European Real Estate May Face Headwinds in 2025

European real estate sector is likely to face headwinds due to global political instability, sluggish European economic growth and increased regulation in 2025, a latest study by PwC revealed.

The study entitled “Emerging Trends in Real Estate 2025,” which is published annually by PwC in cooperation with the Urban Land Institute (ULI) in Austria, highlighted most important challenges and trends of over 1,100 surveyed real estate professionals from across Europe, including investors, developers, lenders and consultants.

As many as 85% of respondents said that political instability at the international level currently represents the greatest challenge for the real estate sector, followed by fragile European economic growth (77%) and increased regulation (74%).

However, captains of the European real estate industry are taking comfort from a more favourable interest rate environment than in previous years.

Marius Richter, Real Estate Leader at PwC Austria, said that the storm clouds of higher interest rates and inflation have subsided. However, concerns about geopolitical issues in connection with economic growth are now increasingly coming into focus.

“Despite challenges, the mood in the real estate industry is more positive than last year. There is cautious optimism. However, the market recovery could only progress gradually and slowly,” he said while summarising the current situation on the European real estate market.

Against the backdrop of economic uncertainty, investors are increasingly turning their attention to alternative sectors such as data centers, modern energy infrastructures or logistics centers, which are characterised by a high level of resilience to economic fluctuations.

Birgit Kraml, Chair of the ULI Austria and Partner at DLA Piper, said that the increased focus on alternative sectors such as data centers and new energy infrastructures were underlining investors’ goal of investing in future-proof areas.

These segments not only offer promising returns, but also promote digital transformation and sustainable development – a decisive advantage for long-term investment strategies, she said.

Vienna Gaining Ground

As in previous years, the study included a ranking based on the assessment of the real estate managers surveyed on the most attractive European investment locations. Among other things, the future prospects of the cities in terms of returns and development are taken into account.

Among the European cities, London is leading the trio of top European investment locations followed by Madrid and Paris. Vienna ranks 13th, improving by two places compared to the previous year.

“This is proof that investors are still focusing on locations that offer long-term stability despite economic uncertainty. This stability is also due to the low vacancy rate and strong demand for office space,” the study said.

Importance of ESG and AI

ESG will remain a key pillar of investment strategy for the coming decades as the respondents among the European real estate experts continued to consider ESG issues to be among the most important factors influencing the real estate market.

At the same time, artificial intelligence (AI) is becoming increasingly relevant with 85% of experts expecting that AI will have a noticeable impact on all areas of the industry in the next five years. They see great potential, especially with regard to increasing efficiency and reducing costs, the study said.