Property Talk: Core Plus – just a new phrase for an old property game?
Commercial property investors have coined a new phrase – Core Plus – as they redefine their investment decisions.
Savills joint managing director Paddy Callesen says Core Plus is a value-add story, where the core is the initial yield on which the property is bought and the plus relates to an immediate increase in the property’s value.
Investors, such as superannuation funds, syndicators, listed property trusts, charitable trusts or high net worth families are using Core Plus as an alternative investment formula.
They are looking for properties that either have surplus land for development, the lease can be extended, the rent can be increased, its use changed, or large bare land blocks can be subdivided, which is not new in the property game, although some smaller funds and trusts are not willing to take risks.
Mr Callesen says Core Plus is appealing to the larger funds, who often describe their property buying efforts as “finding a home” or “parking” money in certain assets.
But the buoyant market over the past two to three years means many buyers have been looking for similar “accretive” property that has long lease terms, yield higher than the running average return and ideally higher than debt costs and a relatively modern/generic property in an established location.
“The competition has become crowded for property that ticks those boxes and it is becoming an investment hurdle for many buyers,” Mr Callesen says.
“Some investors get around the initial buying yield by looking at the internal rate of return (IRR) in scenarios where the running yield is added to by the growth in capital value.
A property could have a buying yield of 7%, capital growth of 3% equalling a 10% IRR. Mr Callesen says however, if an investor is not actively selling, the IRR is often just a notional value which goes up or down based on the market but helps justify the purchase for “internal criteria.”
He says investment hurdles are difficult to move past, so Core Plus is becoming an innovative way for investors with skills to take on increased risk to boost their portfolios.