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4/4/2025
Ruben Bos
Head of Real Estate Investment Strategy
The term "pinch hitter" originates from baseball, where it refers to a substitute batter brought in to replace a regular player in a critical moment of the game. In the context of investing in European real estate, the term pinch hitter signifies a strategic pivot in response to market changes. Much like a baseball manager substituting a pinch hitter to seize an opportunity at a crucial time. Moreover, being a "pinch hitter" in the investment world emphasizes the importance of having a diverse portfolio. It is widely known that Europe is forecasted to exhibit modest economic growth. However, from a real estate perspective, Europe benefits from historically lower supply levels, lower land availability and stricter planning regulations, resulting in structurally lower vacancy rates. Countries such as the United States and Australia are experiencing much higher economic growth, driving demand for real estate. This is often coupled with a higher supply response, especially compared to Europe. Understanding these differences is crucial for investors seeking to navigate the nuances of each market and capitalize on opportunities.
Now, in our view, it becomes evident that this is a good time to focus our attention on the European real estate market, bringing in the “pinch hitter”. Europe is entering a promising new chapter, with robust occupier fundamentals, limited new supply, stabilized yields, increasing liquidity and an easing interest rate environment. We believe the year 2025 is set to be a standout vintage year in European real estate. European real estate, with its intrinsic benefits of diversification, stable income, could potentially lead to attractive risk-adjusted returns. Real estate also stands Real estate also stands out for its potential to foster positive impacts, such as the development of green(er) buildings and the provision of affordable housing. Also central to the attractiveness of Europe's real estate market are several key structural drivers, such as acute housing shortages, student mobility, ageing population, and increased healthcare and defense spending.
As we look ahead, it’s clear that Europe is on a path toward subdued economics growth, likely falling behind other major developed economies. The persistence of elevated energy prices creates enduring challenges, particularly for large industrial nations. Moreover, with an aging population, demographic trends could further limit the growth potential in the decade to come. But if we look beyond the headlines, a brighter outlook emerges. Higher European defence spending will likely boost economic growth over the next five year. But more importantly, fiscal policy is set to play a more pivotal role in Europe. Several European countries benefit from a relatively low level of public debt[1], including Denmark (32%), Sweden (32%), the Netherlands (43%) and Germany (62%) – compared to 125% in the United States[2]. European countries also benefit from lower a lower fiscal balance (-2.8% for the Eurozone vs. -6.9% in the U.S.[3]). The fiscal spending power could unlock further growth. For example, Germany recently proposed a €500bn fund for investment in infrastructure, financed by additional government borrowing. This would position Germany favourably for economic stability and ability to invest into growth sectors. European equity markets rallied in the first three months of 2025, suggesting renewed investor confidence and equity investors desire to diversify their holdings.
While Europe faces a slow growth outlook on a national level, key cities are displaying a much more promising trajectory, underscoring their resilience and vitality. These urban centres are thriving due to ongoing urbanization and the presence of fast-growing, high-productivity companies that appeal to a young, dynamic population. Europe's gateway cities—such as London, Berlin, and Amsterdam—are emerging as premier destinations for young professionals, high-productivity businesses, and rapidly growing companies. Over the next decade, these key cities are projected to see an impressive 8% growth in their working-age population, while the rest of Europe faces a 3% decline[4]. This compares to an average decline of 6% in Boston, Chicago and New York[5].
Inflation is broadly under control in Europe as Central Banks implemented interest rate hikes to manage the money supply and curb spending. Interest rate cuts are now well underway across Europe, providing tailwinds for the real estate industry. The outlook for modest economic growth driven by the challenges of an ageing population and diminishing productivity growth suggests a lower "neutral rate," particularly when compared to the higher-growth U.S. For example, the European Central Bank has cut interest rates by 150 basis points since its peak of 4% in 2023. This sets the stage for European real estate markets to benefit from potential yield compression, unlocking potential for investors. The strong correlation between real estate returns and interest rates further underscores the opportunities present in this sector.
Gross government debt (as a % of GDP) Maastricht definition, Oxford Economics, March 2025
DWS Macro and Market View, February 2025
2024 actual. DWS Strategic CIO View, March 2025
Oxford Economics, March 2025
Moody’s Analytics, March 2025
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