Europe’s role as a portfolio anchor strengthens amid whipsawing trade volatility

The U.S. administration’s sweeping tariff regime is reshaping global trade, supply chains and capital flows. This resurgence of U.S.-led protectionism and rising geopolitical risk has triggered a reset across the real asset investment landscape. As the U.S. advances a more transactional, domestically-focused industrial strategy, global institutional capital is starting to recalibrate.

Following the announcement of the 90-day U.S.–China tariff truce, fears of an imminent trade breakdown have eased. However, investors remain wary of further U.S. policy reversals, reinforcing Europe’s appeal as a stable capital allocation destination with clearly defined governance, decarbonisation frameworks and cross-border cohesion. Investors are no longer rotating into Europe purely for defensive reasons – they increasingly view the investment market as a sustainable long-term portfolio anchor.

While caution is still widespread in response to recent volatility, selective reallocations are underway – targeting jurisdictions with macro-policy clarity, regulatory consistency and geopolitical insulation. Europe is emerging as a preferred destination, attracted by its accretive financing, expansive consumer and industrial base, sustainability leadership and comparative distance from the epicentre of U.S.-China tensions.

Capital Flows Recalibrate Toward Europe

Over late 2024 and into early 2025, investor confidence had been returning across European real estate markets with improving liquidity, stronger capital flows and initial signs of a recovering transaction market. As we entered Q2 however, U.S. tariff escalations and separate geopolitical instability blunted the momentum. Some decision-making temporarily paused, but improved clarity on U.S. policy has renewed interest in allocating capital to European markets, particularly those offering stable yield profiles and regulatory insulation.

The emerging European investment thesis is underpinned by reducing exposure to tariff-exposed markets in favour of locations offering liquidity, market-leading governance standards and macro-policy clarity. The repricing of geopolitical risk is placing a premium on gateway cities that combine resilient infrastructure, regulatory certainty and innovation readiness.

While long-term U.S. allocations remain substantial, non-U.S. institutional investors – particularly from Canada and Asia – are looking to increase European exposures as a portfolio stabilizer, while European investors are exploring widening allocations across the continent. For example, Asian capital is expected to concentrate strongly in core sectors within western and northern European gateway cities, led by London, Paris, and Berlin, with liquidity consolidating into best-in-class assets and limited appetite for secondary or southern markets. By contrast, Canadian pension funds may prove more flexible, broadening exposures beyond prime offices and logistics into alternatives such as life sciences, student accommodation, multifamily, and self-storage. European investors are more likely to selectively rotate southward, with Spain and Italy, as they are more familiar with the region’s evolving economic recovery.

Meanwhile, strategic locations such as France, Poland, and Spain are emerging as alternative manufacturing, logistics, and R&D hubs, supported by relative tariff insulation due to lower U.S. trading, skilled labour pools, and regulatory stability. Cities like Paris, Berlin, and Madrid are well-positioned to capture renewed investor attention, while Bavaria and Nouvelle-Aquitaine benefit from defence infrastructure-linked real estate tailwinds. Defence-related R&D investments are seen as a structural lever to revive Europe’s competitiveness.

Rising military R&D spending could increase the euro area GDP through enhanced innovation and labour productivity, boosting occupier demand in specialized offices and tech hubs. In the long term, the anticipated incoming EU-UK defence pact could strengthen political and trade ties, improving cross-border capital flows and liquidity across the English Channel. More broadly, investor confidence is expected to rise as the European Central Bank eases monetary policy and fiscal spending expands across the bloc. By the end of the year, lower borrowing costs and a more supportive macro backdrop should support fundamentals, transaction volumes and financing.

The rotation of capital towards Europe will not be uniform. As investors become more selective, existing divergences between markets and sectors will widen further. Top-tier gateway cities will likely consolidate their dominance as capital targets, while secondary city markets may struggle to attract spill over demand. Trade-dependent economies such as Germany, Ireland and the Netherlands face near-term headwinds in sectors like pharmaceuticals, manufacturing and high-tech machinery, where exposure to global supply chains is highest.

Sticking on the topic of supply chains, it is unsurprising that there is much focus on the logistics. Some impacts on the sector may take longer to feed through than others. For example, longer-term, inland distribution hubs and urban infill logistics assets should be better insulated from global trade volatility than major port-driven locations exposed to tariff-driven supply chain disruption. In the nearer term, the recent surge in logistics leasing is driven by companies adopting ‘just-in-case’ inventory strategies, nearshoring manufacturing and expanding e-commerce operations. The durability of this demand remains to be seen as supply chains stabilize. Elsewhere, life sciences, defence infrastructure, student accommodation and senior housing are expected to be among the preferred targets for inbound capital aligned to Europe's themes of resilience, domestic demand and sustainability.

Sustainability and Decarbonization: Europe’s Strategic Advantage

Europe’s leadership in sustainability and decarbonization is emerging as a tangible competitive advantage in attracting global real asset capital. In his MIPIM 2025 keynote, Mario Draghi positioned the energy transition as an environmental imperative and a cornerstone of Europe’s future economic resilience and political sovereignty. “Decarbonization,” Draghi argued, “is a great occasion for Europe to decrease our historical energy dependence.”

A significant fiscal realignment is underpinning this shift. Europe is pivoting towards targeted defence-led fiscal stimulus, led by Germany’s €500bn infrastructure plan and loosened deficit rules. These changes are designed to boost long-term competitiveness and productivity while reducing reliance on U.S. industrial supply chains. For institutional investors, Europe’s evolving regulatory regime – from the EU Taxonomy to the Carbon Border Adjustment Mechanism – is no longer viewed as a compliance burden but increasingly as a source of pricing power and portfolio resilience. In a world where capital access, supply chain resilience and tenant preferences are shaped by sustainability, Europe’s regulatory clarity and first-mover status are proving increasingly attractive.

The scale of investment required is vast. Draghi estimates an €800 billion annual shortfall across energy, digital, transport, and defence infrastructure. According to McKinsey, Europe could mobilize at least €100 billion annually in additional private capital to help close this gap, through public-private partnerships (PPP) targeting climate-aligned and logistics-related real assets. Institutional capital is already pivoting toward assets aligned with these priorities, with a clear focus emerging across four fronts:

• Decarbonization and Clean Energy: Green logistics facilities, energy-efficient multifamily housing and electrified office buildings that align with Europe’s energy transition and resource resilience goals.
• Digitalization and Tech Infrastructure: High-specification warehouses, data centres and AI-integrated logistics hubs support Europe’s industrial competitiveness and modernisation of supply chains.
• Cross-Border Infrastructure: Pan-European energy and transport connectivity, resilient industrial corridors and networked logistics hubs that support internal market integration and supply chain resilience.
• Defence and Sovereignty: Real estate linked to rising defence budgets and strategic autonomy, including strategic logistics assets and critical infrastructure hubs in Germany, France and the Czech Republic.

These priorities are becoming cemented into investor due diligence frameworks. This global reset can help reinforce Europe’s position as a preferred destination for long-term institutional capital. Sustainability leadership is no longer simply a box-ticking exercise for investors but is becoming a decisive factor embedded into investment selection. With global capital increasingly tilting toward jurisdictions offering regulatory certainty, sustainability credibility and operational resilience, Europe’s best-in-class real assets are set to gain a more structural advantage over the next investment cycle.

Conclusion

Europe’s strategic convergence of attractive financing, fiscal stimulus and sustainability leadership is positioning the region as more than just a defensive allocation. Indeed, our latest real estate house views show Europe having the highest return outlook across regions and an overweight position in our global model portfolio. The outlook points toward a favourable investment cycle, supported by structural tailwinds and a robust pipeline of core and targeted value-add opportunities.