LRE poised to benefit from strong operations and easing macro-economic environment

by Giovanni Curatolo , Research and Indexes Analyst

Although 2024 marked a rather challenging year for European listed real estate, which posted a total return of -2.7% against a general positive performance from both global and regional equities, 2025 has started on a strong note. The FTSE EPRA Nareit Developed Europe Index has delivered a YTD total return of 2.77% (as of 17/02), driven by growing investors’ confidence in the broader sector and the outperformance of Retail and Industrial sectors, which returned 7.13% and 5.51%, respectively.

Exhibit 1

As highlighted in one of our previous research articles, European property companies managed to raise more than EUR 22 billion in 2024 through a mix of equity and bonds. This capital is set to be deployed by property companies to refinance obligations and fund new business opportunities. While these funding channels provide an ‘immediate’ source of capital, the growth in assets under management among actively managed funds specialized in the sector reflects an increasing confidence in the European listed real estate sector.

In 2024, the assets under management of the 32 largest actively managed LRE open-ended funds[1], which invest exclusively in European LRE companies, increased by 8.6%, even as the sector market cap contracted by 4.7%[2]. This divergence suggests that, although the sector faced uncertainty due to the unstable macroeconomic environment, shifting conditions and strong operational performance are now encouraging more investments towards the sector. The following chart illustrates the income generated by European property companies[3] from their rental activities over the past ten years. Notably, in 2024, the average rental yield4 for the sector has reached and exceeded pre-pandemic levels.

Exhibit 2

In terms of sectors, over the past year, active fund managers have increased their allocations to diversified, residential, and retail property companies while reducing their exposure to industrial and healthcare sectors.[5]

Exhibit 3

On average, actively managed funds tend to overweight companies that invest in traditional sectors such as residential (4.6%), retail (3.6%), and industrial (2%). Additionally, they allocate an average of 14% to companies investing in multiple property sectors[6]. This ‘Diversified’ sector is the most underweight (12% below than the benchmark)[7]. Combined, ‘traditional sectors’ account for approximately 63% of the weighted average allocation of the funds, 8% more than the share of the same sectors in the FTSE EPRA Nareit Developed Europe Index as of December 2024. This higher allocation compared to the benchmark suggests a more selective approach by active fund managers, prioritizing companies operating solely in traditional sectors due to their stability and predictability. The following chart illustrates the extent to which the funds are overweight or underweight in each sector relative to the index[8].

Exhibit 4

On a weighted average basis, European active managers delivered a 5.6%[9] total return in 2024, signalling how strategic positioning can play a key role in achieving competitive returns through evolving macro-economic conditions. While it is too early to even imagine how the sector will perform in 2025, the growth of the capital allocated to active managers and a more stable interest rate environment are both positive signals for the growth of the sector.

[1] The 32 active funds are all domiciled in Europe and were chosen based on availability of data (LSEG Data).

[2] FTSE EPRA Nareit Developed Europe Index free float market capitalization as of Dec 31, 2024.

[3] Constituents of the FTSE EPRA Nareit Developed Europe Index.

[4] Average estimate for all the FTSE EPRA Nareit Developed Europe Index constituents - Rental Yield is computed as the ratio between as reported Rental Income and Investment Properties at fair value in EUR.

[5] Sector classification is based on the FTSE EPRA Nareit Developed Europe Index + Towers and Infrastructure – data as of December 2024.

[6] Companies that invest <75% of their total assets in a specific sector are considered “Diversified”, according to the FTSE EPRA Nareit Index series ground rules.

[7] Overweight/underweight based on the FTSE EPRA Nareit Developed Europe Index sector split.

[8] Managers’ allocation represents the weighted average allocation (by AUM) to the different sectors.

[9] Total return on a weighted average basis of the largest 31 funds as of December 31, 2024.