As real estate repricing hangs in the balance, value-add focused strategies are likely to benefit from being first-movers. However, the deployment of capital has yet to take flight, with Graham saying it remains dependent on market dynamics and macro-economics, with interest rate direction a major influence in most markets.

And while there currently aren’t enough assets out there to satisfy the amount of value-add capital, capex could provide a potential route to market, says Cameron Ramsey, Senior Director, Capital Markets, EMEA & UK Research & Strategy at JLL. “Current owners of core-plus office assets who are looking to upgrade their building are facing a decision between either capital expenditure on upgrades – or selling at a discount.”

The office sector, with its pressures to remain attractive in an era of hybrid work and evolving tenant expectations, may seem a logical first stop. In particular, the mid-price range of major office markets, Ramsey says.

“Average asset quality is much better than a decade ago and the dislocation between repriced prime office assets in the likes of London or Paris, and the expenditure required to renovate has perhaps been exaggerated, which could create opportunities in the short term,” he says.

For now, value-add office property deals are more likely to take place in the €50 million to €100 million ($108 million) price range, he adds. Above and beyond that, there’s caution, mainly due to a “perceived exit risk that comes from holding larger properties”.

Indeed, with exit strategies for value-add funds often involve finding a willing core buyer, all eyes are on how core capital is behaving.

“Once large ticket, core buyers return to the fray, then that may give value-add players confidence to deploy, knowing that future buyers are around.”

While the office sector may be where many value-add funds put their focus, other sectors are also in view. DWS is raising capital for a new pan-European living fund, while LaSalle’s Value Partners US IX fund is targeting the residential rental, self-storage, industrial and healthcare sectors. Hines’ target investments include purpose-built student accommodation and distribution logistics, alongside highly sustainable prime offices.

Nuveen Real Estate’s diversified value add strategy, which has around €350 million to invest, recently invested in a portfolio of single housing properties in Helsinki. Meanwhile, PGIM’s European Value Partners II bought a site for data center development in Munich.

“There’s long been wisdom in a diversified approach by most fund managers – but sectoral expertise is arguably more important today than ever, as new sectors such as data centers emerge and capital seeks to partner with the very best sector knowledge,” says Graham. “Value-add can have very different connotations depending on sector. A single-let warehouse, for example, presents different challenges to a multi-let office with staggered lease expirations.”

How much time value-add strategies have on their side will depend on the cost of borrowing, says Graham. “Investors are carefully monitoring the best risk adjusted returns in real estate, and as fixed income returns have risen, they’re drawn to value-add strategies as a route to achieving their return targets.”