Origin Principal David Scherer explains the five pillars of a core investment and who should consider investing in them. We’ve previously written about what it means to be a core, core plus, value add, or opportunistic investment, but here we break down core even further. Core investments should be in primary markets, newer vintage, stabilized, have low debt, and lower expected returns. Each of the following five pillars is geared towards ensuring that the asset is truly a core asset, and by referencing this frame, you can ensure you’re dealing with a core asset.
1) Location
Core assets need to be located in core cities. And within those core cities they must be located in the core submarkets to ensure liquidity upon exit. You cannot be sure an asset checks the “core” box just because it is within a core city – you need to also look at the submarket.
2) Vintage
Core assets should be newer vintage to avoid the pitfalls that come with older buildings. This is because the asset needs to have a reliable income stream to be core, and income reliability becomes an issue as buildings get older. Our next pillar of the frame, cash flow, goes into more detail on this aspect.
3) Cash Flow
Similar to a dividend stock like Coca-Cola, core investments should have a reliable income stream. An investor should be able to rest easy knowing they are getting “x” amount of annual return for owning a core asset.
4) Debt to Equity
A core asset should keep leverage low to avoid the risks that come with too much debt. When you put a high amount of debt on an asset, you increase the risk, which disqualifies the asset from being considered a core investment.
5) Expected Returns
Returns vary, but generally speaking, any manager promising returns greater than 10% on a core asset should be closely inspected. If the core asset manages to achieve a higher than expected return, we’re thrilled, but you need to understand that you’re getting a safe and stable return with a core investment. No one is expecting to quadruple their money in 10 years with a core investment.
Who Should Invest in Core Real Estate?
Anyone who is looking to increase their dividend yield, while mitigating risk should consider investing in core real estate. Core assets are ideal for moments when you may be unsure about the current economic cycle, or when you’re simply looking to protect your wealth.
