- May 1, 2022: Vol. 34, Number 5

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Leveraged core vs. noncore: Research stirs debate on performance of higher-levered core compared with noncore strategies

by Beth Mattson-Teig

The desire to generate higher yields in recent years has spurred more capital flows into riskier value-add and opportunistic strategies. The ongoing debate is whether those risks are worth the returns they’re generating.

Adding fodder to this discussion is a 2019 research study in the Journal of Portfolio Management that analyzed the performance of private real estate investments over 2000–2017. Authors Mitchell Bollinger and Joseph Pagliari Jr. found when increasing leverage to between 35 percent and 55 percent, core funds consistently outperformed their noncore counterparts. The difference was most striking on net returns for core, where value-added funds generated an alpha of –3.26 percent and opportunistic funds –2.85 percent in comparison to the core returns.

Applying leverage to generate a higher yield is a fundamental concept to real estate investing. Core funds, however, have typically favored low-risk and low-leverage strategies. Many use the

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