Will 2025 see comeback for core real estate?

Stubborn inflation and high interest rates have taken their toll on core real estate strategies over the past two-and-a-half years. Regional indices for the major open-end diversified core equity (ODCE) property funds tell a tale of redemptions, negative growth and weakened capital-raising since the midpoint of 2022, when a painful surge in inflation hit the markets and dampened sentiment.

However, evolving data over the course of last year suggests core is turning a corner. The Global ODCE fund index reported a total return of 1.99% in Q3 2024, marking the first positive performance since Q2 2022. Asia-Pacific outperformed the other regions in Q3, posting total returns of 5.92%, followed by Europe with 0.03% and the US closely behind with 0.02%. Other than Europe, all regions saw a quarter-on-quarter increase in performance.

Europe’s core funds had already displayed a positive result in Q1 2024, delivering a total return of 0.13% after six consecutive quarters of negative performance. In fact, the 2025 Investment Intentions Survey published in January by INREV and PREA reports a significant uptick in interest for core strategies focused on Europe, with 38% of investors now favouring them, up from 21% in 2024. 

Asia-Pacific’s recent outperformance is a positive sign despite the region’s fund managers struggling to pull the trigger on deals in 2024. ANREV data shows that capital deployment in Asia as a share of capital raised in 2023 slid to just 16%, leaving a record high of 84% of remaining capital still to be invested at year-end.  

Despite the sector’s difficulties, core fund managers report having been as busy as ever, with the tougher macroeconomic environment requiring an even more attuned response. “Navigating through the higher interest-rate environment of the past two years has required clarity of thought, diversification and the trust of investors,” says Rainer Suter, head of core funds at AXA IM Alts. “In this environment, you need to find bespoke solutions to keep the lights on in some commercial premises and local expertise in asset management to concentrate on income.”

Suter says his team has succeeded. “We’ve seen a great deal of stability, limited outflows and a return to net inflows. That’s a great message and a good starting point for the next phase, as interest rates reduce further, and valuations turn positive again.”

Across the pond, Elizabeth Troni, portfolio manager for CBRE Investment Management’s US direct core strategy, notes that the latest outlook views indicating the probability of “a higher and even higher-for-longer environment” remain “a key challenge”.

She adds: “However, with liquidity and flows returning to core funds, they can invest on an unleveraged basis, and this is how we are approaching underwriting today. Yes, it may reduce total activity in the market, but given the market has rebased, the entry point is attractive and supports core return expectations without the use of leverage.”

Richard Everett, managing director for the European core strategy at CBRE Investment Management, is even more bullish. “All the signs are there that capital raising is back as of Q1 2025,” he says. “US investors will be key to the global investment picture. If they start to embrace the diversification risk of coming to Europe – there have been very few core investors here in recent years – that will prompt a dramatic change to the landscape.”

But are global macroeconomic markers displaying enough upside to back significant inflows and investor action throughout the course of the year? Geopolitical uncertainty and mixed messages on inflation suggest not entirely. In January, the US 10-year Treasury yield hit a 14-month high, while a sell-off in UK Gilt markets pushed yields to multi-year peaks. In turn, key US inflation data has led to a conviction that rate cuts from the US Federal Bank – which held rates in January – may be slower to materialise than once hoped.

Meanwhile, US president Donald Trump has already caused geopolitical upheaval and implemented various tariffs on imports, leading to growing trade tensions. The moves could lead to a resurgence in global protectionism and end up pushing inflation higher.

Andrew Angeli, global head of real estate research and strategy at Zurich Insurance, thinks that the fate of core will depend more on the attractiveness of funds from a capital-raising perspective than the uncertain economic landscape. “Core funds have had a tough ride in the last seven quarters, but values have adjusted,” he notes. “REITs are looking positive for 2025, trading at premiums to the underlying NAV. With core funds, while some redemptions are still being paid, subscriptions are increasing. We expect to see more traction in core capital-raising in 2025, even though it won’t always be easy.”

Everett agrees that, while the investment community is weighing up the opportunity cost of investing in real estate versus other sectors, he sees some positive signals in this area. “Continental Europe is looking better value than the UK when you consider the risk-free rate for core,” he says, “with returns almost wholly set to come from income growth, rather than cap-rate compression”.

Everett suggests that core fund managers will be looking to develop “the best platforms to deliver that income growth, which will be a bit harder than it has been over the last couple of years”. 

He adds: “The best managers will come out of it looking very good.”

He even suggests that core strategies could be finding themselves “at the best point in the 15-year cycle”, adding: “That is, provided you aren’t distracted by debt, fund redemptions, or too small fund sizes to take advantage.” 

What is ‘core’ today? 

But it is not just a question of timing. Core real estate fund managers have to factor in structural changes taking place within the asset class, not least the widely recognised trend of property assets becoming more ‘operational’. Core investors can no longer be passive holders of income-producing assets; they also need access to operational capabilities.

Chris Brett, head of capital markets for Europe at CBRE, says: “The focus now is, how are we going to get the returns from the operational side of real estate and create the core product in a different way?”

Suter sees core investors continuing to get more comfortable with operational risk, although he warns that “we have to be very cautious not to replace investment risk with operational risk”. He says: “Buying platforms has become more and more common in real estate and has given a new dynamism to the sector.”

An operational focus is part of his fund’s aim to “create value beyond the impact on interest rates”, but he says fund managers need to be mindful about “partnerships and who is best in class, and what kind of relationship there is between the asset and its operation” to drive revenues.

Meanwhile, traditional criteria for core, which might include prime city locations – which might have been apt for the office market – are not applicable to the industrial sector, which is becoming a bigger component of core portfolios. “When you look at really good logistics, with good covenants and long-term income, you’re not quite so reliant on location, changing the investor mindset about what core looks like – at least for that sector,” Brett says.

Core investors are also showing a willingness to extend beyond traditional sectors, into assets that some would label infrastructure. Certain assets like self-storage, student housing and data centres can fall into a category of “not quite infrastructure, nor wholly real estate”, Brett says. “All of these sectors have durable income streams which are historically what core should be. You might not be able to raise a core office fund today, but a student housing fund would attract a lot of interest.”

He also anticipates that investors will embrace a broader swathe of asset classes as dealmaking picks up pace. Already, the living asset class subsectors of purpose-built student accommodation and senior housing have been largely accepted into core strategies, while medical offices, life science and self-storage assets “make sense as a new segment or as an add-on to existing sectors, as subsectors of offices or industrial”.

Brett adds: “We’re not actively considering data centres for our core fund strategies, but we are monitoring the sector’s growth – it feels like where logistics was 10 years ago.” 

Open-ended German funds have been something of a poster child for core’s woes in recent times, with record outflows preventing them from making the large deals they had been known for in the past.

Victor Stoltenburg, global head of acquisitions and sales at Deka Immobilien, suggests that, while capital raising may take some time to pick up pace, “2025 will be an interesting year”. He adds: “While we are seeing signs of the core market coming back all over Europe, core investors are more cautious on principle.”

Despite the environment, Deka’s funds have continued to execute deals across office, retail, logistics and hotel sectors in recent years, “based on opportunity”, Stoltenburg says. Offices have remained of interest in the US and Asia, and this “counter-cyclical” approach is likely to continue.

“On the face of it, US offices are very weak at the moment, but we consider the asset class something of a ‘hidden champion’,” he says. “I was in New York at the end of 2024, touring the Manhattan market, and was surprised by how quickly recovery is happening there. In Asia, offices are still the easiest part of the market for us to understand, although logistics there, as elsewhere, has an enduring appeal for us.”

Stoltenburg notes that the parameters of core are influenced by market timing, and more specifically, the stage in the cycle. He explains: “At the end of a cycle, core is a very big segment, while at the beginning of a cycle, core is small.” As a nascent cycle picks up pace in 2025, therefore, core players still face leaner pickings than their opportunistic counterparts. 

Despite this, he sees some cause for optimism in the German real estate fund industry. “For Deka, that means a strategic focus on management of the portfolio and remaining active on the selling side.” He adds: “We don’t need to raise liquidity for redemptions by selling properties, so the proceeds can be used for new investments.”