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FRM Part II · FRM Exam Part II · Private Markets Investing

A pension fund is comparing a core real estate allocation with a value-add real estate allocation. Which characteristic best describes the core strategy relative to value-add?

Core real estate focuses on stabilized, well-leased properties with low leverage, so most of its return comes from rental income. Value-add strategies instead rely on leverage, renovation, and repositioning, which makes appreciation a larger return driver and raises risk.

  1. AHigher use of leverage and a larger share of return from capital appreciation
  2. BStabilized, well-leased properties with a larger share of return from income and lower leverageCorrect
  3. CGround-up development with lease-up risk as the main return driver
  4. DDistressed property purchases with heavy renovation requirements

Explanation

Core real estate holds stabilized, high-occupancy assets in major markets, uses modest leverage, and earns most of its return from rental income. Value-add and opportunistic strategies take on leverage, renovation, and lease-up risk to generate appreciation.

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