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Eye of the beholder

With high prices squeezing core returns, industry players are blurring the line between core and non-core property, as speakers at the PERE’s New York Summit demonstrated.

Here’s a question that was put to the audience for a vote at the PERE New York Summit this week: “Is core real estate in the US a good investment today?” According to 72 percent of respondents, the answer is no.

Of course, that answer may be biased, considering that non-core real estate is the principal focus of the firms that PERE covers. That said, it was interesting how speakers and delegates blurred the lines in terms of what they considered core and non-core.

On the one hand, some industry players are proponents of non-core real estate investing, but they don’t necessarily perceive such strategies as higher risk. As Mark Canavan, senior portfolio manager at New Mexico Educational Retirement Board, bluntly put it, core investments can be the less safe option since it can result in investors paying too much for properties.

“I find people’s obsession with core to be somewhat suicidal, if you ask me,” Canavan said. He has long favored less popular investment opportunities, “things that nobody else wanted to do because that to me is low risk.”

On the other hand, some core-focused investors are looking at high-quality properties in secondary markets. The idea behind such an approach is that these types of investments offer higher yields than those in traditional prime locations but are still considered core because of the stabilized nature of the assets. “It’s not traditionally what we would do but, in a market where there is mispricing between prime and secondary, we’re choosing that investment choice rather than value-add,” said Elisabeth Troni, global strategist of global real estate at UBS Global Asset Management.

This concept has its detractors, such as moderator Ted Leary, founder and president of Crosswater Realty Advisors, who commented during one of the first panels. “Finding the best office building in Cincinnati is not a core investment,” he said.

But it has a growing army of supporters – industry heavyweights too. In a keynote interview, Jack Chandler, global head of real estate at BlackRock, revealed that the firm is planning to sell UK office properties in its core open-ended fund at 3 percent cap rates, while redeploying that capital in industrial assets and other property types that aren’t “overlogged.”

Taking all of the perspectives from PERE NY into account, it’s evident that what’s considered core and non-core is in the eye of beholder.

Both camps, however, do share some common ground, as exemplified by panelists Steve Hason, co-head of Americas real estate at APG Asset Management, which favors non-core real estate, and Lindsey Adams, senior portfolio manager of real estate at the San Francisco Employees’ Retirement System, whose property holdings are heavily weighted to core. On two separate panels, both Hason and Adams placed a high premium on manager behavior, with Adams noting that behavior was one of the most important factors in evaluating a manager.

Properly evaluating a manager is one of the most sensible ways of minimizing potential risk – no matter how you may define the property being targeted.