Bernstein: European real estate outperforms the market in October, with operating and asset price trends diverging behind low valuations

Are valuations still attractive after real estate stocks rose in October?

In October 2026, the STOXX 600 Real Estate Index returned 3.8% in total, outperforming the STOXX 600 return of 2.0%. Falling bond yields in most major regions, together with improving operating trends at most companies that had reported results, supported the sector’s performance.
As of 30 October, the European real estate companies covered by Bernstein traded at a weighted average discount of 31% to their most recently reported net tangible asset values, well above the long-term average net asset value discount of approximately 10%. The bank’s forecast recurring earnings yield for fiscal 2026 was 8.7%, also above the long-term average of 6.5%, leading it to consider sector valuations attractive.
Low valuations coexist with pressure on asset prices: France’s 10-year government bond yield rose 11 basis points in October to 4.97%, while Germany’s fell 26 basis points to 3.32%. European office property transaction volumes fell by one third year over year in the third quarter to 8.8 billion euros, the lowest since 2009.

Operating trends at retail landlords were generally positive, and Klépierre and Eurocommercial slightly raised their earnings forecasts. Covivio’s office, hotel and German residential businesses performed steadily, while WDP also progressed as planned.
Development activity was more constrained: CTP lowered its forecast for full-year completions because of slower leasing activity and weaker pre-leasing, but reiterated its fiscal 2026 earnings per share guidance. Icade reiterated its guidance, but operating trends weakened, and it proposed a scrip dividend scheme that would dilute existing shareholders.
German residential landlord Vonovia lowered its earnings and capital expenditure outlook for fiscal 2026 and 2028, and its asset value outlook was also weaker than Bernstein expected. The bank believes cutting capital expenditure helps protect the balance sheet and expects the company may adopt a more prudent dividend policy in March of the following year.

Leasing demand and investment transactions for prime offices are diverging. JLL expects central London office leasing volume to exceed 10 million square feet in 2026, making it the strongest year since 2019. At the time of the report, leasing volume for the year was 10% above the long-term average.
High financing costs and differences between buyers’ and sellers’ price expectations, however, are suppressing transactions. UK office property investment fell 25% in the third quarter of 2026 to approximately 2.1 billion pounds, with transactions concentrated in London and prime assets. Bernstein noted that some sellers may need to accept lower prices to complete deals.
Valuation pressure is also reflected in yields: according to Savills, the average yield on prime UK properties rose to 6% in October, with office and distribution property yields expanding by 25 basis points. Bernstein believes limited new supply and high construction costs help support the rental outlook in some sectors.

The UK autumn budget raised the threshold for small business rates relief applicable to retail, hospitality and leisure businesses, and provided two years of protection for eligible properties, limiting above-inflation increases in bills and helping tenants bear property costs.
There were no new sector-specific surcharges on office and logistics properties, better than some pre-budget speculation had suggested. Property taxes and charges are usually borne by tenants, but rising occupancy costs may ultimately reduce the rents landlords can charge.
Before formal coalition talks, three Berlin parties proposed a housing socialisation scheme: eligible homes above the threshold held by owners of more than 10 thousand Berlin homes could be transferred into public ownership, with compensation capped at 16 billion euros. The proposal has not become law, and Bernstein believes continued uncertainty could weigh on local real estate investment.

The latest developments in Spain’s draft data centre regulations indicate that stricter requirements may remain after the transition period ending in 2031, while the final draft also eases renewable energy procurement rules. It still requires an opinion from the Council of State, revisions and approval by the Council of Ministers.
Bernstein estimates that, in a worst-case scenario, slightly more than a quarter of Merlin Properties’ data centre development pipeline would be affected, and accelerated development in Portugal could fully offset the impact. The bank believes Merlin’s current valuation, on a sum-of-the-parts basis, does not reflect future upside from data centres.
Costs and power supply also affect development: according to Turner & Townsend, European data centre construction costs rose 13% year over year to 12.76 dollars per watt. A planned project in Loughton, UK, lost Microsoft as its anchor tenant after its grid connection was reportedly delayed until the 2030s.