Real estate recapitalisations: navigating dislocation and unlocking value
Our real estate outlook points to immediate opportunities following a significant pricing correction – and this market dislocation is also creating new and potentially compelling access points for assets with balance sheet or funding challenges.
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As has been well documented, private real estate markets have been through a period of substantial repricing.
This, in turn, was driven by sustained, fundamental shifts in key macroeconomic drivers, notably the sharp rises in interest rates that began in the second half of 2022, alongside structural changes related to what occupiers seek from real estate and property owners.
Our proprietary analysis suggests the market has moved through its period of price discovery and has reached an inflection point, with tight supply conditions owing to elevated construction and debt finance costs providing a conducive backdrop for recovery.
This is therefore laying the foundation for attractive investment vintages – including for funds investing now – as investors have the opportunity to capitalise on repricing to enter into assets at lower valuations with significant headroom for growth.
Within this, there is a specific cyclical opportunity to access existing, seasoned real estate assets and portfolios via recapitalisations. These situations are arising as management teams face liquidity shortfalls and so insufficient capital to bolster balance sheets, invest in their portfolios or drive growth to further optimise value.
Against a backdrop of reduced realisations – private equity real estate fund distributions are 30% below trend levels, according to Preqin data – a range of investors are also seeking liquidity for a wider array of reasons. These include pending maturities of existing ownership structures, portfolio rebalancing and investor-specific situations, such as the maturing profile of DB pension plans.
This creates a gap in the market for management teams to bring in a new partner, able to provide capital solutions and operational support to drive growth and value creation. In this article we elabroate further on the capital market dislocation in European real estate markets that is underpinning this growing recapitalisation opportunity in the region.
Rebased pricing presents opportunity
Across Europe, pricing and capital values have experienced falls exceeding 20% across many markets since the 2022 peak. This repricing is characterised by significant sectoral divergence, reflecting not only the impact of rising rates on yield movements and increased debt finance costs, but also positive and negative structural tailwinds unevenly impacting various property types, including an increasing range of newer segments now available to investors.
This has happened at a time in which, despite modest economic and rental growth expectations, a lack of supply continues to support operational performance. Elevated construction costs and reduced debt availability have significantly slowed new project pipelines across the region. Should European economies regain momentum, these dynamics could allow well-positioned assets to deliver real income growth, laying the foundation for improved long-term performance.
Asset price rebasing creates cyclical opportunity in European real estate
European real estate transaction pricing by sector (Index, Q4’21=100)
Source: Green Street Advisors, Schroders Capital, August 2025. Shown for illustrative purposes only and should not be interpreted as investment guidance. There is no guarantee favourable investment outcomes will be achieved.
Key considerations here include:
- Sector divergence: Distinction between sectors remains critical. The office sector has been hardest hit, having seen a correction exceeding 38% according to Green Street data, whereas retail has only experienced 13% given its secular challenges were reflected earlier in the cycle. Even within some sectors, trends have diverged – for example, grocery-anchored retail in areas of high population density has outperformed other retail formats.
- Asset specifics: We expect asset and location considerations, for example building aesthetics, amenity provisions and colocation profile, to have a greater influence on relative performance going forward than seen in recent years.
- Decarbonisation and climate risks: A key asset specific factor is the impact of tightening regulations concerning sustainability requirements, which is accelerating obsolescence and ‘brown discounts’. Capital must be deployed to protect value and transform more challenged assets into operational income-producing real estate. Where expenditure backlogs exist, owing to liquidity constraints, value diminution is being exacerbated. More frequent extreme climatic conditions and events also pose physical risk for assets.
Liquidity constraints
Owing to tighter financial regulations and a generally cautious approach to risk, banks remain conservative. They are maintaining loan-to-value (LTV) levels and covenants, and higher interest costs have also acted to constrain transactional liquidity.
Non-bank lenders are increasing in prominence having raised meaningful capital, but nonetheless asset owners are also contending with more challenging debt capital market conditions, particularly relating to refinancing events.
Subdued capital markets have contributed to a drop in transaction volumes
European real estate investment volumes - €bn
Source: MSCI RCA, Schroders Capital. August 2025. Shown for illustrative purposes only and should not be interpreted as investment guidance. There is no guarantee favourable investment outcomes will be achieved.
Importantly, this has the potential to create 'funding gaps' upon refinancing. When current loans mature, the amount of financing that can be raised, calculated against reduced asset values, is often too small to cover the existing debt. Owners therefore face a need for capital that, in turn, encourages consideration of recapitalisation-led solutions.
Funding gaps emerging for real estate loans reaching maturity
Estimated UK debt funding needs per loan vintage*: % Capital stack
Source: Bayes Business School, MSCI, Refinitiv, Schroders Capital, November 2025. *Estimated by assuming a newly originated loan at average LTV according to Bayes Business School survey data and both the past and projected MSCI UK all property capital growth, to infer the implied equity position at the end of a five-year term for a bullet loan. ** Assumes prevailing and forward-curve implied five-year swap rates at these times plus Bayes Business School survey data for average senior real estate debt margins and five-year amortized arrangement fees.
Simultaneously, a substantial volume of real estate funds (estimated at over $20 billion in current net asset value, $40 billion in gross asset value) are at least five years into their lives. They have a structural need to generate liquidity when market sales are challenging, adding to the strong opportunity for recapitalisations.
Substantial unrealised value in real estate funds from pre-2020
Private real estate fund universe value and dry powder by vintage ($bn)
Sources: Preqin, Schroders Capital, June 2025. Shown for illustrative purposes only and should not be viewed as investment guidance. Forecast may not be realized. Sample selection includes core-plus, distressed, value and opportunistic funds.
Finally, it is also notable that capital has become increasingly concentrated in recent years among the largest global managers, which oversee large funds deploying into large-cap transactions. The implication is that the funding deficit we have outlined is most acute for mid-market management teams.
Less capital has been raised and is unevenly concentrated in fewer managers
Sources: Schroders Capital, Preqin, September 2025. Shown for illustrative purposes only and should not be interpreted as investment guidance. There is no guarantee favourable investment outcomes will be achieved. 1. YTD = to Q3 2025.
From challenge to opportunity
European real estate markets are being constrained by capital market dislocation which is providing an opportunity to access high-quality assets at attractive valuations via recapitalisations. These involve providing flexible capital solutions to established management teams facing time or capital constraints in optimising value.
Favourable cyclical and structural dynamics – particularly the need to address operational complexity and sustainability requirements – are further fuelling these opportunities, especially for managers able to bring established operational and asset management expertise to the table.
We will delve further into this dynamic in the second paper in this series, providing further detail on the evolution in occupier markets and providing a deep dive into the resulting recapitalisation opportunities that we see in the market.
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