Private Markets
Value-add real estate and the speed of forgetting
10 min read 22 May 26
The built environment is having to adapt more quickly than it once did. Technology, tighter regulation and higher capital costs have shortened the lifespan of established property formats. Noura Tan, together with Robert Balick and Frédéric Laurent, Managing Partners at BauMont Real Estate Capital, M&G’s European value-add real estate business, examine how value-add investing is being redefined as cycles shorten and why building portfolios around more than one market story is becoming increasingly important.
Buildings tend to outlast the conditions that produced them, carrying forward assumptions about how people work, consume and move long after those assumptions have begun to change. History offers plenty of precedent. Roman storehouses evolved into trading halls as commerce expanded. Waterfronts shaped by maritime transport became cultural and residential districts. Industrial neighbourhoods turned into creative quarters as economies moved beyond heavy industry. These transitions rarely felt obvious or orderly at the time, yet each reflected the way cities adapt when inherited formats no longer serve contemporary needs.
What distinguishes the current phase is not the process itself, but its speed. Artificial intelligence (AI) is accelerating changes in how work is organised, regulation is tightening across energy and sustainability standards, and capital markets are repricing risk after years of excess liquidity. Together, these forces are shortening the interval between relevance and decline. Buildings that once stayed competitive for decades can slip behind within a few years. Adaptation, once episodic, has become a continuous requirement in a faster‑moving market.
For investors, the difficulty is less about choosing between stories of technology, regulation or capital, but more about recognising how these forces interact. No single lens fully captures the market now taking shape. Value‑add strategies offer a practical response to ageing stock as standards rise, while an orthogonal approach helps prevent all signals from being folded into a single macro thesis. In doing so, they frame a market in transition where structural change and short‑term dislocation often look alike – yet demand very different responses.
Value-add in real estate
Value‑add investing seeks to improve an existing asset to enhance income and value, rather than depending solely on rising property prices. Typical interventions include energy upgrades, layout changes or a shift to a more in‑demand use. With higher regulatory and tenant standards, many buildings now lag requirements despite good fundamentals. Value‑add aims to restore competitiveness and relevance.
Orthogonal approach
An orthogonal approach in real estate means not tying investment outcomes to a single market view, such as falling interest rates or a broad office recovery. Instead, it deliberately combines two routes to value: Intensive Value‑Add, where outdated assets are actively repositioned to meet current demand, and Opportunistic Core+, where fundamentally strong assets are acquired at discounts created by tighter credit. The aim is to limit exposure to any one assumption and build a portfolio that can perform even as conditions evolve unevenly.
AI and the reorganisation of work
Technological transitions have always reorganised not only how work is done but where it takes place. The factory concentrated labour, clerical expansion filled towers and computing allowed some dispersal of routine tasks. AI now extends this lineage, although with a broader and faster reach.
Generative tools are already taking on much of the routine, process-driven work that once justified large junior teams and filled the standardised suburban offices of the previous era. Hiring patterns are trending accordingly, with organisations prioritising roles requiring judgement and expertise over task execution1.
Exposure analysis in the US shows that occupations with the highest applicability to AI tend to combine complex responsibilities with a large share of structured information tasks2. These structured elements are the parts of work that generative systems can support most readily, which raises exposure levels in many highly educated professions.
Highly educated occupations sit at the sharpest edge of AI exposure
Source: Microsoft, July 2025.
Notes: 40 occupations shown for both highest and lowest AI applicability.
As routine work recedes, the office increasingly functions as a place for collaboration, culture and collective problem solving rather than individual output. Hybrid work, now a stable feature of white‑collar employment, reinforces this. Presence is now selective rather than assumed, leaving little appetite for vast, uniform floorplates designed for dense desk occupancy. Demand instead concentrates on environments that support higher value interaction and justify the commute.
Market outcomes reflect this realignment. Well‑connected central business districts (CBDs) with strong transport links and amenity corridors continue to attract tenants, while suburban buildings conceived for traditional patterns of occupancy face weaker absorption. Across Europe, CBD vacancy has held at roughly 5%, even as whole market vacancy has risen sitting at 9.5% on average due largely to outdated space piling up in peripheral districts3 . London mirrors this divergence, with continued West End outperformance and a slower, more tentative recovery across fringe locations4 .
CBD vacancy rates significantly lower than whole market averages across European cities
Source: M&G Real Estate based on local broker reports, Q4 2025.
In effect, AI and hybrid work are hollowing out the routine tasks that once justified sprawling suburban footprints and raising expectations for what office space must deliver. Many older buildings were never designed for this mix of flexibility, performance and experience. As these expectations rise, the gap between competitive and non‑competitive stock widens.
In effect, AI and hybrid work are hollowing out the routine tasks that once justified sprawling suburban footprints and raising expectations for what office space must deliver.
Regulation and the new definition of asset viability
Alongside technological change, regulation is now a decisive force reshaping European real estate. Energy performance and sustainability rules – from the EU Taxonomy, the Sustainable Finance Disclosure Regulation and a growing set of national requirements – increasingly determine which buildings can secure debt, attract institutional capital or remain legally lettable.
The penalties for falling short are already visible. Poor Energy Performance Certificate (EPC) ratings already translate into higher operating costs, constrained financing and declining tenant demand. In the UK, offices below EPC B may be unlettable by 2030, with over 70% of London’s stock falling below this threshold5 . In Germany, inefficient residential assets already trade at 15–20% discounts to top rated equivalents6 , reflecting both market expectations and the cost of compliance.
Poor EPC ratings drive material price discounts in German residential real estate
Source: JLL, 2025.
As regulatory thresholds tighten, the market is splitting more sharply. Buildings aligned with future standards continue to attract tenants and liquidity, and account for the bulk of transactions still happening. Non‑compliant assets face a different trajectory. In strong locations, price adjustments often reflect the cost and complexity of modernisation. Elsewhere, particularly in suburban offices already weakened by changing demand, discounts increasingly point toward obsolescence and the need for change‑of‑use or full redevelopment.
Yet this regulatory squeeze is generating targeted openings. Many discounted assets are not poorly located or fundamentally misused, they have simply failed to keep pace with rising standards. With targeted investment, these assets can be repositioned for materially higher value. The challenge, and increasingly the skill, lies in distinguishing between buildings that can be revived and those whose demand base has structurally eroded. As performance thresholds rise, that distinction becomes more consequential.
Many discounted assets are not poorly located or fundamentally misused, they have simply failed to keep pace with rising standards.
Capital tightening and its uneven effects
The rapid reversal of monetary policy since 2022 has intensified these pressures. For much of the previous decade in Europe, low interest rates and abundant liquidity supported elevated valuations, ambitious business plans and generous underwriting. When funding costs rose sharply, these assumptions were quickly exposed. With limited fiscal flexibility and geopolitical uncertainty supporting a higher risk premium, policy rates now appear set to hold near present levels for longer than markets once expected.
Projects launched under the old assumptions have been wrestling with the consequences ever since. Across Europe, developments encountered delays just as construction costs rose and refinancing became more difficult. Business plans that once relied on predictable liquidity now face longer holding periods, tighter covenants and narrower exit windows. In many cases, the stress reflects not faulty execution but a capital environment that shifted faster than the assets could adapt.
In many cases, the stress reflects not faulty execution but a capital environment that shifted faster than the assets could adapt.
Valuations have adjusted unevenly. Transaction evidence indicates that European real estate valuations declined by around 18–20% over the 2022–24 market adjustment, before stabilising from mid‑20247, but the distribution of that decline tells the story. Well-located assets with resilient income and strong sustainability credentials have held up relatively well, forming the bulk of today’s transaction activity. Secondary stock remains in price discovery. Suburban offices, ageing shopping centres and older industrial buildings continue to face downward pressure as markets determine their future uses.
With the refinancing cycle now under way, existing divides are becoming more apparent. Between 2025 and 2027, approximately €86 billion of European commercial real estate loans will mature, and nearly half of them are backed by office assets8. As loans come due, more sales are likely to be driven by balance sheet pressure rather than conviction, further testing weaker assets while creating opportunities for capital on hand. Importantly, not all discounted assets reflect structural decline. Some assets are priced down primarily because capital is scarce, not because demand has disappeared. As refinancing deadlines approach and lenders grow more selective, the market is likely to clarify these distinctions, separating assets facing genuine obsolescence from those which have simply been caught in the capital reset.
Orthogonality: A two-track approach to value in a reset market
In a market reshaped by changing demand, stricter regulation and uneven pricing, value‑add strategies have taken on greater importance. When value‑add is paired with an orthogonal approach, it could provide a more stable strategy for a market still reorganising around new fundamentals.
The first pathway, Intensive Value‑Add, involves transforming assets whose current usage no longer aligns with modern demand. Offices again provide the clearest example. Many were designed for traditional working patterns and now struggle to meet modern occupational or environmental expectations. Meanwhile, European cities face persistent shortages of housing, student accommodation and hospitality space. With planning systems slow and land constrained, underused offices in central locations can, with the right approvals and design, be converted into the kinds of ‘living’ and mixed‑use formats that cities increasingly need.
Office‑to‑‘living’ conversion programme, Paris region.
Source: BauMont Real Estate Capital.
Paris and London lead Europe in office-to-residential potential, with more than 50,000 and 40,000 units respectively9. In London, permitted development rights have allowed 73,575 residential units between 2015 and 2022-2110. Berlin and Paris are following suit, with local governments incentivising adaptive reuse.
Significant housing potential through office conversion across major European cities
Source: M&G Real Estate, ORIE, CBRE, bulwiengesa, 2025.
Notes: Based on conversions and not including demolitions. Numbers reported are from studies using different methodologies, therefore may not be directly comparable.
‘Living’ sectors deliver positive returns while lower quality offices post persistent losses
Source: MSCI Quarterly Index, Q4 2025. Past performance is not a guide to future performance.
Notes: UQ = Upper quartile yield, used as a proxy for lower-quality assets.
Notes: Based on conversions and not including demolitions. Numbers reported are from studies using different methodologies, therefore may not be directly comparable.
The second route, Opportunistic Core+, targets assets whose fundamentals remain intact but whose pricing has been distorted by the credit reset. A typical case is a recently built, energy efficient office in a prime location where the owner faces refinancing pressure or redemption needs. The building continues to attract tenants and generate reliable income, yet in a market of cautious lenders and thin core demand, it trades at a discount driven by liquidity stress rather than any structural weakness. In these cases, the required intervention is generally limited – leasing remaining space, selective ESG upgrades or modest amenity improvements. Once capital conditions stabilise, these buildings will be well positioned to recover value.
Prime office acquisition, major UK regional city.
Source: BauMont Real Estate Capital.
Orthogonality links these two routes. It recognises that today’s market is shaped by overlapping and uneven signals. Occupier demand patterns that vary by sector and city, regulatory standards that tighten at different speeds across jurisdictions, and interest rates that may stay high but are difficult to forecast. In such conditions, strategies anchored to a single thesis tend to be more exposed than those that draw on multiple drivers.
Adaptation under constraint
At the current moment, real estate feels unsettled, not because change is unprecedented, but because familiar processes are unfolding more quickly and with fewer cushions. What looks like disruption is often the market doing what it has always done – testing which structures still make sense and repricing those that do not, only now in a market defined by accelerated change.
The practical implication is less grand than it sometimes appears. Investors are not being asked to predict a single future, but to work with a narrower margin for error. Approaches that allow for multiple outcomes, and that are flexible about where value can be created, are better suited to an environment where both obsolescence and mispricing coexist.
This cycle will be remembered as one where adjustment happened sooner and more unevenly. As in past transitions, the edge lies not in predicting the market with precision, but in recognising when existing assumptions no longer hold and adjusting course accordingly.
1 Seyed Mahdi Hosseini Maasoum and Guy Lichtinger, ‘Generative AI as Seniority-Biased Technological Change: Evidence from U.S. Résumé and Job Posting Data’, (papers.ssrn.com), August 2025.
2 Kiran Tomlinson, Sonia Jaffe, Will Wang, Scott Counts and Siddharth Suri, ‘Working with AI: Measuring the Applicability of Generative AI to Occupations’, (microsoft.com), July 2025.
3 M&G Real Estate based on local broker reports, Q4 2025.
4 Carter Jonas, ‘Central London Net Effective Rents Monitor Q4 2025’, (carterjonas.co.uk), 2026.
5 Flora Harley, ‘Meeting the Commercial Property Retrofit Challenge - Part 1: Defining a Strategy’, (knightfrank.com), September 2024.
6 JLL, 2025.
7 MSCI Europe Quarterly Property Index, Q4 2025.
8 AEW, ‘Back-leverage Helps Bridge the Debt Funding Gap’, (aew.com), October 2025.
9 M&G Real Estate, ORIE, CBRE, bulwiengesa, 2025.
10 Matthew Sobic, ‘Why now is a good time to revisit office to residential permitted development rights’, (savills.co.uk), February 2024.
The views expressed in this webpage should not be taken as a recommendation, advice or forecast, nor a recommendation to purchase or sell any specific security.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
Contributors
Robert Balick, Managing Partner, BauMont
Frédéric Laurent, Managing Partner, BauMont
