Breakdown Of Old Order And Rearmament Brings Opportunity For European Real Estate

As the transatlantic alliance and a globalised world order forged after the Second World War start to crack, Europe is facing an existential crisis.

As the U.S. withdraws militaristic support, European countries are quickly realising they will need to increase spending, not just on defence, but in areas like artificial intelligence, research and development, infrastructure and energy that make them more self-reliant. 

The U.S. has pulled back its forces in Romania, the first of about 30,000 expected troop drawdowns planned across Europe.

The U.S. 2026 National Defense Strategy released in late January calls on European nations to take primary responsibility of their own defence by 2027.

Nations in NATO have agreed to increase their defence spending to 5% of GDP, and the European Union has proposed to quintuple its increase defence and critical infrastructure spending to 1.26% of its budget starting in 2028.

That will require new real estate, from warehouses to store armaments to data centres and energy infrastructure. BNP Paribas Asset Management Alts forecasts logistics demand could spike 10% annually from this push alone. 

“I think that people are underestimating the impact of hundreds of billions going into growth-oriented investment and the effect that will have on real estate markets,” BNP Global Co-Head of Real Estate John O’Driscoll said. The asset management arm of the French bank has €1.6B in assets under management. 

European real estate was already poised to benefit from increased domestic and cross-border capital flows, given its favourable interest rate environment and growing wariness among global investors about the political and economic resilience of the U.S. 

A new world order will only build demand.

“What this is all about is sovereign capability,” Sirius Real Estate Chief Executive Andrew Coombs said.

The £1.5B market cap company owns industrial sites and business parks in Germany and the UK.

“We're moving from a world of globalisation to a world where nations need to be able to depend on what they can provide for themselves, particularly where defending that nation is concerned.”

While Donald Trump has been the most explicit exponent of a fissure with Europe, U.S. retrenchment was a policy pursued by the Biden administration as well and will remain a long-term trend, Coombs said. 

As a result, European governments have announced plans to increase spending on defence and infrastructure. 

Germany has outlined plans to double its defence spending, and it is exempting such spending from rules that govern how much debt it can take on. That allows for €378B of borrowing for investment in the sector between now and 2029. The definition of defence that governments use will be flexible, Coombs said, taking in armaments but also transport, energy and cyber infrastructure. 

Several new brigades of the German army have already been established, most notably the 45th Lithuanian Brigade, the largest unit to be stationed outside the country since the Second World War. 

Logistics real estate demand will rise significantly. O’Driscoll said BNP made a provisional estimate that the expanded supply chain needed to support greater defence and other infrastructure spending could increase the need for European logistics by 8-10% annually. 

Areas where traditional logistic centres overlap with defence hubs will be particular beneficiaries. Dresden, Germany, has seen increased development of the back of defence spending, Coombs said. 

In Germany, 20% of Sirius’ sites have been involved in defence in the past and the company is purchasing new sites anchored by defence tenants, such as a 293K SF site it bought late last year in Munich Feldkirchen, where the major tenant supplies military grade optical sites and lasers to the German military.  

“It doesn't matter whether you're talking about making things that are kinetic and metal, or developing storage for drones or logistics to support defence, nearly all of it happens in warehouses and industrial areas, rather than people's back rooms and offices,” Coombs said.

In the UK the picture is different. The country has far less — ie, no — fiscal headroom in comparison to Germany. The Labour government has committed to raising defence spending from 2.3% of GDP in 2024 to 3.5% by 2035, but a BBC analysis predicted there would be a £28B shortfall in that increase, which will be paid for by cutting foreign aid — another form of deglobalisation. 

The UK is a major player in the world of defence manufacturing, with companies like BAE and Rolls Royce major exporters. Depending on the attitude of European countries to the UK in a post-Brexit world, the country should still benefit from a regional increase in defence spending. 

Real estate companies will need to address their staffing to most benefit. Coombs, himself a UK military vet, said governments and companies in the defence sector will only deal with service providers with specialist knowledge, which led Sirius to hire Major General (Retd) Angus Fay as a strategic adviser last year. 

Increased European government spending will not be limited to defence.

“The reality is, Europe is just massively underinvested in absolutely everything and really undermined its strategic autonomy, whether it's energy, AI, other types of R&D and definitely defence,” BNP’s O’Driscoll said.

He points to life sciences real estate as a potential beneficiary of increased R&D spending from European companies, whether that is in the tech sector, defence or traditional life sciences — knowledge clusters in Oxford, Cambridge and London are poised to benefit. 

An even bigger area of investment will be AI, and thus data centres. Thus far, the data centre boom has been led by the U.S., with Asia in second but trailing far behind, and investment in European AI infrastructure a distant third. 

Oxford Economics anticipates AI spending will add just 0.2% to European GDP between now and 2030 — but it still foresees the continent doubling its data centre capacity. 

In a world where AI becomes a dominant driver of economic growth, that will force Europe to invest more in both the research and the data infrastructure needed to maintain independence in the area. 

“I think it's not really an acceptable thing to be completely reliant on if you believe AI is going to drive economic activity,” O’Driscoll said. “How could you have something of that magnitude, that importance, and completely import it from other countries?”

The real estate sector could also benefit from second order effects of increased government spending, O’Driscoll said. When you start putting €500B into infrastructure, you need office space to fulfil project mandates and four-star hotels where consultants might stay.

“It does create a lift in real estate markets at a time when we have pretty much full occupancy across portfolios,” he said. 

Even without a boost from increased government spending, European real estate is in a good spot to benefit from a shifting global economy, several major investors said. 

“The way I'm expressing it to our clients is, the European story is strong enough on its own, and if this comes through, it's upside,” CBRE Investment Management Chief Economist and Head of Insights & Intelligence Sabina Reeves said. 

Economic growth is lower in Europe than in the U.S. and Asia. But Reeves pointed to European Central Bank interest rates which at 2% are almost half the levels of the UK and U.S. Margins on debt are also near historic lows because of competition among lenders, and the market has repriced faster than the U.S. 

For that reason CBRE IM is forecasting continental Europe to have the highest returns over the next few years.

“It’s the most positive we've been relative to the UK and U.S. since we started our house view in 2011,” Reeves said. “We are doubling down on our conviction in continental Europe.” 

The investor is far less bullish on the UK, she said, because of higher rates, equally sluggish economic growth and less potential upside from government spending. 

Last year €225B was invested in European and UK real estate, flat on 2024, according to data from MSCI. 

But within that data there are some wrinkles that highlight how the fracture between the U.S. and much of the rest of the world might influence real estate capital flows.

The U.S. normally sees the highest absolute amount of cross-border investment — while domestic investors account for by far the largest proportion of real estate deals, the sheer size of the market means it captures the biggest portion of global investment. 

But this year, the UK was the biggest destination for cross-border capital, MSCI data showed, in spite of the fact that the market overall had a lacklustre year for investment — the €65B spent was up 3% of the year before.

What knocked the U.S. off the top spot in 2025? A change in investment patterns from Canadians. Canadian acquisitions of U.S. real estate fell to the lowest annual level since 2010 last year, MSCI said, and that money was at least partially redirected to the UK and Europe. The region made up 40% of Canadian cross-border investment, compared with a long-run average of 23%. The UK benefitted due to its status as a large, transparent, liquid market. 

“If you listen to what Mark Carney was saying at Davos, if you pay attention to consumer habits in Canada, with some boycotting U.S. liquor and things like that, I think it would make sense that some of that would feed into decision-making at an investment level,” MSCI Head of EMEA Research Tom Leahy said. 

It would take some shift for global investors to turn their backs on U.S. real estate for the long term, both Leahy and Reeves said. It is the largest market globally, with the strongest developed economy, and if you want to invest in data centres, the hottest real estate asset class, the U.S. is where you do that. 

But Europe, and the UK, can benefit from a perception of greater certainty in an uncertain world.

“I think institutional investors are somewhat influenced by their government policy, and have to turn back a bit more local,” Bei Capital CEO Collin Lau said.

The firm is a Hong Kong-based investor, and Lau is the former head of real estate at China’s sovereign wealth fund. 

Because while the current U.S. president is only in power for three more years, this is not a trend that is likely to be reversed any time soon. 

“You can't unpick what's already been picked,” Sirius’ Coombs said. “The trust has been broken. The rules have been broken. Now, even if everyone puts their hands up and says, terrible mistake, let's all be friends, it’s another two generations before that trust returns.”