Distress levels within real estate have fallen, with the sector now the fourth most distressed in Europe, behind retail and consumer goods, industrial and infrastructure, according to global law firm Weil, Gotshal & Manges.

Total distress in real estate is falling to its lowest level since early 2022 amid stronger market fundamentals and valuations, the Weil European Distress Index reveals.

It shows “positive momentum” in the sector, which has gained traction since 2023. The law firm said it anticipated real estate’s market recovery to accelerate from 2026 onwards, driven by falling interest rates and increased infrastructure spending.

Across all the sectors in Europe, however, corporate distress is expected to rise further in the year ahead amid liquidity and investment pressures, and a growing divergence emerging across sectors and countries.

In the UK specifically, the index highlights that underlying weakness in economic growth, rising unemployment and slowing wage growth are weighing heavily on confidence. Liquidity distress is now the highest in the index.

While the Spring Budget was less damaging to consumer demand than initially feared, it has done little to lift sentiment, according to the law firm. Retail and consumer goods are expected to face renewed strain as higher National Insurance contributions and an increased minimum wage add to corporate distress in 2026.

Neil Devaney, partner and co-head of Weil, Gotshal & Manges’ London restructuring practice, said: “In the UK, recent Budget measures – including higher National Insurance and minimum wage costs – are set to add further pressure into 2026. With growth expected to offer little relief over the coming years, these pressures are unlikely to ease quickly.”

According to Andrew Wilkinson, partner and co-head of the firm’s London restructuring practice, challenges around structural shifts, alongside general geopolitical and policy uncertainty, are weighing heavily on investment decisions.

“Elevated financing costs and fragile demand are pushing firms to prioritise liquidity over long-term capital deployment, reinforcing uneven distress across sectors and countries,” he said.