Core Real Estate Assets
What are core assets?
Generally, core assets are commercially used real estate such as office, hotel, logistics or trade space as well as regular residential real estate. These investment objects are located in exclusive neighbourhoods of big cities such as Hamburg, Frankfurt, Berlin and Munich. They are fully leased long term to solvent tenants, which are successful companies, clubs or organisations. The rental leases have good terms and run for at least 10 years or longer.
There is no precise definition which properties belong to the core segment. The term describes a narrow market, which includes over half of the investment volume of the German commercial real estate market. Due to their exclusive character, the properties offer advantages for owners, investors and tenants alike. Marketing efforts and the time required are usually very low. When selling the objects, there is no need to compromise on the price. Tenants can always expect good business deals.
Private equity fund strategy
The Return of a real estate portfolio depends on the acquisition costs or purchase price as well as the prospective rental income. However, in order to assess the success of property investments, it is not enough to simply compare the return of the properties. The profitability of a real estate object needs to be evaluated in relation to the risks taken. For better illustration, real estate is divided into segments representing certain risk classes. Investments in the core real estate segment are associated with fewer risks.
Characteristics of core real estate
Existing core properties have the following characteristics:
- Located in central neighbourhoods of big cities
- High quality amenities and locations
- Fully rented out objects with long term leases
- Solvent tenants
- Appropriate equity return
- Debt ratio of below 50%
How do core real estate objects differ from other types of real estate?
Core real estate assets are existing high quality properties with a secure predictable return and a high vacancy rate. From the onset, the objects are traded in the high-priced segment. Therefore, real estate investors can expect a comparatively low but stable rental return. As with any investment, low-risk properties will yield low returns, especially at the beginning of the lease. In addition, investors use a relatively high share of equity for the acquisition of the land.
Why are core real estate objects attractive?
Due to these characteristics, the properties are particularly suitable for risk-averse investors with a high proportion of equity. They are best suited for investors who value a continuous, long-term secure rental income. Investors who want to keep their properties long-term benefit from stable earnings. There are opportunities to generate even higher future returns by including clauses pertaining to graduated, index-linked or revenue-based rents, value-preservation or modernization measures. By investing in these high quality properties, landlords are guaranteed (a) long-term security in terms of planning, calculation and budget. Furthermore, the subletting risks of these properties are quite small. Core real estate investments are thus in particular demand amongst institutional investors or foundations for open-ended funds portfolios.
Different investment strategies contribute to keeping the value of a portfolio with less risk exposure, or increasing wealth despite increased investment risks. Investment strategies can also generate higher returns as well as more stable returns in the real estate sector. Due to the first-class characteristics of these properties, an investment strategy in the core real estate segment has proven itself successful. The property's excellent locations and features guarantee value stability and continuous returns. However, as this strategy is well known and easy to implement, it leads to a shortage of existing high quality real estate supply and thus speculative prices increase. If core real estate investments are too expensive, the existing investment strategy must be expanded and supplemented. Therefore, investors are looking for ways to improve the results of the core investment strategy. The Core Plus strategy allows for compromises on the location or the object itself or even changes in the capital expenditure in order to achieve higher returns.
Differences between core and core plus strategies
Better risk management will result in a favorable risk-return profile for the real estate portfolio. As part of the Core Plus strategy, investors acquire a number of riskier properties in addition to the core real estate investments. This concerns the location of the properties as well as the lease terms, which are shorter than they are with core properties. For both criteria, these properties have the future potential in terms of price and rent increases. To finance the object, the leverage on the return on equity is increased with loan capital of approximately 50 to 60 percent. In addition, investors can trade the existing properties without having to hold them for at least 10 years in order to realize increases in value through sales. The Core Plus investment strategy generates higher returns by taking on greater risks, by investing in central locations in smaller metropolitan areas for example. Smart real estate management helps to increase revenues by adding a small percentage of riskier investments to the portfolio. Investors require many years of experience in the real estate market as well as a fundamental knowledge of the regional market and direct access to the core real estate segment. Service for investors plays an increasing role in real estate management. As less rewarding core investments are available to the market, core real estate assets will remain sought-after in 2018 in order to be able to rent out business premises profitably.
- Core real estate assets are existing properties, mainly in the commercial sector; they are considered secure and solvent assets
- They are located in desirable 1a cities, have upscale amenities and are fully leased to successful companies and high credit tenants
- They provide small but stable and predictable returns with relatively low risk
- A real estate investment strategy is advisable for a better risk diversification
- Core real estate is highly sought after which makes it more difficult to achieve high returns
- The Core Plus strategy combines core real estate with a small percentage of riskier investments
- Allows for higher returns by compromising on the location, the objects and lease terms as well as increasing the debt ratio
- Active real estate trading can increase returns by realizing value appreciation
- Advanced real estate management is a prerequisite for taking on higher risks; relevant experience and market knowledge are imperative
- Investors around the world are competing for the same core properties; the demand for core real estate is predicted to remain hig