The early signs of the European real estate market recovery have been slowly falling into place. Transaction activity in the region bottomed out and year-on-year price declines started to stabilize in 2023, while deal velocity ticked up 15 percent last year, according to a July report from commercial real estate services firm Cushman & Wakefield.

Debt has also returned to the market, with Europe “entering a ‘golden era’ of real estate financing,” which includes debt funds and structures such as back leverage and hybrid capital, the report stated.

However, there remains “the last shoe to drop”: core money, said David Hutchings, Cushman’s head of European investment strategy.

“Over the next six to 12 months, the growth in core money will be the story of the recovery,” he said, speaking with PERE at Expo Real in Munich this week. “It is key. If you don’t have core money, you don’t have a functioning market.”

He estimates core capital typically accounts for about a quarter of European real estate market activity.

Last year, there were 15 new direct real estate mandates representing €18 billion of core capital targeting the European real estate market, according to Hutchings. That core money comprised capital primarily from European pension funds, as well as some insurers and one or two large family offices based in the region.

In 2025, there are 82 new mandates representing €58 billion of core money looking to be deployed in European property. The surge in investor interest over the past year has been driven by the changing interest rate environment, Hutchings said. The European Central Bank, for example, has cut rates eight times since June 2024, but left them unchanged at its most recent meetings in July and September.

He observed a “sudden jump” in core investor requests after Q1, with a number of mandates emerging after Expo Real last year. While some institutions face liquidity constraints because of issues with their existing real estate portfolios, many will still be looking to buy new assets to not miss out on the current market opportunity.

“People are changing their priorities,” Hutchings explained. “They need to rebalance their portfolios and buy, and revisit their issues at a later date.”

Deployment challenges

The core capital hunting for European property is seeking investments that can produce secure, long-term income. One challenge with deployment, however, is the misalignment between the investors’ risk-return expectations and the actual opportunity set, he said.

Core investors typically will seek an internal rate of return of 7-9 percent from their investment using low leverage. Last year, they were able to exceed this target by buying core product at elevated yields and achieving returns of 12 percent-plus, according to Hutchings. Today, core investors are targeting similar returns, despite the increase in bond yields because of more competitive leverage.

“However, it would now be harder to significantly outdo that return target and investors may be looking more at 9-11 percent from a current core opportunity,” he noted, adding that return numbers can vary widely by sector and geography.

In a typical year, the aggregate capital targeting Europe is never fully deployed, added Hutchings. This is because investors usually do not find all of the opportunities they seek at the prices they are willing to pay. Additionally, other opportunities will typically emerge, such as investing through an indirect route or in a debt structure rather than equity.

However, he still expected at least half of the €58 billion to be invested over the next 12 months as more assets are put on the market.

“There will be a gradual release of stock,” he said. “There will be some degree of price alignment. There will be some degree of yield compression, which will encourage people to sell. A stronger economy will also encourage more forward funding.”