European real estate operations were steady in 1H26, with shopping centers continuing to outperform office properties

Overview

The report reviews the 1H26 results of Carmila, Colonial, Covivio, Gecina, Icade, Klépierre, Mercialys, Merlin, and URW. Overall operating performance was solid, but the number of companies raising guidance fell from seven in 2025 to four. Shopping centers continued to lead, supported by positive reversion, stable occupancy, healthy tenant sales, and increasingly important non-rental income; office properties were affected by a slowdown in inflation-linked rent adjustments and showed clear divergence between core and secondary assets, as well as between Southern Europe and the French market.

Core views

First, retail real estate remains the more attractive allocation direction, with URW and Mercialys as top picks. Second, high-quality shopping centers have pricing power; rental growth has not yet significantly squeezed tenant affordability, and asset valuations are also continuing to recover amid improving investment demand. Third, office assets are not deteriorating across the board: the Paris core, Madrid, and some Italian assets still show solid leasing and occupancy performance, while secondary locations face tenant departures, negative reversion, and valuation declines. Fourth, sector balance sheets are generally stable, but higher financing costs will limit cash flow growth over the medium term.

Analysis framework

Based on the 1H26 results of nine European listed real estate companies, the report compares like-for-like rental growth, inflation-linked adjustments, reversion, occupancy, tenant sales, asset valuations, yields, leverage, and debt costs across companies, breaking them down by office and shopping center assets, core and secondary assets, and different national markets; it then incorporates operating updates, company guidance, transactions, and valuation changes into earnings forecasts and target price adjustments.

Methodology notes

• Operating performanceLike-for-like growth decomposition

  Break down like-for-like rental growth into indexation adjustments, occupancy changes, reversion, and other income contributions.

  This method is used to determine whether growth comes from inflation pass-through or from asset quality, leasing capability, and landlord pricing power.

• Cross-sectional comparisonQuality and geographic divergence analysis

  Compare performance by core versus secondary assets and across markets such as France, Iberia, Italy, and Germany.

  The report believes asset quality and supply constraints explain differences in rents, occupancy, and valuations better than the overall direction of the office sector.

• Asset valuationRental value and yield analysis

  Assess property values through expected rental value growth and changes in capitalization yields.

  The recovery in shopping center valuations is supported simultaneously by expected rental value growth, yield compression, and recovering investor demand.

• Equity valuationEarnings forecasts and discounted cash flow

  Adjust earnings forecasts based on the latest results, guidance, acquisitions and disposals, and asset value changes, and roll forward discounted cash flow models in the valuation of some companies.

  Forecast revisions are generally modest, but Klépierre receives a more meaningful target price increase due to improved long-term growth assumptions, while Icade’s target price is cut because of asset value reductions and more cautious long-term growth assumptions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• URW and Mercialys

  Top picks in retail real estate, both rated Outperform

  Strengths

  Benefiting from shopping center rental growth, resilient tenant sales, asset valuation recovery, and strong pricing power.

  Weaknesses

  URW’s Westfield Rise progress is below expectations, and Mercialys’s leverage rose significantly in 1H26.

  Comparison

  Compared with office landlords, both have stronger operating momentum and a clearer asset value recovery path.

  Risks

  Consumption slowdown, asset yields rising again, non-rental income growth falling short of expectations, and rising refinancing costs.

• Klépierre

  Rated Market-Perform, but target price received a relatively meaningful increase

  Strengths

  Leading like-for-like rental growth and reversion, mall-related non-rental income grew 13%, and long-term growth assessment improved.

  Weaknesses

  The current rating has not been upgraded to Outperform, and the French retail rent index has turned negative.

  Comparison

  Operating quality is among the industry leaders alongside URW, but the report’s equity preference is more concentrated in URW and Mercialys.

  Risks

  Declining contribution from indexed rents, weakening consumer environment, and slower valuation recovery.

• Gecina, Merlin, and prime office assets

  Selective office allocation direction, with Gecina and Merlin rated Outperform

  Strengths

  Paris core and Madrid assets show strong occupancy and leasing performance, with supply constraints supporting rents and occupancy.

  Weaknesses

  Office rent growth is slowing as inflation-linked adjustments moderate, and French office valuation trends have deteriorated somewhat.

  Comparison

  Clearly outperforming secondary French office assets; Spanish and Italian markets are generally performing better than France.

  Risks

  Remote working, tenant departures, capital expenditure requirements, asset value declines, and interest rates remaining high.

• Icade

  Rated Market-Perform, but operating and valuation pressures are the most prominent

  Strengths

  The 2026 net current cash flow per share forecast remains close to the upper end of company guidance, and healthcare asset disposals help focus on strategic businesses.

  Weaknesses

  Exposure to secondary locations has led to tenant departures, negative reversion, and asset value declines; the target price was cut.

  Comparison

  Compared with Gecina, Colonial, Covivio, and Merlin, Icade’s office operating performance is clearly weaker.

  Risks

  Further decline in occupancy, disposal execution falling short of expectations, long-term growth below expectations, and further pressure on secondary French office valuations.

• Colonial and Covivio

  Office operations are steady, but stock ratings or disclosed conclusions are inconsistent

  Strengths

  Colonial benefits from core assets in Paris, Madrid, and Barcelona; Covivio achieved strong reversion in Italy and has a more diversified business.

  Weaknesses

  Colonial is rated Underperform and leverage has risen; Covivio’s German office vacancy rate remains relatively high.

  Comparison

  Operating performance is better than Icade’s, but differences across countries and cities are significant.

  Risks

  German vacancy rates, weakness in the French office market, acquisition integration, increased disposal scale, and leverage pressure.

Key data

• Number of companies raising guidance4 companies/9 companiesBelow 7 companies/9 companies in 2025; no office-focused company raised guidance because of its office business.
• URW tenant sales growthEurope 4.6%, United States 6.9%Shows that consumption and tenant demand at flagship shopping center destinations remain resilient.
• Carmila innovative growth revenue€13.7mUp 13% year over year, accounting for about 7% of net rental income.
• Klépierre mall-related income growth13%Retail media, events, specialty leasing, and travel services income account for about 10% of group net rental income.
• Covivio reversion10%Mainly driven by the Garibaldi asset in Italy, reflecting significant divergence across national markets.
• Merlin Madrid office occupancy95.4%Up from 94.6% in 1Q; Barcelona declined to 84.4% due to tenant departures.
• Mercialys EPRA LTV45.9%Up 260 basis points in 1H26; Colonial rose to 46.3%, while URW remained the highest in the sample at 50.7%.
• Change in average sector debt costUp 60 basis points versus December 2022In 1H26, company debt costs ranged from Gecina’s 1.3% to Mercialys’s 3.2%.
• Gecina 2026 recurring net income per share forecast€6.74At the upper end of the company’s guidance range of €6.70 to €6.75.
• Icade 2026 net current cash flow per share forecast€3.05Close to the upper end of the company’s guidance range of €2.90 to €3.10, but the strategic business is expected to trough in 2026.

Impact & implications

Asset allocation should continue to favor retail real estate companies with high-quality shopping centers, positive reversion, and diversified non-rental income, especially URW and Mercialys. For office real estate, a selective strategy is appropriate, prioritizing core business districts, supply-constrained cities, and exposure to Spain and Italy, while avoiding secondary French office assets with greater tenant departure pressure and clear negative reversion. Valuation recovery can help retail companies reduce leverage and provide upside to net asset value, but rising debt refinancing costs may still suppress medium-term cash flow per share growth.

Risks

• Lower inflation reduces the contribution from rent indexation, which may cause like-for-like rental growth in both office and retail to continue slowing.
• Secondary office assets face risks of tenant departures, negative reversion, rising vacancy, and asset value declines.
• Although financing costs are stable in the short term, they may still become a drag on medium-term cash flow growth as debt is gradually refinanced.
• Higher or rising leverage at companies such as Mercialys, Colonial, and URW may limit room for investment and shareholder returns.
• Shopping center valuation recovery depends on tenant sales, investor demand, and yield compression; deterioration in macro consumption or interest rates could reverse the trend.
• The like-for-like asset value metrics disclosed by different companies treat capital expenditure inconsistently, limiting cross-sectional comparability.
• The French shopping center rent index has turned negative, making short-term indexed rent support weaker than in other European markets.
• If non-rental businesses such as Westfield Rise expand more slowly than expected, they may weaken the growth contribution of companies such as URW.

What to watch

• Whether the rent indexation contribution can strengthen again from late 2026 to 2027.
• Whether URW and Klépierre’s tenant sales, reversion, and occupancy cost ratios remain healthy.
• Whether shopping center transaction activity, yield compression, and asset valuation recovery can continue.
• Occupancy and leasing divergence in the office markets of the Paris core, Madrid, Barcelona, Italy, and Germany.
• Icade’s asset disposals, troughing of strategic businesses, and changes in asset values.
• Leverage and debt refinancing costs at Mercialys, Colonial, and URW.
• Whether the share of income from retail media, specialty leasing, and events can continue to rise.
• Delivery against second-half guidance by each company and the next round of earnings forecast and target price adjustments.