The outbreak of the COVID-19 pandemic and the resulting uncertainty has made the majority of investors highly conscious of security in recent times. Consequently, the risk aversion of many market participants has risen, leading a majority of investors to seek property with stable, long-term income. However, the supply of such assets has been significantly lower than the corresponding demand over the last twelve months, particularly since many investors have tightened their criteria for the core risk category. As a result, prices for such properties have risen further in recent months with yields also hardening further (see also: How are initial yields trending?). At the same time, the focus on greater security has led some investors to rebalance their portfolios and to dispose of properties that no longer meet their current investment criteria. This, in turn, is creating numerous opportunities for value-add investors.

Besides the abundance of potential purchasers, unlike in the core segment, there are also more vendors in the value-add category. One reason for this is that market participants have very different views on the development prospects of properties (which have been changed drastically by the COVID-19 pandemic in many cases). The challenge lies in finding a compromise in terms of price levels, which has proven difficult over the last 12 months. To date, vendors have rarely been prepared to deviate from the price levels for such properties from prior to the pandemic. Purchasers, meanwhile, would like to see the greater risk compared with 2019 priced in and expect corresponding price reductions. Financing value-add investments has also not become any easier, with banks becoming more discerning in this risk segment and subjecting calculations to greater scrutiny. One solution observed in recent times is for vendors to grant rental guarantees in order to maintain price levels.

Below, we provide a brief overview of the segments currently offering opportunities for value-add investors:

Offices: The COVID-19 pandemic will change the world of office work for the long term. Precisely how this structural upheaval will impact the design of modern office space and how much office space will be required in view of the changing working concepts remains to be seen. Where the optimal office locations will be going forward also remains unclear. On the one hand, this offers value-add investors the opportunity to take offices that are no longer contemporary and make them fit for the requirements of the future. On the other hand, properties in urban district locations or even peripheral locations could be converted into flexible workspaces or satellite offices close to residential locations for individual companies.

Logistics: The shortage of sites remains a hot topic of conversation in the logistics sector. This relates to both greenfield sites and inner-city locations. In view of the much-discussed last-mile delivery and the necessity for suitable space in central and easily accessible urban locations, conversion of space into inner-city logistics hubs, e.g., in retail locations, offers interesting opportunities for value-add investors.

Retail: The COVID-19 pandemic did not initiate the structural change of shopping streets. The events of the last twelve months have merely accelerated an existing trend (see also: Where are the opportunities for city centres?). Falling rents in the best city-centre retail locations will result in the repositioning of department stores. However, most of the typical investors in department stores in prime high street locations will be unable to manage this process, opening up opportunities for value-add investors.

Regardless of the sector, there is also significant value-add potential in terms of energy efficiency upgrades of properties. While the EU criteria for real estate funds are still not clearly defined, this will be a dominant theme over the coming years. It is only a matter of time before existing properties must also fulfil more stringent ESG criteria in order to remain appealing to institutional investors. By way of example, in France and the Netherlands, properties must achieve a certain energy reduction or obtain a certain energy label by 2030; a development also likely to be adopted in Germany.