Core-Plus is a property investment strategy that aims to strike a balance between the security of an income-based approach (usually associated with Core) with the potential for future capital appreciation.
From a risk perspective, it sits between the traditional strategies of Core (which aims to deliver regular and stable ‘income returns’) vs. Value-Add strategies (that tends to focus purely on capital enhancement projects i.e. taking underperforming assets and converting them to institutional quality where returns are not usually realised until the end of the project).
Ultimately, Core-Plus investments result in a blend of income return and capital growth, ideally delivering an IRR of between 8-10%. It is not a new concept, but Avignon Capital believe that challenges in the current market cycle make Core-Plus a more attractive strategy than ever.
At a late stage in the cycle and with real estate pricing at peak highs, there is no doubt a Value-Add strategy carries risks, whilst acceptable Core returns are being squeezed to lower and lower levels. Couple tight yields with a potential rise in interest rates, slowing economic growth, changes to debt rates and other geopolitical concerns, Core returns are under increasing pressure and Value-Add managers are having to take on a lot more risk to achieve their IRR targets set a number of years ago.
In the highly competitive ‘Core’ investment arena, Managers are having to come up with new strategies in order to become more attractive to their LPs and keep their attractiveness when compared to other asset classes.
In contrast, Core-Plus strategies can provide both reliable income returns in the short-term, whilst offering the opportunity to enhance an asset’s capital value once the economic outlook stabilises.
Avignon Capital has always focused its investment strategy on opportunities with strong income and growth fundamentals. Investing in strategic locations to strong tenants that offer opportunities for future repositioning or development remain an attractive combination in today’s uncertain economic outlook.
To execute an effective Core-Plus strategy there needs to be a clear business plan and asset management strategy for the asset to unlock future growth from the outset. This was evident in Avignon’s acquisition of the Fontanella building in Barcelona 2014.
Located on the corner on Plaça de Catalunya, one of the busiest tourist locations in Barcelona, the property was fully let to the Government of Catalunya from the ground floor up.
The business plan on acquisition was to maintain the secure income, whilst simultaneously creating a new retail offering by reconfiguring the lower floors. Subsequently, the leading European consumer electronics retailer Media Markt signed a 10-year lease and began trading after upgrade works were completed in December 2016. By preserving the building’s strong fundamentals and adding value, Avignon achieved a 135% return on equity when it was sold in July 2017.
Media Markt, Barcelona
Under a Core-Plus strategy, Avignon believes that attractive opportunities can still be found in growing cities such as Berlin, Copenhagen, Lisbon and Amsterdam.
For investors looking to navigate today’s uncertain real estate market, they should not ignore Core-Plus and consider exposure to this strategy.