Has Europe’s housing crisis become structural?

What the GRI Institute’s latest Pan-European Living Outlook reveals about the future of European residential real estate.

The latest Pan-European Living Outlook from the GRI Institute offers a clear picture of where European residential real estate is heading in H2 2026.

Across virtually every major European market, demand fundamentals remain exceptionally strong, supported by demographic pressure, urbanisation, migration flows, and a chronic undersupply of housing stock. Yet despite this imbalance, new development activity remains constrained by elevated construction costs, financing pressure, regulatory friction, and deteriorating affordability metrics.

What emerges from the report is a market undergoing a profound repricing, not only of assets, but of the residential model itself.

Capital is moving away from traditional residential

One of the most important shifts identified is the continued migration of institutional capital away from traditional multifamily exposure and toward operationally driven ‘living’ segments: PBSA, senior living, flex-living, co-living, and other alternative residential formats.

Conventional residential development is increasingly challenged by compressed margins and political intervention, while operational housing platforms offer stronger pricing power, recurring income dynamics, and more resilient demand profiles. In other words, investors are no longer simply buying apartments. They are buying operating businesses attached to residential real estate.

The rise of conversions and adaptive reuse

The report also highlights the growing importance of adaptive reuse strategies, particularly office-to-residential conversions.

With development viability deteriorating across several gateway cities, repositioning obsolete office stock into housing is becoming one of the few scalable ways to deliver supply while maintaining acceptable return profiles.

This trend is especially visible in markets such as Paris, Milan and parts of Germany, where the economics of ground-up development have become increasingly difficult to justify.

Local operators are gaining an edge

Another important takeaway is the widening advantage of local capital over cross-border investors.

Regulatory complexity, permitting timelines, rent controls, and local political dynamics now require a level of market-specific expertise that many international investors underestimated over the last cycle.

As a result, operational capability and local intelligence are becoming as important as access to capital itself.

Germany: strong demand, weak development appetite

Severe housing shortages, regulatory pressure and rent intervention continue to suppress development appetite. Institutional capital is becoming more selective and increasingly focused on student housing, co-living and conversion opportunities rather than traditional rental stock.

Spain: strong fundamentals, growing affordability pressure

Spain continues to stand out for its strong macro and demographic fundamentals, but affordability pressures are intensifying rapidly. The report suggests a growing divergence between demand and purchasing power, particularly in Madrid and Barcelona. Build-to-rent strategies are becoming harder to underwrite, while build-to-sell and flex-living formats are gaining momentum.

France: stabilisation beneath institutional caution

France appears to be entering a more stabilized phase after a prolonged period of uncertainty. While institutional residential investment volumes remain under pressure, the underlying housing fundamentals, particularly in Paris and other major urban centres, continue to support long-term conviction.

The report highlights a growing focus on office-to-residential conversions. Senior living also stands out as one of the most mature and institutionalized sectors in the French market, attracting continued investor interest. However, regulation and political sensitivity around housing affordability remain key concerns for capital allocators evaluating long-duration exposure.

Italy: institutionalization is accelerating

Italy is emerging as one of the more dynamic residential stories in Southern Europe, with increasing institutional appetite for living strategies across Milan, Rome and several secondary urban centres, particularly in Purpose Built Student Accommodation, urban regeneration, and conversion-led projects. What makes Italy increasingly attractive is the combination of relatively low institutional penetration, strong urban demand and a large stock of obsolete buildings suitable for repositioning.

Investors continue to face considerable execution risk, planning uncertainty, municipal bureaucracy and inconsistent regulatory interpretation across regions. In many ways, Italy is evolving into a high-opportunity, high-complexity market.

Portugal’s structural supply deficit

Portugal presents a particularly interesting case, according to the GRI Report. The country continues to benefit from positive macro sentiment and international investor interest, yet the housing imbalance has reached critical levels.

Portugal requires roughly 80,000 new homes annually while delivering less than half that number. At the same time, yields remain too compressed in many urban markets to support large-scale institutional build-to-rent activity. As a result, build-to-sell remains dominant, while affordability pressures continue to push demand toward peripheral municipalities surrounding Lisbon and Porto.

Southern Europe: lifestyle markets becoming institutional

A broader theme running through Southern Europe, particularly Portugal, Spain and parts of Italy, is the gradual institutionalization of markets that were historically fragmented and retail driven. International capital continues to target these regions due to demographic attractiveness, lifestyle appeal and relative pricing advantages versus Northern Europe.

However, the report makes clear that affordability pressures are no longer isolated to gateway cities. Housing accessibility has become a political and economic issue across the region, increasing the likelihood of future regulatory intervention. As a result, investors are becoming more cautious around underwriting assumptions tied purely to rental growth compression.

Residential real estate is becoming an operational asset class

Perhaps the broader conclusion from the report is that Europe’s residential sector is entering a new institutional phase, and scale alone is no longer enough.

The winners over the next cycle are likely to be operators capable of combining capital, technology, local execution, and hospitality-style management platforms. Residential real estate is evolving into a far more operational asset class (one where customer experience, retention, data, and efficiency increasingly drive performance).

For investors, the implication is significant: the ‘living’ sector remains one of the most compelling long-term themes in European real estate, but the investment playbook that worked over the past decade is rapidly becoming obsolete.