Navigating the Complexities of European Commercial Real Estate Investments

16 April 2025 - The European commercial real estate market, particularly in the areas of logistic warehouses and data centers, continues to exhibit robust growth driven by e-commerce trends and the increasing adoption of Artificial Intelligence (AI) technologies. This growth, however, is accompanied by a complex landscape of challenges that investors must navigate to maximize returns and minimize risks.

Key factors impacting European commercial real estate

For the past two years European commercial real estate has been facing some headwinds, but a recovery cycle is currently underway for 2025 and the years beyond¹. As a result of this, certain regions of Western Europe, including Germany, France, Spain and the Netherlands, are experiencing intense competition for prime commercial real estate assets again. This surge in demand will lead to significant increases in property prices and a compression of yields, making it increasingly difficult for investors to find high-return opportunities, especially in mature markets. While interest rates are expected to decrease in the future, they currently remain stable at elevated levels². This, coupled with the effects of inflation, energy prices, labor shortages, and material supply chain issues, have driven construction costs across Europe to new heights³. The combination of these factors is putting additional pressure on yields, and in turn, forcing investors to reassess their strategies and expectations.

Another crucial factor shaping the European commercial real estate landscape is the growing emphasis on Environmental, Social, and Governance (ESG) compliance⁴. Stringent EU sustainability regulations are pushing investors to confront higher costs associated with retrofitting older properties or developing new facilities to meet green standards. In particular, for high-consuming energy assets like data centers there is an incentive to achieve lower energy consumption, efficient cooling systems and utilize renewable energy sources as much as feasible. This shift towards sustainability, while necessary to reduce environmental impact and beneficial in the long term, presents immediate financial challenges for many investors.

This situation is made more complex for managers investing across multiple jurisdictions, who face additional operational challenges that may result in higher costs for running their investment holding structures.

Operational challenges

The combination of higher acquisition and running costs resulting in compressed yields in prime markets necessitates better cost control and operational efficiencies to maintain attractive returns. Investment managers must therefore scrutinize every aspect of their operations to identify areas for potential savings without compromising the quality of their assets or services. Operational efficiency becomes paramount when managing multiple assets across various jurisdictions. The complexity of cross-border investments can lead to operational inefficiencies and increased risks if not managed properly. Investment managers must implement robust systems and processes to ensure smooth operations across their entire portfolio.

One of the primary challenges in multi-jurisdictional investments is the consolidation of financial statements across various legal and tax regimes – often a daunting task for investors with diverse portfolios. Furthermore, differences in financial reporting standards across jurisdictions can lead to complex reconciliation issues. Investment managers must navigate these disparities to ensure accurate and consistent reporting across their portfolios. This challenge is compounded by the need for standardized data from various stakeholders, which must be transformed into unified reporting files.

While it may be challenging to control macro variables affecting the market, investment managers can definitely exert more control over their investment holding structures. By optimizing the administrative processes involved in maintaining these structures (which often consists of multiple different legal entities), managers can achieve more efficient workflows and lower running costs, potentially offsetting some of the yield compression caused by market conditions.

In conclusion, while the European commercial real estate market presents significant opportunities, particularly in the logistic and data center sectors, investors must navigate a complex landscape of market dynamics, regulatory and ESG requirements, and operational challenges. By focusing on operational efficiency, cost control, and leveraging specialized expertise in combination with technology solutions, investors can position themselves to thrive in this evolving and competitive market.

¹ Knight Frank – European Commercial Outlook 2025 – The European real estate market is showing signs of recovery, underpinned by falling interest rates and stabilizing valuations, creating a more favorable environment for investment.

² RICS Global Commercial Property Monitor Q3 2024 - Europe: Demand holds steady at the regional level while improving credit conditions should support the outlook “Easing credit conditions provide some relief for the market.”

³ https://www.statista.com/statistics/377422/europe-real-estate-investment-existing-big-cities-ranking/ - When it comes to the issues influencing real estate professionals in their investment choices, the major concerns shared were construction costs, capex requirements, and environmental sustainability requirements.

⁴ Savills’ European Real Estate Logistics Census – Autumn 2024, Game-changers – ESG is the most important potential factor. “More stringent ESG targets/regulations”, was identified as important or very important by 69% of occupiers. EU regulations continue to be a moving target, with more regulations on the horizon. This is creating ongoing uncertainty. A major change to ESG or regulatory requirements could have significant impacts on both occupiers’ businesses and their real estate requirements.