Adding the ‘plus’ into core plus investments: Paddy Callesen

GUEST OBSERVER

Regardless of their size, investors and fund managers such as superannuation funds, syndicators, listed property trusts, charitable trusts or larger high net worth families, are often out on the market looking for the same type of investment product - properties that are ‘accretive’. 

Put simply, this means that several tick boxes need to be ticked for the ideal investment property, such as:

• Lease term - ideally needs to be longer than the average Weighted Average Lease Term (WALT) of the portfolio (generally this is 4-5 years)
• Yield – ideally needs to be higher than the running average return and higher than debt costs 
• Building Quality / Location – this typically means relatively modern in an established location

With many buyers searching for the same type of investment, the competition quickly becomes crowded for property that ticks all the boxes, and the above criteria becomes an investment hurdle.

This is where Core Plus investments come in

As the investment hurdles can be difficult to overcome, some investors are turning to Core Plus investments.

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.

Investopedia defines Core Plus as a fixed-income investment management style that permits managers to add instruments with greater risk and greater potential return to core portfolios. This type of investment is considered moderate risk/moderate return, and is slightly higher on the risk scale due to the additional enhancements needed to bring the property to value.

Supplementing the core yield

The core yield may be supplemented by any one or a number of the following:

• Surplus Land – where a building provides the initial running yield but surplus land can be developed or sold to increase the return
• Lease Extension – where the tenant may have a long right of lease renewal or no renewal at all and the purchaser backs themselves to be able to renegotiate a better lease position offering immediate upside value 
• Under Rented – when the passing rent is less than the estimated rental value. After purchase,  the investor backs themselves to increase the rent to achieve a better running yield
• Change of Use – where a building is zoned as one type but then redeveloped as another (for example an industrial building can be redeveloped to accommodate retail to provide higher rents, or even residential where “air space” can be developed) 
• Land Fragmentation – where a large unsubdivided or englobo block of land is subdivided into small parcels where the end result is a higher overall value
• Land/Building Purchase – where the ‘existing’ building on the site is deemed obsolete or unleasable, so the investor purchases at land value with the building free

Investment hurdles are difficult to move past, so Core Plus is becoming an innovative way for investors to take on increased risk to boost their portfolios. The reality is that investors are using Core Plus as an alternative investment formula.

Paddy Callesen is a managing director of the Savills Auckland office and can be contacted here.