Selectivity drives outperformance in Europe

Market response: Real estate

November 21, 2025 | 2 min read

Rich Hill

Global Head of Real Estate Research & Strategy

European real estate funds extended their winning streak in the third quarter of 2025, with performance data revealing that selectivity is a key driver of returns. European ODCE indices have now delivered six consecutive quarters of positive performance and have recently outperformed their U.S. peers, where return dispersion between top- and bottom-quartile funds is more pronounced. Furthermore, single sector funds continue to notably outperform their multisector counterparts.

Open-ended core fund returns gain momentum

The European ODCE index posted net cash returns of +0.83% (local currency), marking a sixth straight positive quarter and accelerating from +0.24% in 2Q. Capital returns turned positive at +0.08%, the third positive performance in the past four quarters. Still, performance remains below the +1.51% posted in 1Q25 and +0.94% in 4Q24.

Across the Atlantic, the U.S. ODCE index returned +0.52% in 3Q25, with income returns of +0.79% offset by negative capital returns of -0.26%. Historically, the U.S. ODCE index has outperformed in 71% of quarters since 3Q11, with annualized returns of +6.4% versus +3.3% in Europe. Yet, since early 2023, performance has reversed, with Europe outperforming in eight out of eleven quarters.

The recent outperformance of Europe is consistent with our view that the continent may benefit from improving economic conditions, wider cap rates, and lower sovereign debt yields making leverage more accretive. Indeed, as of 2Q25, Europe’s unlevered asset level total returns across stood +6.9% over the trailing four-quarters compared to +4.7% for the U.S. over the same period. These results are consistent with our midyear forecast of 6–7% total returns for Europe in 2025, versus roughly ±5% in the U.S.

Another layer to the story

Macro tailwinds alone don’t explain the divergence. Return dispersion across funds has also widened. Over the past year, the median net return for European ODCE funds was +4.2%, with top-quartile managers at +5.3% and bottom-quartile managers at +2.5%.

U.S. ODCE dispersion is even starker: top-quartile funds delivered 1-year annualized gross total returns of +5.7% vs. 4.9% for the second quartile, 4% for the third quartile and a notably weak 0.3% for the bottom quartile. In other words, the top U.S. funds are outperforming, but laggards are far underperforming their European peers.

Focused strategies continue to outperform diversified

The broader INREV All-Fund Index delivered a stronger +1.05% total return, supported by income (+0.67%) and capital growth (+0.38%). This is consistent with historical trends, as the All-Fund Index has outperformed the European ODCE index in nearly 74% of quarters since 3Q11, driven in part by stronger single-sector performance.

Single-sector funds continued to outpace multi-sector peers (+0.55% total return), with the notable exception of office. Sector-level returns included:

Residential: +1.87% (+1.15% capital growth)
Industrial: +1.41% (+0.80% income growth)
Retail: +0.96% (+0.66% income growth
Office: +0.27% (0.50% income growth)

Bottom line

European real estate markets continue to demonstrate steady momentum, with consistent performance supported by improving macro conditions and tighter return dispersion. While U.S. funds still lead at the top end of the return spectrum, European strategies are benefiting from greater stability across managers and sectors. In the current environment, where macro tailwinds and manager skill both matter, selectivity both in geography and strategy remains the key to capturing outperformance.

Real estate

Disclosure

Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. Commercial real estate (CRE) investments carry several inherent risks, including those related to the economy, interest rates, and tenant behavior. These risks can impact property values, rental income, and overall investment returns. International investing involves greater risks such as currency fluctuations, political/social instability, and differing accounting standards.   

Views and opinions expressed are accurate as of the date of this communication and are subject to change without notice. This material may contain ‘forward-looking’ information that is not purely historical in nature and may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information in the article should not be construed as investment advice or a recommendation for the purchase or sale of any security. The general information it contains does not take account of any investor’s investment objectives, particular needs, or financial situation.

5012562