Public debt is rising the European Commission has warned eurozone countries that rising public deficits and debt levels pose sustainability risks. A pandemic response, energy crisis, ageing demographics and higher defence spending requirements have all pushed European government debt-to-GDP ratios to elevated levels. Governments are now taking steps to reduce debt by increasing taxation, with the burden landing on businesses and consumers, slowing decision-making. In France, however, the government’s target of reducing the government deficit below 5% next year is unlikely to be met, given spending cut measures have been dropped. Investor confidence has reflected this — European sovereign debt yields have risen, which has delayed the return of property yield compression.

Business and household spending

Servicing higher debt costs remains a challenge for businesses, particularly in operationally intensive sectors where occupiers are having to navigate higher costs. Businesses are cautious about making new investments, which is limiting expansion and leasing activity across the office and logistics sectors. The European Central Bank has lowered interest rates, making euro-denominated debt accretive to returns in many instances, supporting investor demand for larger lot sizes. Oxford Economics anticipates further interest rate cuts for the Bank of England and Norges Bank. Even so, interest repayments continue to weigh on GDP growth, raising questions over medium-term debt sustainability.

On the other hand, consumers have benefited from a previously low-interest-rate environment, increased savings and reduced household debt levels. Consumers are well-positioned going into 2026, which should support a recovery in spending across the retail, leisure and hospitality sectors.

Real estate debt — lenders back, margins fall

Debt strategies remain popular, accounting for 20% of total European real estate capital raised during Q1–Q3 2025. Real estate lenders have returned to the market, given the high risk-reward profile, and we expect this to help unlock the transaction market in 2026. Tenants are paying rent on time, rents have ticked upwards, and lenders have been able to extend debt terms to accommodate refinancing in most instances. The long-awaited distress remains minimal, and lenders have been gradually able to shift towards lending on new deals.

Increased competition among alternative lenders has reduced margins, which is gradually supporting larger deal sizes. In November 2025, for example, AXA IM Alts and Société Générale provided Blackstone with a €530 million debt facility to back the purchase of the Centre d’Affaires Paris Trocadéro. Lending activity from German banks for Q1–Q3 2025 rose by 18% year on year, according to VDP.

Debt funds are increasingly using back leverage to enhance their debt-on-debt returns. By borrowing from traditional banks, debt funds can enhance their lending capacity to partially finance loans, and are more willing to take on additional risks for secondary assets or new developments.

However, there remains a wall of real estate debt to be refinanced. Bayes' latest European CRE lending report indicates that over 50% of German and French real estate debt matures from 2028 onwards, likely slowing the speed of the transactional recovery in these markets. The proportion of non-performing CRE loans has stabilised across Europe, though regional variations remain, with increases in Germany offset by falls in Southern European markets over the past twelve months.

The current uncertainty surrounding the inflated equity indices due to big bets being placed on AI could have an impact on the private credit markets and debt availability. Should equity values fall, lending from non-bank lenders is likely to tighten. That said, not all investors rely on debt; many private buyers will seek to acquire assets at today’s prices before the full wave of competition returns to market.

The return of real estate debt bodes positively for 2026. Lender sentiment has improved, with larger transactions back on the agenda, but every building will be closely scrutinised, particularly for new loans, as lenders will remain selective on the quality of their loan book.

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