High interest rates continue to impact the real estate sector, now the second-most-distressed corporate sector, according to the latest Weil European Distress Index.

Despite some stabilisation in real estate valuations, with limited refinancing options and reduced investment metrics adding pressure, the issues are expected to persist in 2025, affecting liquidity and profitability.

The economic outlook for Europe in 2025 remains cautious. While a slight improvement in growth is expected compared to 2024, the recovery is likely to be uneven, constrained by structural challenges, geopolitical risks and monetary pressures, Weil said.

The last quarter of 2024 saw the industrial sector emerge as the most distressed, thanks to rising capital costs and tighter financing conditions. Poor liquidity, reduced demand and shrinking project pipelines are expected to intensify in 2025.

The UK ended 2024 as the second-most-distressed market after Germany, facing high borrowing costs and corporate uncertainty following the autumn budget, with businesses and investors delaying capital expenditure in anticipation of future rate cuts.

However, a modest easing of distress is expected in 2025, supported by gradual improvements in profitability, market conditions and risk metrics.

Overall, Q4 corporate distress levels showed signs of stabilising compared to the same period in 2023, but they remained above the long-term average.

Additionally, shifts in global trade policies, particularly in response to protectionist trends under a new U.S. administration, may further disrupt export-driven economies.

Retail and consumer rose to the third-most-distressed sector in Q4, while infrastructure experienced a sharp rise in distress, moving from eighth to fifth.

“The data for Q4 2024 underscores the challenges ahead, with flat growth and declining investment metrics painting a difficult picture for 2025,” Weil partner and co-Head of London Restructuring Andrew Wilkinson said in a statement. “While higher interest rates and fiscal tightening are likely to weigh on investor confidence, our outlook is contingent on a complex mix of geopolitical and economic factors.

“Political instability in key markets like France and Germany may complicate the European Central Bank’s efforts to lower interest rates, increasing the chance of a prolonged elevated period. If Germany revisits its debt brake policy it could create opportunities for increased investment. Additionally, progress towards a resolution in Ukraine could deliver a material improvement in stability and economic confidence, unlocking opportunities for trade and investment across the region.”