Aberdeen Investments Q4 Real Estate Houseview: Bond sell-off puts real estate pricing under pressure

• Housing – strong demand, but pricing a challenge - regulation and starting valuations will be in the spotlight
   

• Data centres in the spotlight as AI usage, development pipelines and financing activity grow 

   

• Retail and selected regional industrial markets offer greater protection, while tightly priced offices, residential and London industrial face further repricing

Aberdeen Investments has published its Q4 2026 Real Estate Houseview, warning that the sell-off in government bonds is changing the relative attractiveness of real estate for the moment. But constrained demand and limited supply remain positives on a medium-term view.

Real estate has its work cut out because rising bond yields increase the so-called “risk-free rate” - the return investors can earn from government bonds such as UK gilts and German Bunds, without taking the additional risks associated with owning real assets.

However, those headwinds should ease over time, with constrained supply, positive rental growth and healthy occupier demand supporting medium-term returns. Aberdeen forecasts annualised returns of 6.6% for European real estate and 5.8% for UK real estate over the next three years.

Retail remains one of Aberdeen Investments’ preferred real estate sectors, with UK, supermarkets, retail parks and shopping centres ranking highly in the Q4 forecasts. When it comes to Living, Aberdeen believes that regulation and valuation adjustments will become increasingly important in determining which markets outperform.

Squeezed margins

As bond yields rise, real estate must offer a sufficient premium, through a higher yield, rental growth or both, to compensate investors for taking additional property and liquidity risk.

In recent months that premium has narrowed sharply. Across Europe, the margin between all-property yields and German Bunds has fallen from around 220 basis points to 160 basis points in the three months to 30 September 2026.

Bright spots

Aberdeen Investments has moved to a neutral view on real estate, reflecting a more difficult environment in the year ahead as higher bond yields and financing costs put pressure on valuations. But that doesn’t mean the outlook is negative everywhere.

Anne Breen, Global Head of Real Estate at Aberdeen Investments, said:

“The bond market sell-off has changed the investment backdrop for real estate quite markedly over the past few months. Whether or not you believe bonds are appropriately priced, the reality is higher fixed income yields means real estate as an asset class has to work harder to justify the additional risk.

“That doesn't mean the outlook is negative. In many sectors, tenant demand remains healthy, rental growth is positive and development pipelines are constrained. These are fundamentals which continue to support the long-term case for the asset class.

“What has changed is that investors are becoming much more focused on relative income and growth potential. Sectors that offer attractive and sustainable cashflows, such as retail and parts of the industrial market, are likely to remain in demand. Areas where prices still look expensive relative to bonds may face further pressure as markets adjust to higher interest rates.”

Macro backdrop: tougher environment, but not a downturn

Aberdeen’s base-case global economic scenario, which it assigns a 55% probability, is for resilient growth despite ongoing geopolitical risks and stubborn inflation pressures, supported partly by AI investment and fiscal stimulus.

In the UK, growth is expected to slow as higher energy costs squeeze households, with GDP growth forecast at 0.9% in 2027. Aberdeen Investments’ base case includes two further Bank of England rate rises, although market pricing currently points to a more extensive tightening cycle.

The Eurozone has meanwhile proved more resilient than expected, but inflation is forecast to touch around 4% this winter. Aberdeen expects two further European Central Bank rate rises, taking the deposit rate to 3% in March 2027.

For real estate investors, this means higher bond yields and borrowing costs at the same time. All-in European real estate debt costs are now above 5%, beyond their 2023 peak. However, debt remains readily available for high-quality assets and lending margins remain low, with no signs of a significant tightening in financing availability.

Data centres: power becomes the scarce commodity amid AI build-out

Aberdeen’s Houseview places renewed emphasis on data centres as rapid growth in AI usage, development pipelines and financing activity brings the sector’s opportunities and risks into sharper focus.

Capacity across Frankfurt, London, Amsterdam, Paris and Dublin has doubled since 2019, while vacancy has fallen to 6.4%. But the key constraint is now access to power, with lengthy grid queues pushing new development further away from traditional hubs.

The sector offers interesting opportunities for investors, but accessing stock with the right return profile remains the big challenge.  High capital expenditure and technological obsolescence create additional risks that are tricky for investors to accurately price in a fast-moving technological evolution. Aberdeen Investments therefore believes specialist funds and operator partnerships offer some of the most appropriate routes into the sector.

Retail: higher yields provide a cushion from bonds

Retail remains one of Aberdeen Investments’ preferred real estate sectors because higher starting yields provide investors with greater protection against rising bond yields while the consumer demand backdrop holds firm for now.

In the UK, supermarkets, retail parks and shopping centres rank highly in Aberdeen’s Q4 forecasts. Retail Park vacancy is around 3%, while shopping centres offer income returns of approximately 8.75–9% and retail park yields exceed 6%. That makes them less sensitive to relative pricing pressures and modest outward yield movements than lower-yielding sectors.

European retail has also been outperforming for more than a year, supported by rental growth, low vacancy and limited new development. Retail is the only major European sector in which more markets recorded inward rather than outward yield movements during the quarter, with retail parks and selected Nordic markets offering particularly attractive spreads over bonds.

Industrials and logistics: selectivity becomes increasingly important

Industrial and logistics continues to benefit from long-term trends including nearshoring, reindustrialisation and defence spending, but higher rates and rental affordability pressures are exposing differences in valuation between markets.

In the UK, London and Inner South East industrials look particularly vulnerable, with yields only around 170 basis points above the 10-year gilt at a time when vacancy is rising and rental growth is slowing. Regional industrial markets look better positioned because yields are higher, rents remain more affordable and supply is constrained.

In Europe, conditions are improving. First-half logistics take-up rose by around 19% year on year, while declining availability and lower development are supporting rents. Aberdeen Investments remains positive on the sector over the medium term but believes the higher-rate environment makes entry price increasingly important for the next phase in the sector’s evolution.

Offices: occupational strength meets pricing pressure

The office market remains highly polarised. In the UK, central London leasing is at or above its long-term average, with around 70–80% of transactions concentrated in best-in-class or Grade A space. A limited pipeline and strong rental growth continue to support the highest-quality buildings.

But valuation risk has increased as gilt yields have risen. Prime West End offices have traded at a negative spread to gilts for several years and continue to do so in view of potential income growth, while weaker regional and peripheral offices face additional challenges from lower demand and higher refurbishment costs.

The picture is similar in Europe. Construction is 37% below its peak, but rapidly narrowing spreads in markets including Munich, Paris, Stockholm and Madrid leave some prime offices exposed to repricing. Offices are forecast to be Europe's weakest-performing major sector, with 11 of the bottom 20 one-year market forecasts coming from the sector. Further ahead, AI presents a risk to service sector job growth, which is increasingly relevant in underwriting and asset selection.

Living: strong demand, but pricing is the challenge

Structural demand for rental housing remains compelling, but rising bond yields have put greater pressure on the sector's relatively tight property yields. This pressure is more pronounced in Living than in any other sector.

In the UK, residential has been the only major sector to record a negative annual total return, with build-to-rent and purpose-built student accommodation both experiencing outward yield movements. Single-family housing looks better supported by structural rental demand and strong investment appetite from large pools of domestic capital.

Across Europe, supply remains structurally constrained. Average housing completions between 2026 and 2028 are expected to be 12% below their 2020–24 annual average across the markets analysed, supporting rents over the longer term. However, Aberdeen Investments believes regulation and valuation adjustments to current relative pricing and debt costs will become increasingly important in determining which markets outperform.

Outlook: investors need to be paid for taking risk

Higher bond yields mean the bar for real estate investment has risen. When government bonds offered very low income yields, investors were prepared to pay more for real estate cashflows. Today, government bonds provide a much higher yield, meaning real estate needs to offer either stronger income, better growth prospects or a cheaper entry price to remain attractive.

Aberdeen therefore remains selective. It favours areas of the market where income returns remain compelling and rental growth prospects are robust, including retail and selected industrial markets. It is more cautious towards sectors where valuations still look stretched relative to higher bond yields.

The medium-term outlook for real estate remains constructive, supported by constrained supply and growing demand across many sectors. But in the near term, Aberdeen believes successful investors will be those that remain focused on broad long-term market convictions and on securing reliable income and attractive pricing in those areas.

Ends

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Notes to editors

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