Total real estate assets of the 150 largest institutional investors rose by 6.9% to US$2.18trn (€1.86trn) in 2025, suggesting a return to growth after the figure fell last year.
But despite this evidence for optimism, the real estate asset class faces myriad challenges, and the prospect of a return of inflation, prompted by the ongoing conflict in the Middle East, will only add to them. As IPE Real Assets went to press, MSCI released its latest figures showing that commercial real estate transaction volumes in Europe had slowed in the first quarter of 2026, which the company attributed to concerns about future interest-rate rises amid the conflict in Iran.
“It’s a notable shift from the fourth quarter last year, when there appeared to be strong momentum for a sustained recovery in real estate investment volumes,” said head of EMEA real assets research Tom Leahy. But he also said: “Many of the ingredients that contributed to the strong end of 2025 for European real estate are still present. Capital values have stabilised; returns are back in positive territory, and occupier markets have held up relatively well.”
As Andrew McDougall, US CIO at Mercer Investments, tells IPE Real Assets, real estate is in “a better place today” and Mercer, which advises investors across asset classes, is “behind it as something [investors] should prioritise as part of a broader toolkit”.
But real estate faces a number of challenges in the short term – not least its recent performance. “It is important to acknowledge how the asset class has recently fared,” says Andrew Angeli, global head of real estate research and strategy at Zurich Insurance. “Candidly, performance has been lacklustre. On a trailing multi-year basis, real estate portfolios have underperformed other asset classes. Not only that, but real estate has failed to meet institutional investors’ target returns. For a notoriously optimistic industry, this may come as a tough reality.”
That said, Zurich Insurance – which comes in at 36th in the top 150 ranking with US$14.1bn invested in the asset class – has “no doubt that real estate will maintain its long-term role in diversified multi-asset-class portfolios due to its ability to provide some inflation protection, deliver current income, while offering an attractive risk-return profile”.
But real estate also still faces liquidity and allocation pressures – according to IPE Real Assets’s real estate survey, investors are by and large close to their target allocations.
“For many investors, future real estate allocations are reliant on legacy investment outcomes,” Angeli adds. “For fund investors, especially in the enhanced-return space, limited distributions have constrained new allocations, as managers have been slow to realise positions while waiting for improved liquidity prospects. The situation is not dissimilar for direct real estate investors, who face the proverbial ‘sell before you buy’ scenario. A hypothetical investor wishing to buy Spanish residential property may have to sell a German office first. A stalemate lingers on.”
The situation is also complicated by changes in the composition of capital that supports real estate and other private markets. The greater role of private wealth, retail money and the growth of defined contribution pension schemes mean the future of capital underpinning real assets is also changing – a theme we explore in our special report.
Richard Lowe, Editor-in-chief
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