Larger capital pools accommodate significant entry tickets and offer investors more efficient exit liquidity, writes Bas Tiemstra
Investors have many factors to consider when choosing between real estate funds, with scale becoming an increasingly decisive factor. While smaller vehicles can offer some advantages, many investors are increasingly focused on the benefits of larger vehicles. Looking at today’s European real estate fund universe, it is worth considering whether larger vehicles really are delivering meaningful benefits.
Although there are parallels with pan-European balanced funds and logistics funds, if we just focus on the offering of residential or ‘living’ funds across Europe, we see that while the absolute offering has grown rapidly, scale has not been easy to achieve and the market remains fragmented.
Within the INREV universe, the number of living funds in Europe increased from four with a total gross asset value (GAV) of €5bn in 2001 to over 50 with more than €60bn GAV in 2025. Pan-European funds only began playing a role in this universe in the late 2010s and, even today, account for less than 20% of the total GAV.
For simplicity, the offering can be described as falling into three tiers. At one extreme, a handful of funds provide pan-European exposure and have reached some level of scale (> €1bn). At the other extreme, there is also a wide range of funds with more specific offerings, be they country, sub-sector or tenure-specific. Between these two groups sits a middle tier of products that are pan-European in ambition but have arguably not yet scaled to the point where this goal can be executed efficiently. The number of funds in this middle group has grown rapidly over recent years.
Scale can deliver clear advantages for investors. Firstly, it enables more robust portfolio construction through greater diversification and broader geographic reach. Our study of diversification benefits shows that 20 to 25 assets are typically required to reduce specific risk by 95%.
Assuming operational efficiency requires assets of at least €50m, this points to a portfolio GAV in excess of €1bn. Sub-scale funds face higher concentration risk and lumpy deployment increases timing risk that can act as a drag on performance. In a sector where sourcing is often from developers, high concentration also accentuates the impact of any development overruns.
Secondly, scale offers advantages in terms of deal sourcing. Large funds can access bigger transactions, portfolios, and programmatic development ventures, opportunities often out of reach of the smaller funds. More generally, execution risk is diminished, which vendors may perceive as a differentiator in competitive processes. All of this is key in a sector where the pipeline supply from developers is both limited and cyclical.
Thirdly, operational capabilities and efficiencies improve with scale as larger platforms have greater potential to internalise operations and optimise the value chain. This also enables best practices to be widely implemented, building the brand, improving tenant experience and ultimately reducing tenant turnover.
Similarly, the size of the asset plays a vital role in justifying features that are increasingly important to tenants, such as dedicated on-site staff, amenities and community building.
The recent INREV Management Fee and Terms Study found that large funds have lower Total Global Expense Ratios (TGER) while the highest TGERs are found among recently launched funds which are typically smaller in size. Vehicle costs and Real Estate Expense Ratios (REER) are both lower for larger funds.
Finally, scale supports more sophisticated fund structures. Efficient structuring can include centralised functions to deal with hedging and debt market access in a consistent way. Portfolio-level debt, including bond issuance, also becomes possible with sufficient scale (> €3bn GAV), replacing more costly and less flexible asset-by-asset financing. Larger teams with suitable succession planning reduce key person risk.
A broader capital and investor base can both accommodate larger tickets on entry and provide greater liquidity for investors at exit. It also provides more stability as individual redemptions do not generate stress or force asset sales to the detriment of overall performance. We’ve seen that investors can become effectively trapped in smaller vehicles when they do not reach an adequate scale.
All four categories are drivers of better investor outcomes. As such, the current landscape does not appear sustainable, given both the opportunity cost for investors and the profitability of these sub-scale products for managers. Meanwhile, investor appetite remains strong. The living sectors will likely continue to grow as a share of the invested universe, supported by structural undersupply, rental growth, defensive characteristics and further institutionalisation.
Therefore, it appears likely that funds operating in the living sector will undergo a period of consolidation. Platforms with existing track record, genuinely pan-European asset and transaction management capabilities, ability to access off-market transactions, and strong in-house teams will be best positioned to achieve scale and deliver superior performance.
As investors redesign portfolios for the next cycle, consolidation will likely become a defining theme.
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