Tariff uncertainty a mixed bag for investor activity in UK and Eurozone

Given that buildings cannot be exported, commercial property is well insulated from the direct impacts of higher tariffs. However, the indirect impacts of tariffs feeding through to higher inflation in the economy could prevent interest rates from falling as anticipated. As a result, occupier demand could be lower across all sectors, limiting the upside for property values. On the other hand, there are opportunities in some sectors as suppliers look for new markets to sidestep US tariffs.

European property investment activity will continue to improve but no big rebound on the horizon

The gradual recovery in European investment continued in Q1 2025. Capital Economics estimates that investment in CRE across Europe (excluding UK) totalled €35billion in Q1 2025. This marked a 16% gain year-on-year and with the level of activity 26% above its trough in Q4 2023 on a four-quarter rolling basis. Although the momentum is still positive, this recovery is rather weak when compared to the rebound to 60% above trough following the Global Financial Crisis.

Looking ahead, the uncertainty arising from higher tariffs is likely to dampen transaction totals given the potential downside that the tariffs represent to property values. This view is echoed by more timely indicators. The Q1 RICS survey, which was partly conducted after ‘Liberation Day’, showed that the recovery in the net balance of Eurozone investment enquiries stalled, halting a trend that had been underway since Q2 2023. In fact, there were fewer surveyors reporting rising enquiries in all major markets, except for Spain. In addition, recent movements in real estate equity prices – while more positive than developments in the wider equity markets – point to modest growth in Eurozone investment in the near term.

Altus Group’s own analysis of its Pan-European dataset for Q1 showed that values increased for the third consecutive quarter across all market sectors and were up 0.8% in the opening months of the year. On an annual basis, all property values have risen by 2%. Across the four main sectors, residential assets led performance in Q1, with values rising by 1.5%. Both industrial and office sectors recorded gains of 0.8%, while retail ended up at the lower end of the spectrum with an increase of 0.5%.

Based on comments by the European Central Bank (ECB) after cutting rates by 25 bps at its June meeting, further rate decreases by the ECB and other key European central banks may support more favourable financing conditions. However, long-term interest rates are likely to remain elevated. Thus, refinancing challenges and stretched valuations are likely to continue acting as a headwind to CRE investment activity for the rest of 2025.

Barring a significant escalation in the trade war, Capital Economics does not expect investment in European CRE to collapse. Commercial property assets are not traded as goods, so are not directly subject to tariffs. In fact, there might even be some positive impacts, including if firms stockpile due to near-term uncertainty or if trade is diverted away from the US. Further, while that same uncertainty will weigh on economic activity and is likely to drag on occupier demand and investor sentiment, Europe, for now, is comparatively insulated from tariffs, which means that a rise in cross-regional capital flows could provide a partial offset to other negative impacts elsewhere in the economy.

Tariffs present some opportunities for UK property investment

After a strong end to 2024, Capital Economics notes that UK CRE investment dropped back in Q1 2025. Transactions fell to the lowest level since Q3 2023 and represented a drop of 30% from the level recorded in Q4 2024.

Compared to Q4 2024, there were significant drops in transactions in both the industrial (down 49%) and retail (down 42%) sectors. Offices bucked the trend with a rise of 30%, driven by London properties. Yet, even with transactions valued at £1.8billion in Q1, Central London office investment is far lower than the average of £3.7billion per quarter achieved in the three years leading up to Q4 2019.

Looking ahead, there are reasons to be hopeful that UK CRE activity may resume its upward trend. Survey evidence has been largely positive, with the Q1 RICS survey reporting a rise in the investment enquiries balance of 4%. This represents the highest reading in three years and, based on historical experience, points to investment potentially rebounding in Q2 2025.

Unlike in Europe, UK banks have recently been loosening commercial lending conditions. According to the Bank of England Credit Conditions Survey for Q1 2025, a net balance of 20.6% of banks loosened conditions, marking the fifth consecutive quarter of easing lending standards. Banks also plan to loosen further in Q2, driven by growing confidence that commercial property capital values are past the trough.

That said, the increased macroeconomic uncertainty caused by US tariffs is likely to weigh on UK CRE investment in the short term. Admittedly, UK commercial property is relatively well insulated from the negative direct impacts of tariffs. In fact, some sectors may even benefit from US tariff policy which helps explain why property equities have outperformed the wider market since ‘Liberation Day’.

Drilling down into the sectors, offices appear the least exposed subsector to either positive or negative direct impacts from higher US tariffs since the vast majority of occupiers are involved in the services sector, which is not subject to tariffs on traded goods.

By contrast, the industrial sector is perhaps the most exposed to tariffs. A sharp fall in world trade volumes has the potential to reduce the need for ports and warehouses. While that is certainly a concern in the US, where container shipments are already declining, it is less severe for the UK since the UK exports relatively few goods to the US. Capital Economics’ own analysis indicates that just 0.9% of UK GDP is dependent on US goods demand, a much more favourable position compared to Germany, for example, where 1.9% of GDP depends on US import demand.

In fact, with President Trump having signed an order confirming some parts of the US-UK trade deal that was discussed back in May, and assuming the UK does not impose significant retaliatory tariffs, it is unlikely that the UK will take a hard line against the US. Thus, as goods are diverted away from the US, particularly those originating in China, it is possible some may end up in the UK, increasing logistics demand. It is still early days, but April has so far seen a larger rise in cargo ship visits to the UK compared to the previous two years. Moreover, if supply chains are severely disrupted, firms may look to increase their stocks of inputs, increasing the demand for warehouse space.

There are potential benefits for the retail sector, too. In the short term, there may be a negative impact on in-store retailers if Chinese goods are dumped via online stores such as Temu. But, a large inflow of cheaper imports would result in greater online retail competition, increasing the demand for warehouse space. However, the potential expansion in warehouse demand might not emerge if the government changes ‘de minimis’ rules that exempt low value packages from custom duties (as has been implemented in the US), cutting off that route of imports.

In the residential sector, there will be limited direct impact on multifamily or single-family rentals, but student accommodation demand could see a boost. While not strictly tariff-related, tougher border checks and enforcement of visa conditions may discourage some students from studying in the US, with the UK an obvious substitute. That said, recent government moves to cut immigration to the UK could also prevent some of those students from coming to the UK.

Nevertheless, property equity prices are lower than a year ago, suggesting that UK CRE investment will remain weak over the next quarter. Although prime property is sometimes viewed as a safe haven which may support demand in turbulent times, it is also illiquid, which may weigh against it. Thus, Capital Economics expects UK CRE investment in 2025 to be slightly lower than the outturn in 2024.

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