 12%. Like last year, the UK is in the lowest bracket with a debt of only 10 billion and just 6 per cent of loans at risk.

For Aew, the strong repricing of the past two years and the fall in rates that is restoring lending will result in an increase in investments. 'We estimate European real estate transaction volumes in 2024 and 2025,' Vrensen added, 'to be EUR 170bn and EUR 200bn respectively across all asset classes, up from EUR 150bn in 2023, as supply-demand spreads are narrowing. Alternative sectors have increased their share of total European transaction volume to a record 18% of volumes'. The vacancy rate in Europe has declined since after covid for all asset classes (around 3%) except for offices, which have risen from 5% at the end of 2019 to 9% today.

"Here the gap between new developments and outdated offices (which are emptying out and no longer have a market) has increased a lot. The outlook,' according to Vrensen, 'is that vacancy will fall to 6.8 per cent by 2029, however, due to a slowdown in new developments (in recent years) and thus from a shortage of new product on the market, together with the conversion of obsolete offices to other functions, which should therefore decrease the current office space'.

'Europe,' Vrensen further explains, 'remains a stable and attractive market for investors. The average total return on prime investments in Europe (which adds up to annual returns and capital value) is 9.2% per annum, with class A offices at the top, at 10.9% per annum for the next five years (slightly lower at 9% in Italy), in the wake of price revisions, improved rental growth forecasts, and falling yields. The highest performance is expected in France and Benelux, ahead of the UK'. Over the next five years, Italy is expected to outperform the European average in returns on logistics (10.2 per cent per year versus around 9 per cent in Europe), shopping centres (9.7 per cent versus 9 per cent) and residential (just above and just below 8 per cent).