Return
Risk
Cashflows
Capital Growth
Core
Core-Plus
Value Added
Opportunistic
Core
Investment in a core fund is the most stable and low-risk form of real estate investment, with the expectation of generating low returns. Key characteristics include:
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Investment in high-quality buildings that are fully leased, multi-tenant properties in strong, diversified metropolitan areas. (Class A)
Typically have long hold periods and are therefore commonly seen in open-ended funds.
Produces predictable cash flows and income.
Generally require little-to-no leverage or debt on the investment (0-30% leverage, low single-digit returns).
Example: a fully leased, modern office building located in Midtown Manhattan.
Core-Plus
Core-plus investments are similar to core investments, but the ‘plus’ allows a fund to invest in improvements. Key characteristics include:
Investment in core properties, though many will require enhancements, such as renovations, repositioning, and re-leasing. (Class B)
Typically located in both primary and secondary markets.
Moderate-risk/return strategy and may require a modest amount of leverage (30-55% leverage, mid-single-digit returns).
Example: a stabilized multi-family building located in metropolitan Boston, US, that is undermanaged.
Value Added
Investing in value added involves buying a property and making improvements with the aim of selling the asset at an opportune time for gain. Key characteristics include:
Investment in lower-quality buildings that exhibit management, operational problems, or require physical improvement. These assets need capital to bring buildings up to Class A quality.
Common strategy for closed-end funds.
Typical hold periods range from 3-10 years.
Value-add investments are more moderate-to-high risk and are expected to provide moderate-to-high returns. They require a high amount of leverage (50-70% leverage, low double-digit to mid-teen returns).
Example: a 50-year-old multi-family property in need of renovation. Post-renovation, it would be repositioned as a higher-quality asset, with new tenants, higher leases, and asset value.
Opportunistic
Opportunistic investments involve the most risk and thus have the potential for the highest returns. Key characteristics include:
Substantial re-development of existing properties, construction of new developments, or investment in raw land and niche property sectors. The fund may also invest in international property or emerging markets.
Common strategy for closed-end funds.
These assets require a heavy amount of capital to move up to class A quality. Generally have a high amount of leverage embedded in the investment (60%+ leverage, at least high-teen returns).
Example: purchase of land and construction of new office building.
