European REITs: Quick to price in a correction, slow to price in a recovery

European listed real estate posted a respectable gain of close to 10% in the first half of 2025.¹ Notably, the sector went from being the weakest part of the European equity market in early March following a negative reaction to the German fiscal bazooka and higher Bund yields, to the strongest in Q2. The asset class outperformed following President Trump’s ‘Liberation Day’ on 2 April, as investors sought the relative stability and defensive characteristics offered by real estate cash flows in a less predictable economic backdrop (see Figure 1). That the sector has kept pace with wider equity markets, while offering diversification, offers a reminder of the case for a real estate allocation.

Zooming further out, we’d remind investors that European real estate investment trusts (REITs) were quick to price in a correction in real estate values when reacting to higher rates in 2022. The sector has tentatively been in a period of recovery since late 2023 as central banks pivoted and credit markets reopened (Figure 2).

That the equity market recovery has been so fragile, reflects both a less certain macro backdrop, but also a degree of scepticism on real estate fundamentals and values. This to us, is continuing to create opportunities for investors to boost their real estate returns in the years ahead through public markets, where we expect a continued re-pricing of the sector’s multiples to enhance underlying income and income growth-led real estate returns.

Healthy M&A activity reflects the value in European REITs today

Highlighting this value opportunity, a notable feature in the European REIT sector this year has been increased merger and acquisition (M&A) activity. We’ve seen private equity bids for several UK REITs, including healthcare-focused Assura (£1.8 billion market cap) and logistics focused Warehouse REIT (£485 million market cap). Bid premiums of circa 35-40% highlight the discounted valuation of the public real estate wrapper versus the true value of the underlying assets. ²

Sector consolidation is also increasing, with continental healthcare landlords Aedifica and Cofinimmo proposing a merger that could create a sector champion in Europe and has the potential to drive incremental earnings growth. A shrinking in the number of European REITs, leaving fewer, larger, more efficient and hopefully higher-rated companies we think is part of the necessary evolution of the sector as we look to learn lessons from the more established (and historically stronger performing) US REIT sector.

Improving growth prospects married with strong fundamentals

We expect real estate fundamentals to remain on a gradually improving path from here. Figure 3 illustrates Green Street Advisors’ positive outlook on REITs, with rental growth forecasted across key real estate sectors in 2025 through to 2029, including best-in-class Retail and Office. We have seen more evidence from recent company reporting, which demonstrates the ability of REITs to benefit from supply constrained markets. Rising interest rates and construction costs have resulted in significantly lower levels of new construction in most sector and markets.

The more positive outlook for European REITs is likely to drive a continued valuation recovery and provide a platform for companies to continue to grow earnings and dividends, this potential does not seem to be reflected in today’s valuations (Figure 4).

There are opportunities in companies that are able to create value above and beyond a market recovery. Merlin Properties in Spain is building out a valuable data centre pipeline in the well-connected Iberian markets. Likewise, Central and Eastern Europe focused industrial/logistics landlord CTP is looking to generate double digit-value growth through its development activities in a market seeing significant tailwinds from near-shoring trends, with more than 20% of its recent leasing activity being to Asian clients ‘producing in Europe for Europe’.³ We also see value in turnaround stories. Retail landlords Unibail-Rodamco-Westfield and Hammerson have repaired their balance sheets, with the businesses once again looking for growth opportunities.

So, where do we go from here?

We look ahead with confidence that the REIT sector is on a firmer footing and offers both value and growth potential for investors. We reiterate our three key messages:

1. Valuations have reset and are now recovering – but this is yet to be fully factored into REIT pricing.
2. Operational performance of most REITs businesses remains robust, with continuing rental growth for best-in-class assets. This is likely to be supported by muted new construction activity in the years ahead.
3. REITs are once more positioning for growth, seeking opportunities to deploy capital accretively and to leverage their strong operational platforms.

The first half of 2025 reminds us that portfolio diversification remains important, and we believe REITs can have a role to play here. The rise of M&A activity in the European listed sector is notable and highlights the value that we see in many parts of the market. While private assets may be en vogue, the fact that many private asset owners are turning to public REIT markets to deploy their capital, even at significant premiums, highlights the attractive opportunities on offer today for long-term investors.

IMPORTANT INFORMATION

REITs or Real Estate Investment Trusts invest in real estate, through direct ownership of property assets, property shares or mortgages. As they are listed on a stock exchange, REITs are usually highly liquid and trade like shares.

Real estate securities, including Real Estate Investment Trusts (REITs), are sensitive to changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, supply and demand, and the management skill and creditworthiness of the company. Additionally, REITs could fail to qualify for certain tax-benefits or registration exemptions which could produce adverse economic consequences.