Several factors will likely lead to a shift in investor focus from core plus assets to core assets later this year, including declining interest rates, stock availability, and difficulty obtaining development funding.

As I wrote about in our first edition of SPACE last year, over this period where interest rates have been higher, core-plus investments have been the most sought-after assets in the industrial property market, particularly in the mid-tier market.

But that could change this year with a shift back to core assets.

What is core-plus product?

‘Core-plus’ refers to existing improvements in good condition but underutilised and have value-adding potential with the opportunity to reposition, including through refurbishment, development or even a reletting strategy. This contrasts to greenfield sites yet to be developed or prime-grade, institutional stock that is new or as new.

Buyers of core-plus investments want assets of good quality but where they can affect change in value via active management – in simple terms, a good-looking property with a problem to fix that will heighten returns.

A shift back to core product

Over this time, where lending costs have been higher, capital has been less inclined to chase passive core product: large institutional-grade buildings with blue-chip tenants and a long WALE.

That type of investment has been less attractive, with higher debt levels making the returns lower and with no additional punch from active management.

However, with interest rates expected to decline later this year, I predict a shift in focus back to the core product, with increased capital chasing this type of investment. Assets with rent review patterns allowing open market reviews during the lease period will be particularly interesting.

Traditionally, core facilities would have a 10-year lease to a major logistics company with a three-percent fixed review pattern.

However, core capital will be more interested in those assets that, during that 10-year lease, allow for negotiation with a tenant at, say, years three, five and nine. That will enable them to enhance the return that otherwise wouldn’t be there with a fixed review lease.

While buyers will have a greater incentive to turn their attention to core as interest rates fall, they may also have to increasingly look at this type of industrial investment due to availability.

Core-plus product is in relatively short supply now as it has been in strong demand amongst buyers in recent years, with many properties snapped up, while they are also becoming increasingly tightly held.

Another aspect to this is that investors who have purchased core-plus product over the past three to five years and added value now want to sell and realise their value, but since the value has already been added those properties will now be classed as ‘core’.

This will add to the core product available while the core-plus product remains in short supply.

Other factors driving investors back to core product are rising construction costs and the difficulty of obtaining development funding.

Where to find the best core opportunities

We are seeing an increasing number of industrial corporates looking to undertake sale and leasebacks in 2024.

This group have purchased greenfield sites in the past and now have development approval or are based on existing land and require a ‘turn key’ solution.

It is from these parties that we forecast much of the core supply to come from. Many sit in older-style lower clearance facilities and now require modern high-clearance warehousing with modern and genuine staff amenities.

Also, we expect some of the developers to sell new facilities with fresh leases to redivert the capital into slightly higher risk projects such as land acquisitions.