European real estate has endured multiple headwinds in recent years, but after a difficult period, prospects for real estate M&A activity are gradually improving.

Investment in European real estate reached €53 billion in the first quarter, up 3% on Q1 2025 figures, according to real estate advisor CBRE.

A move in the right direction

The year-on-year gains may appear modest, but represent a positive shift in momentum in the context of the disruption the sector has faced.

Real estate dealmakers have had to contend with shifting office usage patterns as working from home became embedded post-pandemic, and volatile demand for logistics and warehouse space amid changing supply chains, inventory adjustments and more recent tariff disruption.

Elevated interest rates, meanwhile, chipped real estate asset valuations and constrained transaction activity. Higher rates also depressed capital inflows into real estate, with investors shifting allocations into other assets like fixed income and infrastructure.

These themes continue to pose risks for real estate investors, but a stabilizing outlook for interest rates and a valuation reset have helped to bring the sector back onto an even keel, and are providing opportunities for dealmakers to rekindle real estate M&A.

Real estate reshaped

The recovery in European real estate will not, however, see the sector revert back to the pre-pandemic, pre-interest rate model.

New real estate categories are emerging, and will be the drivers of industry growth and dealmaking in the months and years ahead.

Rapid advances in the uptake of AI technology, for example, have positioned data center real estate as one of the fastest growing real estate sub-sectors for investment and M&A, with the European Data Centre Association forecasting that cumulative investment in new data center infrastructure in Europe will reach record highs of €176 billion between 2026 and 2031.

Increased European defense spending, meanwhile, is driving demand for specialized manufacturing facilities, testing sites, and logistics real estate.

Sirius Real Estate, for example, paid close to €100 million to acquire a German business park in Kiel where tank manufacturer Rheinmetall leases space, and Bloomberg reports that landlords for other industrial sites are reporting rising lease inquiries from other defense companies, including those developing novel defense technologies such as drones.

Indeed, figures from Savills and CoStar Group show that defense companies and their suppliers accounted for 8.5% of UK industrial and logistics leasing in 2025, more than double the figure for any of the last 15 years.

Opportunistic M&A

As European real estate recovers and reconfigures, attractive M&A opportunities are expected to emerge for dealmakers who can move early and take a long-term view that looks beyond previous and more recent market risk factors, such as the Iran conflict.

Prologis, for example, has made a £12.6 billion bid to acquire Segro, the biggest listed property company in the UK.

The bid prices Segro at a meaningful premium to its pre-bid share price, which could appeal to shareholders seeking to crystallize a premium valuation in the face of macro-volatility and the risk of borrowing costs increasing again.

Segro has pushed back at the bid, arguing that it is under no pressure to do a deal, and that selling into the market that is in a phase of transition would not be in shareholders' best interests.

Other real estate companies, however, may be under more pressure to transact. Private real estate investors, for example, will be looking to sell assets after longer than anticipated hold periods, and may be willing to accept discounted prices (within reason) to do so. Bloomberg reports that the combined value of unsold investments in closed-ended European real estate funds now exceeds $325 billion.

Cash-rich dealmakers with the conviction to deploy capital despite short-term uncertainty will be more than happy to help clear the backlog, and could land some bargain deals as they do so.