After a difficult few years marred by challenging performance and capital raising conditions, the $1.6 trillion real estate fund industry [1] is finally having a much-needed reset, as market headwinds ease and new commercial opportunities emerge.
This article takes a deeper look at what is happening in the world of real estate.
Calmer markets steady the industry
Between 2022 and 2024, high interest rates – and with it increased debt servicing costs, plus tumbling valuations – put all sorts of pressure on the real estate sector. In Europe, for example, commercial real estate suffered losses of -2.8% in 2022 before dropping even further to -4.7% in 2023, making it one of the worst calendar years for performance on record.[2]
However, the situation is slowly stabilising, as falling inflation gradually paves the way for monetary policy easing, a trend experts anticipate will continue in 2025.
“There is certainly a lot more optimism about 2025. Barring any major global shocks, the consensus is that interest rates will continue to fall this year, which is obviously good news for real estate,” commented Simon Gordon, Senior Director, Fund & Corporate Services.
Looser monetary policies should put real estate funds on a much stronger footing in 2025.
European real estate offers an opening
Real estate investment opportunities are also becoming more ubiquitous across Europe, with experts increasingly confident that the worst of the valuation cycle is behind us.
“In the UK, we are seeing some green shoots of deal activity in certain sectors of the office and retail markets, where pricing corrections are now allowing for a more attractive level of return” said Will Turner, Director, Fund & Corporate Services.
UK residential real estate is also gaining traction.
Investor appetite for residential real estate was given a boost by the UK government’s pledge to double down on housebuilding, setting a target of 1.5 million new homes by 2029. “In particular, we are seeing an interest in investors allocating to social housing. Not only does this help them fulfil the social element in their environment, social, governance (ESG) KPIs, but social housing can also provide stable, predictable level of long-term income,” added Turner.
Real estate managers are also zeroing in on mixed use urban residential developments. “This is when residential led developments encompass retail and leisure aspects, along with co-working and other facilities. There is increased demand for these types of developments, as they help investors diversify their return streams,” said Turner.
Elsewhere across Europe, Vincent Van Den Brink, Commercial Director, Luxembourg, said real estate managers are keen on investing into data centres, a commercial real estate sub-sector which could be riding high off the Artificial Intelligence (AI) boom.
For AI models to work, they require enormous amounts of computational power, i.e. data centres.
Although the recent emergence of China’s DeepSeek AI model has stirred debate about whether returns on AI investment and its infrastructure are somewhat inflated, research from Goldman Sachs still suggests that demand for high density data centres is only going to intensify, highlighting global power demand could jump by 50% in 2027, and a staggering 165% by 2030. [3]
With AI’s growth spurt is showing no signs of losing any momentum, van den Brink said European real estate managers will continue to ramp up their holdings in data centres. This comes as Brookfield recently announced it would invest €15 billion via its European data centre platform D4 into supporting AI infrastructure development, i.e. data centres, in France over the next five years. [4]
As 2025 progresses, the deal pipeline for real estate managers is looking increasingly promising.
Fundraising starts to look healthier
Fundraising across real estate funds is also expected to recover in 2025.
In addition to denting portfolio performance, the high interest rates also made fundraising incredibly difficult. “With interest rates at such high levels between 2022-2024, institutional investors, such as pension funds, were getting comparable rates of return on low-risk Gilts and cash deposits as they were from real estate managers, which made fundraising much harder,” noted Turner.
This comes as Preqin data shows that global real estate managers raised $91 billion in 2024, which was just 61% of 2023’s total[5]. But capital raising is expected to accelerate, as interest rates trend downwards.
According to Preqin, 36% of investors plan to increase their real estate allocations over the next 12 months, a significant jump from 2023 when that figure stood at 25%. 34% of investors also said they would invest more capital into real estate compared to just 13% in 2023[6]. Investors are certainly more optimistic about real estate’s prospects, with 47% of allocators saying the asset class will generate better returns in 2025, versus only 20% a year ago[7].
This bullishness amongst investors is prompting more alternative asset managers to embrace new and different strategies. For instance, EY research shows that 51% of European alternative asset managers are looking to diversify their strategies[8], including real estate.
Flows into real estate are likely to pick up off the back of regulatory changes and product innovation too, with Preqin projecting that real estate assets could reach $2.66 trillion by 2029[9].
According to Turner, proposed UK government reforms to consolidate defined contribution (DC) schemes and merge local government pension plans into mega funds had the potential to help unlock a significant amount of capital for real estate funds, although these flows will take a few years to materialise.
The rise of semi-liquid, more retail-focussed fund structures, e.g. the European Long Term Investment Fund (ELTIF), the UK’s Long Term Asset Fund (LTAF), might also lead to real estate funds benefiting from more cash infusions. For managers and investors alike, these fund structures are proving to be useful income diversification tools.
A record 36 ELTIFs were launched in the nine months leading up to September 2024[10], with experts forecasting the fund wrapper could be looking after €30 billion – €35 billion by the end of 2026. “While LTAFs have had a slower start, they are now becoming more popular and have the potential to bring significant DC capital into the Real Estate/Alternatives market.” continued Turner.
In order to attract more retail money, managers are also lowering their minimum investment criteria. “There are innovative fund structures coming into play today whereby managers allow smaller investor ticket sizes into their funds. Previously, a manager might have a minimum investment of, say, $1 million, but some firms are lowering this to $50,000. Whereas before, there would be a handful of LPs in a fund, now there can be thousands of investors,” said Gordon.
In the short-term, lower interest rates will likely re-energise investors into making more real estate allocations. Over the longer-term, regulation, i.e. pension fund reform, and product innovation, will also be catalyst for investment flows.
After a tough few years, it looks like we are on the cusp of a real estate fund renaissance.
JTC provides comprehensive support for real estate funds, from fund administration and regulatory compliance to investor reporting and liquidity management. With JTC’s expertise, clients can navigate the recovering real estate market confidently.
For more information, visit our dedicated Real Estate website.
[1] Preqin – September 18, 2024 – Preqin forecasts global alternatives AUM to rise to $29.22 trillion by 2029
[2] MSCI – March 11, 2024 – Returns for European property fell as office weakened
[3] Goldman Sachs – February 4, 2025 – AI to drive 165% increase in data centre power demand by 2030
[4] IPE Real Assets – February 10, 2025 – Brookfield to invest €20 billion in AI and data centres in France
[5] Preqin – December 11, 2024 – Global real estate deal market shows early signs of recovery in 2024 – Preqin reports
[6] Preqin data
[7] Preqin data
[8] EY – 2024 EY Global Alternative Fund Survey
[9] Preqin- September 18, 2024 – Preqin forecasts global alternatives AUM to rise to $29.22 trillion by 2029
[10] Scope Explorer – October 10, 2024 – ELTIFs: a new record for launches in 2024 as more asset managers join market
