The 300 or so delegates gathering at Glaziers Hall in London for PERE Europe Forum 2023 this week will have left the three-day conference with little doubt as to where we are in the current private real estate cycle.

The sector is in relative disarray. Commentators of all stripes increasingly are blaming the industry’s asset- and capital structure-level dislocations for wider financial market woes; occupier confidence is polarized in too few asset types; and its decarbonization story is becoming harder to believe.

With uncertainty widespread, there is a general consensus the sector’s ‘great reset,’ as one delegate called it, will require plenty of value-add investment. Furthermore, what will be a liability for many current asset owners is set to become the opportunity for buyers when a wave of maturing loans over the next several years require refinancing, first in the US, then in Europe.

As panel after panel agreed, that will happen when today’s institutional landlords finally accept a need to sell after they come to terms with their inability to both meet dramatically higher financing costs and to underwrite another business plan based around remedial work.

Capital markets are readying for that moment. According to PERE’s own fundraising data – presented onstage – almost half of the approximately $17 billion raised so outside of Blackstone’s $30 billion BREP X global opportunity fund year-to-date was for value-add strategies. This represents a notable uptick on the 21 percent raised for the strategy for all of last year or 38 percent raised in 2021.

Conversations on and offstage at PERE Europe demonstrated investors are keen to capitalize on the sector’s current ebb by backing such strategies. But they are equally clear managers will need to work assets smarter and harder than any time since the global financial crisis, with return requirements meaningfully rising with inflation.

Indeed, with bonds yielding in line with rising central bank base rates – the Bank of England raised interest rates to 4.5 percent yesterday following the Federal Reserve’s increase to between 5 percent and 5.25 percent last week – real estate can no longer describe itself as a proxy for fixed income and will need to revert to its prior role of institutional portfolio enhancer.

Keynote presenter and global head of real estate of Credit Suisse Asset Management Rob Rackind, underscored that point when he displayed a slide showing performance expectations for value-add strategies: 12-15 percent target return was “yesterday,” while 18-21 percent is “today’s reality.”

Herein lies the crux of the sector’s reset challenge. With financing either unavailable or unattractive for anything outside of the few asset classes driving the institutional herds – forms of residential, logistics and data centers among them – there is very little ability to borrow. Most value-add definitions traditionally assume a notable degree of leverage; manager CBRE Investment Management, for example, pegged value-add leverage levels at 50-70 percent in a 2020 research note.

As such, the extensive repositioning work that comes with value-add strategies will need to be undertaken with little financing support to achieve these now higher returns. To compound matters, construction costs have risen sharply and material prices are showing little signs of reducing.

As multiple speakers indicated onstage, landlords are banking on seismic rental growth from occupiers prepared to pay higher prices for prime, ESG-compliant real estate in order to execute their strategies.

They must know, however, that will not be possible for a vast amount of real estate which is today miles away from core quality and may never get there. As Rackind said, about 85 percent of today’s real estate needs to improve to meet future energy efficiency standards.

For that to happen, however, something else has to give lift to the industry beyond pockets of higher rents.