Core plus investment refers to a moderate-risk/moderate-return real estate investment strategy. It involves acquiring core properties that have good cash flows and operations, but require some enhancement or value-added elements. Compared to pure core investments, core plus investments have higher risks but also higher returns. Their IRRs are typically around 10-15%, with leverage usually below 70% and holding periods of 3-7 years. In this article, we will analyze the characteristics, return drivers, exit strategies, and historical performance of core plus investments.
Core plus investments target properties with enhancement potential
Core plus funds acquire properties that are usually well-located and have strong tenant profiles, but may suffer from inferior operations, physical issues, or capital constraints. By improving management, renovating buildings, and addressing financing needs, the properties can achieve increased occupancy and rental rates after acquisition, driving returns through both recurring income and capital appreciation upon exit.
Moderate leverage contributes to balanced risk-return profile
The leverage employed in core plus investments is higher than pure core funds, allowing for amplified returns, but remains below opportunistic funds. With leverage around 50-70%, core plus funds can achieve IRRs of 10-15%, positioning themselves between the stability of core and aggression of opportunistic strategies.
Exit strategies focus on capturing value gains
As the objective is to enhance properties and sell at an opportune time, common exit strategies for core plus investments include outright sales to realize the value additions. Some platforms may also look to recapitalize assets after making improvements by bringing in new equity partners or refinancing.
Historical performance exceeds core investments
Data analyzing real estate returns over full market cycles indicate that core plus investments outperform core substantially. For example, over the 1991-2008 period, value-added funds had a compound annual return of 8.9%, well above the 7.7% for core funds, with only slightly higher volatility.
In summary, core plus real estate investments provide investors a middle path between stable cash flows and aggressive high returns. By targeting properties with unrealized potential, astute fund managers can employ moderate leverage and operational enhancements to generate IRRs exceeding core investments over hold periods of several years.