Strategies underpinned by DUEL megatrends offer best opportunities
What can we expect from 2026? PATRIZIA Head of Investment Strategy Radu Mircea sets the scene.
Radu Mircea,
Head of Investment Strategy
The macroeconomic environment in Europe is becoming more favourable, leaving the impact of negative supply shocks behind. Nevertheless, geopolitics and ongoing technological disruption will persist for years and affect performance. Building resilient real asset portfolios will require strategic allocations across segments benefitting from the DUEL megatrends (digitalisation, urbanisation, energy transition and modern living), combined with tactical tilts responding to changing market conditions.
Tailwinds in Europe
Since 2022 the main economic question has been: where are interest rates likely to settle? In brief, Europe is ahead of the US, with rates having come down faster and further in Europe. Banks are increasingly competing for business, and this has translated in a fall in debt margins and improving access to credit for real estate.
Another tailwind is fiscal policy. In the early 2010s, European governments pursued austerity measures which were a drag on economic growth. Today, policy is looking to reignite growth. In Germany, the combined defence and infrastructure fiscal packages are estimated to be the largest post-Second World War stimulus, including as a share of GDP. Moreover, EU-wide spending plans such as ReArm Europe and Next Generation EU will contribute to growth in the region.
All in all, the policy mix is more favourable relative to previous crises, with a clear focus on closing Europe’s infrastructure gap and accelerating the energy transition. Meeting Europe’s ambitions by 2040 requires roughly EUR 800 billion per year (3.5 % of GDP), with energy (EUR 5.5 trillion) and the built environment (EUR 3.6 trillion) dominating total needs in that timeframe. Germany took a huge step forward this year by announcing its EUR 500 billion special fund for infrastructure and climate neutrality - a paradigm change compared to the previous decades.
Energy transition: Emerging markets step up
Emerging markets (EM) are also expected to accelerate their energy transition path, with EMs excluding China installing more new solar and wind capacity than either the European Union or the United States in the first half of 2025. But the need for investment is also immense. Excluding China, EMs need to more than double their annual energy investment to an estimated USD 2.6 trillion per annum to achieve net zero by 2050.
Digital transition: AI boom creating CapEx supercycle
At the same time, the artificial intelligence (AI) boom is creating a capital expenditure 'supercycle', with massive investment in physical assets focused on digital infrastructure and affordable energy. In contrast with other global regions such as the US, the European data centre market is more undersupplied, with significant capital needed going forward to accelerate the digital transition.
Real estate sector outlook
For most other real estate sectors, the dominant theme in 2025 was stabilisation after a deep repricing during 2022-24 driven by the interest rate environment. Total returns are improving, underpinned by falling borrowing costs and robust rental growth, particularly in sectors with constrained supply. For core sectors, income growth prospects are today stronger than in North America.
However, the capital market recovery is still lagging occupational markets. European investment volumes stand at similar levels to the early 2010s, once corrected for inflation. The current vintage should be particularly attractive for value-add strategies. In today’s relatively illiquid environment, investors are getting rewarded generously for going up the risk curve.
In recent years, the real estate market was defined by simple narratives (e.g. ‘beds and sheds’ during COVID-19), but going forward we expect a higher dispersion of performance within sectors. The ability to grow income through active asset management and decarbonisation initiatives will become crucial. Moreover, selecting the right assets will require the ability to leverage granular and accurate real-time data for assessing markets and locations - which is why we’re continuously enhancing our proprietary location analytics embedded in the investment process at PATRIZIA.
The new environment also requires an active approach to managing and rebalancing portfolios. Fundamentals today justify some rotation from industrial (good but deteriorating fundamentals) to office (less good but underpriced recovery). The office sector remains polarised, but we are seeing operating income growth starting to improve and broaden beyond prime CBD assets. Emerging CBD locations remain at the epicentre of the urban transition as the gentrification frontier expands in major urban areas. Out of fashion in recent years, offices benefit from location scarcity in public transport-centric European cities.
Living sector in the ascendancy
The living sector remains the structurally undersupplied major sector in Europe, with a highly defensive income profile which is keeping it in favour for core, long-term capital. At the same time, the recent headwinds to development viability have created a funding gap which gives value-add investors today a stronger bargaining power in relation to developers hence the potential for outsized returns.
The affordable housing sector is becoming more institutional across Europe as it strengthens its role as a premier strategy for impact investors, thanks to both resilient performance prospects and measurable social outcomes. There is growing government interest at an EU-level, as reflected in the Housing Advisory Board recommendations for a European Affordable Housing Plan. At the same time, various regional governments are offering grants and subsidies supporting the viability of providing affordable housing supply.
The living transition will also benefit structurally supported emerging segments, such as purpose-built student accommodation, flexible living and senior living concepts. For these, operational expertise remains key: partnering with best-in-class operators, as well as calibrating expenses, to maximise operational performance.
Citywest: One of PATRIZIA's affordable housing projects in Dublin
The path to value creation
Real assets are gradually becoming more data-rich, with residential at the forefront. At PATRIZIA, our AI-powered data intelligence tools, such as pricing analytics, facilitate living investment underwriting by providing detailed insights into rent and price levels, such as their historical evolution, distributions and drivers. This happens at an extremely granular level. As new market segments and geographies reach maturity, the picture will feature both winners and losers, emphasising the importance of backing experts and top-tier platforms.
The path to value creation in today’s world is has two key characteristics. It demands agility, expertise and an operational setup that can quickly and decisively execute tactical allocation shifts. It also calls for portfolio construction strategies anchored in the megatrends — the digital, urban, energy and living transitions — because these forces will define the next cycle.