Performance across core real estate funds, as reported by ODCE indices, improved in 1Q26, but the underlying story remains one of divergence rather than uniform recovery. Europe outperformed the U.S., though for different reasons: U.S. returns are still income-led, while Europe is increasingly benefiting from recovering capital appreciation.

Importantly, headline returns continue to obscure a wide range of outcomes for investors. Dispersion across funds, sectors, and markets remains elevated, reinforcing the view that this is a selection-driven cycle in which manager and strategy choice are often determining results.

European ODCE funds delivered net returns of 1.28% in 1Q26, modestly ahead of the U.S. at 1.04%. The gap continues to reflect differences in return composition: capital appreciation contributed 0.55% in Europe versus just 0.24% in the U.S., while income remains slightly higher in the U.S. (0.80% vs. 0.73%).

This divergence is even clearer over the past year. U.S. returns of 3.11% were entirely driven by income (+3.22%), with capital returns slightly negative. In contrast, Europe’s 3.52% total return was primarily driven by capital growth (+3.07%), with income playing a much smaller role.

Headline index returns continue to mask meaningful differences across managers. In the U.S., the spread between top- and bottom-quartile funds remains wide, with top performers generating 5.9% annualized returns versus just 0.1% for the bottom quartile.

Reporting conventions differ slightly in Europe, but the widening dispersion profile story is similar. The net total returns for the lower and upper quartiles were 0.91% and 1.85%, respectively, representing an interquartile range of 94 bps versus 79 bps in 4Q25. On a one-year annualized basis, the upper quartile generated net total returns of 5.73% versus 3.38% for the bottom quartile.

In both regions, the “average” fund is becoming less representative of actual investor outcomes. Instead, performance is increasingly concentrated among a smaller set of managers and strategies.

Capital flows into European ODCE funds remained constructive in 1Q26. Net inflows remained steady at €541 million, supported by a sharp decline in redemptions to €36 million, the lowest quarterly level in several years.

At the same time, broader INREV data highlights where that recovery is taking hold. Returns across all European funds reached 1.30% in 1Q26, the strongest since mid-2022, driven by a rebound in capital growth. Performance continues to be led by single-sector strategies, particularly residential, while multi-sector funds lag.

Geographically, leadership is shifting toward peripheral markets such as the Netherlands, Finland, and Southern Europe, while larger core markets, including the U.K., France, and Germany, are trailing. Together, these trends point to a European real estate market where both sector and regional allocation decisions are increasingly shaping investor outcomes.

The improvement in headline returns points to a market that is stabilizing but not necessarily converging. Europe’s recovery is gaining traction through capital appreciation and improving flows, while the U.S. remains anchored by income with limited evidence of a broader valuation rebound.

At the same time, dispersion across funds, sectors, and geographies continues to widen. That reinforces the defining feature of this cycle: returns are no longer a function of broad market exposure, but of targeted positioning. Manager quality, sector focus, and geographic exposure are now the primary drivers of performance, and the gap between getting it right and getting it wrong is only increasing.