Investment managers have increasingly been raising capital from institutional investors for value-add strategies, which typically focus on properties with untapped potential.

In the U.S., Crow Holdings has attracted $3.7 billion for its U.S. value-add real estate strategy. Pennybacker Capital’s sixth U.S. value-add real estate fund, which closed at $1.6 billion, includes allocations from the Texas Permanent School Fund and New York State Teachers' Retirement System.

In Europe, Revelop’s Swedish value-add fund has drawn in more than SEK2.4bn ($231 million), while a value add real estate investment firm has been launched by three former Patrizia directors.

“Momentum has been building for capital to be deployed into value-add and opportunistic strategies,” says Tim Graham, Global Lead for International and Strategic Capital at JLL. “Investors have been focused on allocating capital to strategies that promise to deliver strong risk-adjusted returns, as return requirements have risen due to higher debt costs.”

Value-add approaches accounted for 56% of preferences stated in the annual ANREV/ INREV/PREA Investment Intentions Survey. And with value-add strategies often encompassing sustainability efforts, a penchant among institutional investors for value-add was noticed by the Global Real Estate Sustainability Benchmark (GRESB). The survey saw a significant surge in the participation of value-add funds in its real estate assessment, tripling between 2019 and 2023 to 537.

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.”