Real estate funds adapting to high-rate, low-yield environment

As borrowing costs rise and property yields remain relatively low, the gap between financing and cash flow becomes constrained, putting pressure on managers to deliver compelling returns. In Europe’s commercial real estate market, Q1 2025 sales totalled just €47.8bn, less than half of comparable volumes seen three years ago, and cross-border investments fell 20% year-on-year to €17.2bn, marking the worst quarter in over a decade. In the US, the Treasury yield was above 4.5% at mid-year with projections of breaching 5% before year-end.

The current market environment is negatively affecting fund performance. Per McKinsey’s 2025 Global Private Markets Report, global closed-end real estate funds posted a pooled internal rate of return (IRR) of -1.1% through Q3 2024, while open-end vehicles reported a 2024 return of -1.6%, their second annual decline since the 2008 financial crisis.

Market uncertainty and rising rates have also slowed fundraising efforts. Global real estate fundraising fell 28% in 2024 to US$104bn, marking the weakest total since 2012. Private credit funds, on the other hand, raised nearly US$40bn in the first half of 2025, almost double the capital raised by real estate funds during the same time period.

Against this backdrop, fund managers must take a hard look at their fund structures and operating models to become more nimble in a dynamic market environment.

Fund structures are evolving in response to these industry challenges. While real estate investment funds are still structured with closed-end vehicles, evergreen or open-ended structures are becoming common due to their flexible formats.. Hybrid fund structures that combine private equity with credit exposure are emerging as an option for managers seeking more agile ways to deploy capital. In a high-rate environment, cost discipline becomes non-negotiable. Fund managers are streamlining internal processes, re-evaluating outsourcing arrangements and modernising legacy systems.

Automation and technology play a crucial role too. Digital tools are accelerating NAV calculations and improving investor reporting by automating certain processes. But technology alone is not enough. Experienced teams and robust oversight controls are needed to oversee that digital transformation translates into tangible performance improvements.

Outsourcing non-core functions is on the rise across middle and back-office operations globally. Experienced fund administrators are providing end-to-end services across fund accounting, SPV administration, regulatory reporting and compliance monitoring, not solely as a cost-cutting measure, but as a strategic lever. These skilled providers are helping managers scale across jurisdictions, allowing in-house teams to focus on deal execution and asset management.

Institutional investors are seeking real-time visibility into portfolio metrics, risk exposures and capital deployment in this capital-constrained environment. Data quality and accessibility are critical to this effort. Leading managers are investing in systems that centralise operational data and deliver real-time insights to improve investor communications and help with internal decision-making. Having this data in hand allows managers to reallocate capital, hedge risks or exit positions with data-driven clarity.

Investor engagement remains crucial during this tumultuous market environment. As LPs rebalance their portfolios in response to rate and liquidity pressures, fund managers who communicate proactively and demonstrate operational discipline will be best positioned to retain and attract capital.

Looking forward, there are signs of cautious optimism. AEW forecasts that the European CRE deal volumes will reach €200bn in 2025, up from €183bn in 2024, although still only slightly more than half of the 2021 peak. Deloitte’s 2025 CRE Outlook reports that 68% of respondents expect sector fundamentals to improve, compared to just 27% a year earlier. Only 13% expect deterioration, down from 44% in 2024. This sentiment shift suggests a slow but measured recovery may be underway.

In this climate, real estate asset managers must do more than weather the storm; they must adapt. Structuring for resilience, investing in operational efficiency and engaging with experienced service providers are no longer optional. They are the levers that will separate the funds that endure from those that falter.

TMF Group has been a strategic operational partner to global real estate asset managers for decades. With a presence across 87 jurisdictions and deep expertise in fund administration, entity management and regulatory compliance, TMF Group helps managers launch and scale fund operations with clarity. Whether structuring cross-border funds, streamlining reporting processes, or supporting local governance requirements, TMF Group delivers the operational expertise and local insight that institutional investors increasingly expect.  

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