Can pan-European core property funds reach the scale of US mega funds?

What is fuelling European funds’ growth?

A key factor in pan-European core funds’ growth stems from the EU single market, and the benefit of a single currency, which dramatically reduced currency risk for investors. Increased demand for low risk investments, following the Global Financial Crisis, lent further support to core strategies, with investors often seeking large, diversified funds run by fewer, experienced managers. This was pivotal in enabling a select number of funds to grow exponentially.

What do US funds have that European funds don’t?

Many pan-European core funds have reached a substantial size, and values are growing¹. However, they are still dwarfed by the typical critical mass of equivalent US funds. To put this into context, the three largest US funds jointly amount to $110 billion². In comparison, the three largest European funds total a combined €15 billion³.

"Though it would be an uphill climb for pan-European core funds to enter the realms of US ‘mega’ funds, we believe there is reason to anticipate that they could double in size in the next decade."

This is largely a product of a far higher proportion of institutional ownership in the US real estate market, and the more varied nature of investible assets – from apartments to medical offices, for example. Moreover, the US is a single country with one language and similar planning regimes. Investing across multiple European markets, on the other hand, requires embedded knowledge of local markets.

What could the future hold for European funds?

The further institutionalisation of the market is likely, in our view, creating new opportunities for core funds. More logistics property is needed, partly due to onshoring production, while more quality rental accommodation is needed to help alleviate Europe’s housing shortage.

And, of course, the nature of property assets that core funds may invest in could also evolve. Alternative real estate types are likely to represent a larger proportion of core funds’ portfolios in 15 years’ time, therefore we expect that European asset managers, like their US counterparts, will gradually become more comfortable owning assets that require an element of operation, such as student accommodation.  

What is the scope of further growth potential?

The scale that pan-European core funds have now reached is proof that diversification can be achieved, and that large pan-European portfolios can be effectively managed, in our view. With momentum well established, we believe that the path is forged for continued growth, reinforced by investors’ focus on diversification, and our expectation for increased allocations to non-domestic real estate.

Though it would be an uphill climb for pan-European core funds to enter the realms of US ‘mega’ funds, we believe there is reason to anticipate that they could double in size in the next decade.    

¹Total GAV, INREV European ODCE Quarterly Index, September 2021.
²Total GAV, NCREIF US ODCE.
³Total GAV, INREV European ODCE Index.  
 

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.