After a tumultuous few years punctuated by disappointing performance, positive signs are finally beginning to emerge in the $1.6 trillion[1] real estate fund market. According to Preqin, the asset class is likely to benefit from steady growth over the next few years, with AUM projected to increase to $2.7 trillion by 2029.[2]
The conditions for real estate investing become more favorable
Market headwinds, such as high inflation, rising interest rates, and complex geopolitics, have not been kind to real estate funds. However, the situation is slowly improving, and this will likely continue in 2025.
Real estate’s return to health will be helped by relative political stability in the US, with the Presidential election in 2024 having taken place producing clear results.
Despite this, ongoing conflicts in Ukraine and the Middle East, and worsening tensions between the US and China, could still cause problems for real estate portfolios.
The opportunities come thick and fast in 2025
Overall, experts are bullish that there will be plenty of investment opportunities for real estate managers in 2025.
Preqin data noted that 42% of real estate managers said it is now easier to identify high-caliber investments, whereas conversely 35% said it was more difficult 12 months ago.[3]
So, what exactly are managers looking at?
In the US, managers are scoping out office space investments, as companies increasingly clamp down on remote working. “Companies, led by some of the big technology firms, are pushing for staff to return to the office. In order to incentivize more people to come back, a number of companies are investing heavily into office amenities by retrofitting existing space and turning it into gyms,” said Harold Patch, Senior Director – Fund Administration at JTC.
Investors return to the fold
Slowly but surely, investors are returning to real estate.
Until recently, high interest rates allowed investors to obtain decent yields from low-risk government debt, so appetite for real estate funds was muted. This is backed up by Preqin data showing that fundraising moderated slightly in 2024, with the total capital raised only hitting 61% of 2023’s total, or $96 billion.[4]
However, the falling rates – and discounted commercial real estate valuations – are causing investors to trickle back into the asset class, a trend that looks set to continue in 2025.
According to Preqin, 36% of investors plan to increase their real estate allocations over the next 12 months, a significant jump from 2023 when that figure stood at 25%. 34% of investors also said they would invest more capital into real estate compared to just 13% last year.[5] Investors are certainly more optimistic about real estate’s prospects, with 47% of allocators saying the asset class will generate better returns in 2025, versus 20% a year ago.[6]
A further 23% of investors told Preqin that the real estate market was at the beginning of its recovery, although 18% said it was still at the bottom of the market.[7]
“Appetite for real estate funds in the US remains strong, particularly for larger managers and Delaware Statutory Trusts (DSTs), a unique structure which allows for passive, fractional ownership in real estate, but which also confers tax advantages under Section 1031,” said Patch.
Winning over investors will not be easy though, especially in today’s ultra-competitive market.
Real estate managers need to demonstrate to clients that they are fully on top of their operations. “Historically, a lot of real estate managers performed administration activities, such as fund accounting and reporting in-house. As markets become more complicated and investors demand greater transparency, we are starting to see a growing number of managers outsource these processes to fund administrators. This allows them to focus on what they do best, namely raising and managing money, instead of worrying about operational infrastructure,” said Patch.
After a fundraising drought over the last few years, expect real estate managers to regain the capital raising momentum in 2025.
Managers will continue to embrace technology
Industry-wide adoption of disruptive technologies will continue in 2025.
More real estate firms are using Artificial Intelligence (AI) to augment performance, by identifying potential investment opportunities, tracking market trends, and improving valuation forecasting.
Others are leveraging AI to extract and normalize unstructured data from legacy reports or systems. By organizing this information, it is then possible for firms to identify operational inefficiencies, and root them out, leading to potential savings.
The regulatory bandwagon keeps on marching
Regulation will continue to put pressure on the real estate market in 2025, particularly in Europe, however in the US “the transformed political environment will likely result in real estate managers facing less regulatory scrutiny in 2025, a status quo which will probably stay in place until 2029 at the earliest,” noted Patch.
Zeroing in on 2025
Real estate managers have gone through a turbulent period.
As markets begin to improve, the industry’s prospects are also expected to recover. This comes as falling interest rates will likely create better conditions for investing, while investors – both old and new – are piling into the asset class.
In order to win mandates though, managers need to do more than just deliver returns. They must ensure that the investment experience is enjoyable and user friendly. This can be done by digitalizing their operating models, whether it be through AI or automation. Reassuringly, a lot of managers are now taking digitalization and automation seriously.
The signs are looking positive that 2025 will be the year in which real estate stages a turn-around and return to a state of full health.
To discuss this article in detail, or to find out about JTC’s real estate services, contact Harold directly.
[1] Preqin – September 18, 2024 – Global alternatives markets on course to exceed $30tn by 2030 — Preqin forecasts
[2] Preqin – September 18, 2024 – Global alternatives markets on course to exceed $30tn by 2030 — Preqin forecasts
[3] Preqin data
[4] Preqin – December 11, 2024 – Global real estate deal market shows early signs of recovery in 2024 – Preqin reports
[5] Preqin data
[6] Preqin data
[7] Preqin data
