Value add in European real estate and speed of obsolescence

From legacy formats to shifting realities

Buildings tend to outlast the conditions that produced them, carrying forward assumptions about how people work, consume and move long after those assumptions change. History offers plenty of precedent. Roman storehouses becoming trading halls; waterfronts evolving into cultural and residential districts; and industrial neighbourhoods turning into creative quarters. These transitions rarely felt orderly at the time, yet each reflects how cities adapt when inherited formats no longer serve contemporary needs.

What sets the current phase apart is the pace of change. Artificial intelligence (AI) is reshaping work dynamics, sustainability standards are tightening and capital markets are still adjusting after a prolonged period of ultra low rates. Together, these forces are accelerating divergence across assets and shortening the window in which buildings remain competitive.

Rethinking value add in a more complex environment

Rather than treating technology, regulation and capital as separate themes, the more relevant question is how they interact at the asset level. Value add, through upgrading or repositioning existing buildings, may offer a response to ageing stock. Our view is that value add portfolios benefit from an orthogonal approach – pairing repositioning with opportunistic acquisitions – to navigate a market where structural change and capital-driven mispricing increasingly overlap.

An accelerated reset across technology, regulation and capital

Technological change has always influenced where work takes place – from factories to office towers to more distributed models – and AI is advancing that shift more rapidly. Generative tools are absorbing routine tasks, shifting demand towards roles requiring judgement and interaction, while hybrid working reinforces a more selective use of space. Together, they are recasting the office as a place for collaboration rather than individual output.

Market performance reflects these changes, with demand concentrating in well connected central business districts while older, peripheral offices face rising vacancy – reflected in Europe’s 5% prime vacancy versus roughly 9.5% market wide¹. London shows a similar divergence, with sustained West End outperformance as expectations for space continue to rise².
 

_{Source: M&G Real Estate based on local broker reports, Q4 2025.}

Regulation reshaping asset viability

At the same time, regulation is tightening the definition of what constitutes a viable asset. Rising energy and sustainability standards increasingly determine access to tenants, debt and institutional capital.

Poor Energy Performance Certificate (EPC) ratings are translating into higher operating costs, tighter financing and weaker tenant demand. In the UK, offices below EPC B risk becoming unlettable by 2030, with over 70% of London’s stock below this threshold³. In Germany, inefficient residential assets already trade at discounts of 15–20% to more efficient peers⁴.

Capital repricing and liquidity pressure

Overlaying both is the repricing of capital since 2022, exposing assets built on assumptions of cheap debt and abundant liquidity.

European real estate valuations fell by around 18% to 20% over the period 2022-24 before stabilising around mid 2024, though the adjustment has been uneven⁵. Prime, resilient assets account for most transaction activity, while secondary stock remains in price discovery. With €86 billion ($98 billion) of loans maturing between 2025 and 2027 – nearly half backed by offices – refinancing pressure is sharpening the divide⁶.

Distinguishing between structural and cyclical weakness is becoming more important. Some assets are impaired because demand has shifted. Others are priced down primarily because liquidity is scarce. The gap between the two is beginning to define opportunity.

Orthogonality: A two-track approach to value in a reset market

Value add strategies are adapting to this environment. Repositioning assets remains central, but it is increasingly combined with acquisitions driven by capital dislocation. This creates two distinct pathways.

1. Intensive Value-Add: transforming assets for new demand
The first pathway, ‘Intensive Value Add’, involves transforming assets whose current usage no longer aligns with modern demand. Offices provide the clearest example; many were designed for a version of work that is already fading, even as cities face acute shortages of housing and alternative ‘living’ formats. In London and Paris alone, office to residential potential exceeds 40,000 and 50,000 units respectively⁷, with more than 73,000 homes already delivered through permitted development in London between 2015 and 2021–22⁸. Returns are beginning to reflect that shift, with living sectors holding up while lower quality offices lag.
 

_{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.}

_{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.}

2. Opportunistic Core+: capturing capital dislocation
The second route, ‘Opportunistic Core+’, targets assets whose fundamentals remain intact but whose pricing has been distorted by the credit reset. These tend to be newer, energy efficient buildings with stable income characteristics, where owners face refinancing pressure or limited liquidity. In these cases, intervention is relatively light – leasing space, selective sustainability upgrades or amenity improvements – with value recovery tied to stabilising capital conditions. As markets adjust, these assets are well positioned to recover, offering income resilience alongside potential capital upside.

Building portfolios for multiple outcomes

Orthogonality links these two routes. It reflects a market shaped by overlapping and uneven signals – shifting occupier demand, tightening regulation and uncertain capital conditions. In this environment, approaches that allow for multiple outcomes and remain flexible on where value can be created, are better suited to a market where obsolescence and mispricing coexist – with the edge lying in recognising shifts early and adjusting course accordingly.

As the European market recalibrates, value-add strategies are evolving into more sophisticated, multi-path approaches, offering Asia-based investors exposure to structural change and differentiated return potential.

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_{Sources - 
1 - M&G Real Estate based on local broker reports, Q4 2025.
2 - Carter Jonas, ‘Central London Net Effective Rents Monitor Q4 2025’, (carterjonas.co.uk), 2026.
3 - Flora Harley, ‘Meeting the Commercial Property Retrofit Challenge - Part 1: Defining a Strategy’, (knightfrank.com), September 2024.
4 - JLL, 2025.
5 - MSCI Europe Quarterly Property Index, Q4 2025.
6 - AEW, ‘Back-leverage Helps Bridge the Debt Funding Gap’, (aew.com), October 2025.
7 - M&G Real Estate, ORIE, CBRE, bulwiengesa, 2025.
8 - Matthew Sobic, ‘Why now is a good time to revisit office to residential permitted development rights’, (savills.co.uk), February 2024.}

_{The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.}

_{For Institutional Investors in Singapore and Professional Investors in Hong Kong only. Not for onward distribution. No other persons should rely on any information contained within. In Hong Kong, this material is issued by M&G Investments (Hong Kong) Limited., and in Singapore, by M&G Investments (Singapore) Pte. Ltd. (UEN 201131425R), regulated by the Monetary Authority of Singapore. The contents of this document have not been reviewed by the SFC in Hong Kong or the MAS in Singapore.}