What’s the Difference Between Core and Core Plus Real Estate Funds? - Caliber (2024)

In the bond world, it’s easy to categorize funds into buckets like “high yield” and “investment grade.”

And when equity investors see a fund described as “large-cap growth,” they immediately have a good idea of what type of stocks it holds.

What about the private real estate realm? Funds typically fall into four broad categories: core, core plus, value add, and opportunistic. While the definition may vary from sponsor to sponsor, these four broad buckets do a good job of communicating the expected risk and return profiles.

As allocations to private real estate funds become more mainstream among high-net-worth investors, it can be helpful to build a comprehensive understanding of the major categories. Here we’ll take an in-depth look at the investment strategies employed by core and core plus real estate funds.

Now that you’re armed with detailed knowledge of the difference between core and core plus real estate funds, you’ll be better positioned to decide which strategy might be the best fit for your portfolio.

What are core real estate funds?

Core real estate funds represent the most conservative blend of risk and return in the private real estate segment. They invest in core properties, which tend to be built exceptionally well, located in great areas, and burdened by very few deferred maintenance requirements.

Core assets typically have high-quality tenants already in place with long-term leases. These properties are usually new or very close to new, with minimal capital expenditures needed each year. Investors can expect few—if any—surprises with these assets.

As you drive through a city center and see a high-rise glass office building with premier tenants, that’s likely a core asset. If you see a beautiful luxury apartment building in a prime location, that’s also likely a core asset.

When you invest in a core real estate fund, you’re investing to access a portion of the properties’ cash flowsright now. As such, current income represents the bulk of the fund return.

Another way to think about the core category is to consider who buys core real estate assets. In large part, the buyers are big institutional investors, such as pensions and endowments. For these institutions, the key advantage of core real estate is its low relative risk profile. In addition, core real estate funds can often accept large amounts of capital—an important capability sought by institutions with big chunks of money to put to work.

In terms of disadvantages, core real estate funds don’t offer much potential for appreciation, making them less suitable for investors seeking growth or a blend of growth and income. Low risk goes hand-in-hand with low return—so the returns of a typical core real estate fund may not be sufficient to meet some investors’ financial goals.

What are core plus real estate funds?

Core plus real estate funds invest in properties that are very similar to core properties, but, for one reason or another, they don’t quite fit into the most conservative category.

Consider, for example, an asset in a Class A location—perhaps right in the middle of a city’s bustling downtown district. If the building itself is Class A, then this would be a core asset, but if the building is Class C—maybe a tired 1970s apartment building—it will land in the core plus category.

Leverage is another reason an asset could move into the core plus category. If you have a Class A location and a Class A building that could be considered a core asset, but you’re using more leverage than typically seen in a core strategy, then the asset will move into the core plus category due to the higher risk profile.

Core plus assets are typically income-producing properties that are well leased—maybe not leased to the absolute highest quality tenants, as you would expect with a core asset, but the tenant base is still creditworthy and there is likely a history of leasing the property successfully. Most core plus assets are stable, meaning they don’t require the buyer to complete extensive renovations or figure out a way to get from 50% occupied to 95% occupied.

Many individual investors, family offices, and small institutions are drawn to core plus real estate funds as long-term investments. Core plus real estate funds offer the advantageous ability to earn a significant portion of returns through cash flow while also earning decent appreciation. For investors looking to grow long-term wealth and/or preserve wealth over multiple generations, core plus real estate funds can be a “sweet spot” that take a bit more risk than traditional core funds, enabling the investment to grow at a pace that outruns inflation. That said, some investors may see the additional risk embedded in core plus real estate funds as a potential disadvantage.

Things to consider when choosing between a core and core plus real estate investment strategy

When considering whether a core or core plus real estate fund might be a good fit for your portfolio—or any private real estate investment, for that matter—it’s important to first establish a foundational framework. Key components include:

• Clearly defining your short-, medium- and long-term financial goals
• Considering whether your priority is to perfect a passive income stream, build wealth, or something in between
• Understanding your risk tolerance
• Assessing your ability to hold illiquid investments

Most individual investors will benefit from the support of financial, tax, and legal advisors throughout the asset allocation and portfolio construction process.

Resources

• Value Add Commercial Real Estate Explained
• Risk vs. Reward: Which Investment Strategy Fits Your Profile?
• Podcast: Caliber CEO Chris Loeffler discusses the differences between core, core plus, value add, and opportunistic strategies
• SEC investor education: Private funds

Key takeaways

• Core real estate funds represent the most conservative blend of risk and return in the private real estate segment. They invest in the best properties in the best locations.
• Core plus real estate funds are one notch higher on the risk-return scale. They invest in assets that fall just outside of the core category, perhaps due to a slightly outdated building, higher leverage profile, or strong but not ultra-premier tenant base.
• Many big institutional investors like the perceived safety and large size of core real estate funds; many high-net-worth individual investors like the higher potential returns offered by core plus real estate funds.

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[1] In private equity real estate transactions, a sponsor is a firm seeking to raise investor capital to fund a proposed action on a given property. Often, a sponsor and the property developer are the same firm, though that’s not always the case.

[2] Specialty is a broad category meant to cover properties that don’t fit neatly into the other property types. Some common specialty properties include theme parks, marinas, and RV parks.

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About Caliber

Caliber is a leading vertically integrated asset management firm whose primary goal is to enhance the wealth of investors seeking to make investments in middle-market assets. We strive to build wealth for our investor clients by creating, managing and servicing proprietary products, including middle-market investment funds, private syndications, and direct investments. Our funds include investment vehicles focused primarily on real estate, private equity, and debt facilities. We market our services through direct sales to private investors, wholesaling to investment advisers, direct sales to family offices and institutions, and in-house client services. Caliber’s middle-market specialty allows the Company to compete with agility and speed in an evolving arena of alternative investments. Additional information can be found at Caliberco.com and CaliberFunds.co.

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If you would like to speak to someone about diversifying your retirement accounts, contact us at[emailprotected]or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.

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Investor Considerations

The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circ*mstances, desires, needs, and requires consideration of all applicable facts and circ*mstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.