Morgan Stanley: 2026 Outlook: Key Debates, Potential Surprises & Best Ideas
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Morgan Stanley anticipates that 2026 will be a stronger year for European real estate than 2025, centered around three key debates, potential surprises, and best ideas. Despite a lack of immediate catalysts, current valuation entry points are highly attractive. Historical data shows that current price-to-earnings ratios have never produced negative returns over the subsequent 12 months, and current NAV discounts are rarely accompanied by negative returns. Capital availability is improving, evidenced by record unsecured bond issuance of approximately EUR 28 billion in 2025 and initial net inflows into UK property funds.
The three key debates focus on what could trigger sector outperformance, the paradox of the office market amid AI disruption, and the potential shift toward an EPS-centric valuation paradigm. Potential surprises include transformative impacts from new CEOs, M&A activity expanding beyond small-caps to large-caps, and significant divergence in rental growth across countries. The sector currently features cheap valuations, with consensus EPS growth at a 4% CAGR (2024-2027) versus implied growth of only 1%, suggesting a potential 20% re-rating.
Top picks include CTP (CTPNV.AS) and British Land, alongside other London office stocks like GPE and Derwent London, which offer superior rental growth. The primary risk remains a status quo scenario of persistently high long-term interest rates.