European real estate stuck in 'zombieland' as recovery proves elusive

By Iain Withers, Tom Sims and John O'Donnell

LONDON/FRANKFURT (Reuters) -Europe's commercial real estate market is defying expectations of a recovery as investor caution pins property sales to near-decade lows.

Some investors and banks, recognising that the outlook remains weak, are even beginning to step in to offload or restructure distressed assets, one executive said, though they added that an "extend and pretend" approach to bad debts is still commonplace.

It is a marked change in mood from the beginning of 2025 when there were hopes for an end to a three-year pandemic-induced downturn, but unpredictable U.S. trade policy, the promise of stronger returns in other private markets and a refusal by sellers to recognise lower prices have hit activity.

Year-on-year commercial property sales in Europe were flat in the first quarter of 2025 at 47.8 billion euros ($55.6 billion), less than half the level of three years earlier, according to the latest revised MSCI data.

    Early indicators suggest a poor second quarter - cross-border investment into property in Europe, the Middle East and Africa fell about a fifth from a year earlier to 17.2 billion euros, the worst April-June period in a decade, property agency Knight Frank said, citing preliminary MSCI data.

Sluggish sales have affected most sectors including hard-hit offices and even data centres, a previous bright spot, although the under-supplied rental housing market continues to attract interest.

    "We have 'zombieland' ... no recovery, stranded assets, no liquidity coming back," said Sebastiano Ferrante, head of European real estate at U.S. fund giant PGIM.

While logistics and hotels also presented buying opportunities, out-of-town offices and old shopping malls are among assets struggling to find buyers, Ferrante added.

Canada's Brookfield asked bondholders to approve the restructuring of a loan secured against its London CityPoint office tower in April, according to a regulatory filing, after shelving a sale when bids fell short of its expectations.

In Germany, one of the country's most prominent property casualties - the Trianon skyscraper in Frankfurt - has been put up for sale by its administrator, Reuters reported last week, in a rare test of the fragile German market.

There is also fierce competition for funds from other private markets such as credit.

Private credit funds in Europe raised $39.9 billion in the first half of 2025, nearly double the $20.6 billion for real estate funds, according to Preqin data.

However, both were on track to top their 2024 totals, with property already ahead of last year's poor tally.

Survey data nonetheless points to ongoing caution. Investor sentiment towards European real estate fell to its lowest in over a year in June, according to trade body INREV, mirroring the U.S. market, where sentiment has also soured this year.

"In some parts of the market the recovery is well under way... However there are out of favour assets and sectors where there is almost no liquidity and more pain to come," said Cecile Retaureau, head of private markets at the investment arm of insurer Phoenix.

Germany, Europe's largest economy, has been particularly hard hit by the property slump, with sales down another 2% in the first half of this year, according to data from CBRE.

"Transaction volumes will not jump. It will not kickstart in a very dynamic way," said Konstantin Kortmann, CEO of property agency JLL in Germany, who expects a gradual recovery.

While still-high interest rates mean property investors have to be selective to make money, the prospect of international cash shifting to Europe from the volatile U.S. market could help, the property executives said.

At least two of PGIM's German clients have cancelled planned property investments in the United States, reprioritising Europe and Asia, Ferrante said.

($1 = 0.8602 euros)

(Reporting by Iain Withers in London and Tom Sims and John O'Donnell in Frankfurt, Editing by Tommy Reggiori Wilkes, Kirsten Donovan)