European Real Estate’s structural shift: lower leverage becomes the new normal

According to the One Real Estate Universe, an EPRA–INREV joint report, INREV gearing which measures leverage across non-listed real estate funds, peaked at 39.8% in 2009 and stood at 24.6% at the end of 2025. Similarly, the EPRA loan-to-value (LTV) ratio for listed real estate companies declined from 44.0% in 2010 to 38.7%. Although the two measures are not directly comparable in absolute terms due to differences in methodology, they provide a consistent directional message: European real estate balance sheets are significantly less leveraged than at the peak of the previous cycle.

INREV gearing is calculated as aggregate debt across contributing funds divided by aggregate gross asset value (GAV). EPRA LTV measures leverage from the perspective of listed equity investors and applies a look-through methodology incorporating debt, cash, hybrid instruments and joint ventures. These differences mean that the two measures should not be interpreted as evidence that listed or non-listed real estate is inherently more or less leveraged. The key conclusion is that both segments have undergone a substantial deleveraging process.

A structural reset after the Global Financial Crisis

European real estate leverage increased steadily before the GFC, supported by abundant bank liquidity, aggressive lender competition, the expansion of commercial mortgage-backed securities (CMBS) markets and the growth of value-added and opportunistic investment strategies. Within the INREV universe, average gearing increased from 8.4% of GAV in 2000 to approximately 30% by the end of 2007, before rising further as falling asset values reduced the denominator and pushed gearing to a peak of 39.8% in Q3 2009.

The crisis exposed the vulnerabilities of highly leveraged business models. Falling asset values increased reported leverage, refinancing conditions tightened and covenant headroom came under pressure. Non-listed funds were required to manage liquidity and debt maturities more actively, while listed companies raised equity, disposed of assets and reduced debt to strengthen their balance sheets.

The subsequent decline in leverage represents a structural reset rather than a temporary cyclical adjustment. Regulatory reforms increased lending discipline, while stronger disclosure and governance standards reshaped investor expectations. Banking sector capital reforms raised the cost of higher-LTV commercial real estate lending, while the Alternative Investment Fund Managers Directive (AIFMD) strengthened reporting, risk-management and governance requirements for alternative investment vehicles. Solvency II also reinforced insurers’ preference for transparent and lower-risk real estate exposure.

In listed markets, greater reliance on unsecured bond financing, the importance of investment-grade ratings and enhanced EPRA disclosure requirements increased the market cost of excessive leverage. Lower leverage has therefore become a permanent feature of European real estate balance-sheet management.

The 2022–24 rate shock tested, but did not break, the new framework

The sharp increase in interest rates during 2022–24 represented the most significant challenge for European real estate since the GFC. The European Central Bank raised its main refinancing rate from 0% to 4.5% in approximately 18 months, triggering a substantial repricing of property assets and increasing financing costs.

Despite this pressure, the impact on reported leverage was moderate. Higher interest rates reduced asset values and increased LTV ratios mainly through valuation effects rather than through a significant rise in debt levels. INREV gearing increased from 22.1% in mid-2022 to 26.2% at the end of 2024, while EPRA LTV rose from 35.9% to 39.0%. By Q4 2025, INREV gearing had fallen back to 24.6%, while EPRA LTV remained broadly stable at 38.7%.

Debt servicing pressures were also relatively contained, particularly among listed companies. EPRA reported that although European central banks increased rates by more than 400 basis points during 2022–23, the average cost of debt for FTSE EPRA Nareit Developed Europe constituents increased by only 91 basis points. Longer debt maturities, fixed-rate financing and hedging strategies helped mitigate the impact of higher borrowing costs.

The main lesson from the 2022–24 period is not that leverage risk has disappeared, but that the sector entered the downturn with substantially stronger financial foundations. Pressure was concentrated around valuation declines, refinancing requirements, interest coverage and sectors with weaker income resilience or higher capital expenditure needs, rather than a broad-based leverage unwind.

Sector differences remain critical

Although leverage has declined across most sectors, headline averages continue to conceal significant differences. Across listed and non-listed real estate, sector gearing ranges from the high teens to almost 50%, reflecting differences in asset characteristics, income stability, liquidity and financing structures.

The largest reductions in leverage between 2012 and 2025 occurred mainly in sectors that entered the period with the highest debt levels, including industrial/logistics in the non-listed market and industrial/logistics and residential in listed markets. The main exception is listed retail, where LTV remains slightly higher than in 2012 due to weaker investor sentiment and faster valuation repricing.

At the end of 2025, retail recorded the highest leverage among major sectors in both listed and non-listed markets. The lowest-leveraged sector differs by segment, with residential leading in the non-listed market and industrial/logistics in the listed market.

The future focus will be on leverage quality

The evolution of European real estate leverage shows that headline ratios alone are insufficient indicators of risk. The key considerations are where leverage sits, when debt matures, the quality of income supporting it and the liquidity of underlying assets during periods of stress.

As the market moves into the next cycle, resilience will depend less on the absolute level of leverage and more on its structure. The post-GFC reduction in leverage has become a defining characteristic of European real estate, making a return to previous-cycle leverage levels unlikely even if financing conditions improve.