Uncertainty, whether geopolitical or economic, tends to spook investors. Yet the current uncertain climate could be a boon for Europe’s residential real estate market, bringing a rebalancing of international private capital away from the U.S. and toward Europe.

Since the Covid-19 pandemic abated, we have been in the midst of a super-trend for residential real estate. In 2024, for the first time, residential real estate had the highest investment volume of all European real estate asset classes. This is a marked change from investors’ pre-pandemic behaviors.

This shift isn’t surprising to us. Residential real estate has historically demonstrated resilience even during times of uncertainty. For example, during 2020, more than 95 percent of tenants renting from Grainger, the UK’s largest listed residential landlord, paid their rent, while only 70 percent of office occupiers kept up with payments, according to data from Re-Leased, a commercial property management platform. Plus, residential rents can be increased each year, making it an ideal asset class in inflationary environments. These qualities, combined with structural changes in how we live and work following the pandemic, with work from home an option for many, have been a wake-up call to those institutional investors who previously opted for commercial office-based investments over residential.

Opportunities in European real estate

Continental Europe and the UK are experiencing prolonged housing affordability crises due to a lack of supply. Yet despite this supply-demand imbalance, the region has historically struggled to attract capital relative to the U.S., which has been viewed as a simpler and more homogenous market. According to data compiled by Real Capital Analytics, the European Union has about 60 percent more households than the U.S. but just a third of the transaction volume. And shifting trade dynamics and legal headwinds in the U.S. are starting to erode the perception of simplicity, opening the door for Europe to capture a greater share of global real estate capital.

The economic and geopolitical uncertainty we are facing could bring a welcome rebalancing between the U.S. and European markets.

Tariff tensions

Let’s take the U.S.’s recent trade policy actions as an example. The imposition of tariffs on imports from other countries had been contributing to higher prices for goods and services - with even the Treasury Secretary Scott Bessent acknowledging “a one-time price adjustment”. These higher prices have reinforced inflationary pressures and, in turn, the likelihood of a prolonged higher interest rate environment. These dynamics present real challenges to the viability of new residential developments in the U.S., where construction costs are already elevated.

At the same time, the legal uncertainty surrounding such policies, highlighted by the U.S. Court of International Trade’s late May 2025 ruling invalidating the so-called “reciprocal” tariffs imposed by the Trump administration, underscores a broader volatility in the U.S. policy landscape. For long-term investors, this kind of unpredictability can complicate decision-making and deter capital deployment. While the ruling may help ease some near-term inflationary pressures, the broader effect may be to reinforce perceptions of the U.S. as a less stable or predictable environment for real estate investment compared to Europe.

Homebuilders in the U.S. are already complaining about rising construction costs as a result of tariffs on China, and, at the time of writing, there’s no sign of what the outcome of the trade war between the two countries will be. While it remains to be seen how quickly the recent court ruling might ease cost pressures in the U.S., the uncertainty it introduces - combined with lingering inflation and interest rate volatility - may still push investors to look elsewhere, such as Europe. Europe could also benefit from cheaper construction material costs from China as the Asian country seeks to attract business from elsewhere to compensate for a fall in American demand.

As a consequence, we are also starting to see investors in Asia pulling away from the U.S. and refocus on Europe. We expect more international capital to follow suit. Europe’s relative geopolitical and regulatory stability - especially in light of shifting U.S. trade policies and judicial interventions – continues to support the perception that European real estate offers relative stability.

Fixing the housing crisis

Core capital is returning to the market thanks to lower interest rates in the Eurozone than in the U.S. Transaction volumes are picking up as those who have been on the sidelines start to feel comfortable selling their assets.

Any further interest rate cuts, combined with the acute housing shortage in many parts of the region, are likely to support residential prices.

Private capital is going to be a necessary part of the solution to Europe’s affordability crisis, and national governments will need to up their game on planning processes to attract and retain this flood of capital. The UK is a pronounced example of a country with a difficult planning process that has dissuaded investment and put a severe constraint on housing production. An easier path in planning, as proposed by the British government, will likely result in less uncertainty and better returns for invested capital.

Demographically driven, economically charged

While interest rates and other economic conditions affect residential real estate, demographic changes drive the asset class even more.

Population growth does not give the full picture when analyzing housing demand. Factors including urbanization, age at marriage, changing lifestyles, income levels and life expectancy all feed into the number of households in a city. We expect to continue seeing significantly positive household growth in key European cities. This growth typically outstrips headline country-level population growth by a wide margin, which on its own can look a bit anaemic in some European cities.

For example, forecasts from Oxford Economics suggest that Spanish population growth over the next five years will be 0.26 percent a year, compared with annual household growth of 0.54 percent in Madrid over the same period. We see the same trend in the UK, where country-level population growth is forecasted at 0.42 percent a year, versus London household growth of 1.12 percent per year. When combined with severely constrained housing supply, this household growth is disproportionately hitting the quality and cost of housing for middle-income households.

The ‘missing middle’

We are focused on investing in the “missing middle” across continental Europe and the UK, by delivering thoughtfully designed, well-located and operationally efficient housing for middle-income earners. Rather than chasing over-amenitized or premium concepts, we’re taking a back-to-basics approach by prioritizing what residents value most: location, quality, affordability and access. It’s about creating real housing solutions that serve communities, not just balance sheets.

Europe is considerably less urbanized than the U.S., at 78 percent and 83 percent, respectively. Yet the formation of smaller households, such as the decision to stay single for longer or have fewer children, lends itself more to city living and creates opportunities in Europe. The United Nations forecasts that Europe’s degree of urbanization will increase to 84 percent by 2050.

At the same time, we estimate the portion of somebody’s life spent renting has roughly doubled. The average age of first-time home buyers in England has climbed to 34, for example. This creates a lot of demand for rental housing, even if headline population growth is stalling.

These robust demographic trends, combined with increased private capital flows into Europe make the continent a bright spot in an uncertain landscape. When you add the wider market re-pricing, we believe this is a generationally compelling time to consider the sector.