LaSalle’s ISA Outlook 2025: A new dawn for European real estate

London (November 27, 2024) –Europe’s real estate cycle has reached a new dawn, following a deep capital market correction over recent years, according to the European chapter of the ISA Outlook 2025 report published by global real estate investment manager LaSalle Investment Management (“LaSalle”).

Last year’s ISA Outlook described the beginning of adjustment to the new reality of higher interest rates and challenging macroeconomic conditions. As we approach a new year, the latest ISA Outlook describes how market evidence is crossing thresholds that point to a new cycle. For example, data tracked by LaSalle’s asset managers show, from January 2024 to date, rents for new commercial leases across LaSalle’s European portfolio grew 2.7% relative to expiring passing rent, representing a return to an above-inflation pace.

LaSalle estimates that expected go-forward returns for the overall European property market are at their highest level in a decade. As capital slowly returns to the market and yield spreads exceed long-term averages, the real estate outlook has diverged from the region’s weak pace of economic growth due to a combination of supply barriers and asset quality polarisation.

This year’s report identifies strategic themes for investment in European real estate, which earn the region’s real estate assets an important place in investors’ property portfolios.

Beyond beds and sheds
A laser focus on “beds and sheds” has become a market consensus portfolio theme for many real estate investors, yet it is now becoming too simplistic to capture the more complex dynamics of the market.

Today’s ISA Outlook 2025 report uses fair value analysis to zero in on the best opportunities across a range of real estate capital and debt strategies and asset classes. These span all property types – not for the sake of diversification – but because we believe there are specific compelling opportunities that span across property types.

The European chapter of ISA Outlook 2025’s five strategic themes:

• Don’t forget a (real estate debt) umbrella: Real estate debt strategies can guard against inclement market conditions. New performance data for European debt funds shows the benefits of preparedness. Debt investors are also taking advantage of the choice between fixed-rate and floating-rate lending positions, and the diversification benefits of investing in both.
• Follow the hexagons for logistics: In our Paths of Distribution Score, we have mapped Europe into 158,455 hexagons – scoring each on their centrality, from an occupier perspective, for distributing goods to the most consumers at the lowest cost – and we favour logistics strategies that focus on the top-scoring hexagons within the highest ranked markets in our fair value analysis (in France, the Netherland and Germany).
• Retail back on the menu: European retail has been through a deep reset, and select retail formats now look too attractive to ignore. Outlet centres in the UK and Northern Europe offer strong alignment between tenants and operators, while Spanish and French retail parks and convenience shopping centres in the Netherlands can also deliver high income returns.
• Master adapters – how Europe’s office markets are different: Europe is leading the office market’s adaptation to hybrid work, as their largely mixed-use, mid-rise character, creates distinctive opportunities. A rebalanced office sector is not a distant next buyer prospect for many of Europe’s markets – it’s happening now. This is evident in return-to-office figures as well as property fundamentals. London City office market vacancy has now declined for five consecutive quarters, driving prime rent growth.
• A residential and living smörgåsbord: European residential (or living) is not really a single property type, it is a large collection of sub-sectors with widely varying cash flow profiles, pricing, regulation and target occupiers. There continue to be opportunities, but sector selection is paramount, with PBSA standing out in Spain and Germany.

Global uncertainty but clear opportunities

The European ISA Outlook forms part of LaSalle’s Global ISA Outlook, which finds that the new dawn extends across real estate around the world.

Greater clarity on the direction of interest rates around the world should help drive healing of the capital markets in 2025, with hesitant sellers gaining confidence as pricing starts to come in closer to their expectations.

There have, of course, been significant political developments in the US in recent weeks. The Global ISA Outlook reflects on how the “Red Sweep” may affect the real estate investment outlook and the shape of the dawning cycle, with signals pointing towards marginally higher growth, inflation and rates, but no great change in the overall outlook. LaSalle expects that the US economy remains on track for a soft landing. Equally, the European ISA Outlook considers the potential impact of the US Election in Europe, recognising that a stronger dollar could result in a possible boost in student demand for housing and tourist demand for hotel rooms.

The Global ISA Outlook also identifies areas of concern, with China a significant ‘soft spot’ due to a combination of generationally low growth and liquidity alongside weak property fundamentals. The Chinese government has made significant interventions to shore up the economy, and in recent weeks further stimulus has been implemented to guard against the potential onset of US tariffs on Chinese goods. These factors mean that China is something of a unique case in the ISA Outlook, with less applicability of global trends. Similarly, the Japanese market is experiencing a different cycle to the rest of the world. Japan is in the process of exiting a long period of deflationary risk and rock-bottom rates, so unlike other countries, monetary policy in Japan has a modest tightening bias.

Dan Mahoney, Head of European Research and Strategy at LaSalle, said: “We are seeing a new cycle dawning for Europe’s real estate markets. Today’s Europe ISA Outlook delves into why we believe we are entering a new cycle, evidence of data thresholds crossed, and our strategy for the years ahead. These go beyond simple ‘beds and sheds’ – which is too simplistic to capture the complexity of European real estate today.”

Brian Klinksiek, Global Head of Research and Strategy at LaSalle, added: “Global real estate sentiment is gradually improving following a long period of negativity and signs are pointing to the beginning of a new real estate cycle. History has shown that investing early in a cycle tends to lead to relatively strong performance. There are, however, still risks on the horizon, and investors are advised to focus on diversified strategies that are flexible and broad enough to adapt to a complex and evolving relative value landscape. A comprehensive look at value across a wide range of sectors and markets will be required to build a well-positioned real estate portfolio.”

Ends

About LaSalle Investment Management | Investing Today. For Tomorrow.

LaSalle Investment Management is one of the world’s leading real estate investment managers. On a global basis, LaSalle manages US$88.2 billion of assets in private and public real estate equity and debt investments as of Q3 2024. LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles, including separate accounts, open- and closed-end funds, public securities and entity-level investments.

For more information, please visit www.lasalle.com, and LinkedIn.

NOTE: This information discussed above is based on the market analysis and expectations of LaSalle and should not be relied upon by the reader as research or investment advice regarding LaSalle funds or any issuer or security in particular. The information presented herein is for illustrative and educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy in any jurisdiction where prohibited by law or where contrary to local law or regulation. Any such offer to invest, if made, will only be made to certain qualified investors by means of a private placement memorandum or applicable offering document and in accordance with applicable laws and regulations. Past performance is not indicative of future results, nor should any statements herein be construed as a prediction or guarantee of future results.