It seems that colcon-core is incompatible with python-setuptools>=80.0 when using --symlink-install: https://github.com/colcon/colcon-core/issues/696
Simply downgrading python-setuptools is not enough since v79 targets python v3.13. Manually compiling setuptools fails because python v3.14 does not have distutils.
Result: --symlink-install is broken on recent arch linux installs.
EDIT:
It seems to be possible to get symlink installs working by using the colcon extension implemented in https://github.com/colcon/colcon-python-project this is a proof of concept - in my case everything works as intended. But who knows?
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