Pep Guardiola's side won Europe's premier club competition for the first time last season, beating Inter Milan 1-0 in the final.
Although the likes of Ilkay Gundogan and Riyad Mahrez have since left the Etihad Stadium, the core of Manchester City's treble-winning side remain while they have reinforced with the additions of highly-rated Croatia defender, Josko Gvardiol, Matheus Nunes, Jeremy Doku and Mateo Kovacic.
“City are favourites because they have a squad that saw them win it last season and they haven’t changed much,” Ancelotti told a press conference.
“However, in the Champions League, like always, there are surprises at the end.
“Real Madrid are a team that are going to fight until the end. We never think of ourselves as favourites, just as I think City don’t.
“But they won it last year, they can win the Champions League. You could say they are the favourites.”
Real Madrid will begin their European campaign with a home game against debutants Union Berlin on Wednesday while Manchester City host Red Star Belgrade on Tuesday.
