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.

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.”