Applying international diversification to real estate investments
Swiss investors still have a very strong tendency to favor their home market when it comes to their real estate portfolios. However, real estate funds and investment groups of investment foundations with an international focus can contribute significantly to real estate portfolio diversification, making them sensible investment alternatives.
Increased interest in real estate investments
Investors continue to favor Swiss real estate funds. They have relatively high direct yields, plus low correlation between their yields and those of other financial investments, and they have frequently had positive performance in recent years. This has been instrumental in making real estate funds an integral part of the investment portfolios of many private and institutional investors in Switzerland.
Since the Swiss National Bank (SNB) imposed negative interest rates more than seven years ago, interest in real estate investments has soared considerably. Prices of Swiss real estate funds on the SIX Swiss Exchange have risen sharply since December 2014. The average premium – the difference between the market price and the intrinsic value, also known as net asset value, of the fund units – has climbed by more than 20 percentage points to 41.7% as of the end of January 2022. Given the relatively high valuations and sustained pressure to invest in a negative interest rate environment, people are scrambling to find alternatives in the real estate sector.
Real estate Investments: Swiss investors still focusing heavily on their home market
While investors adopted a globally diversified approach to their securities investing decades ago, both private and institutional investors, for the most part, are still focused on the home market. For example, 86% of real estate portfolios of Swiss pension funds were concentrated in Switzerland, while only 33% and 43% of portfolios invest in equities and bonds from Swiss issuers, respectively. The investment approach taken by private investors is likely to be even more heavily concentrated in Switzerland.
Benefits and risks of international diversification of real estate investments
The main argument for diversifying real estate investments on an international level is the difference in performance between markets at home and abroad, which is heavily affected by local supply and demand. For instance, the real estate market in the Canton of Zurich grows largely independently of the office property market in Sydney, the logistics market in the Netherlands, and retirement and nursing homes in the US. Since properties are almost always tied to one location – in other words, immovable – the addition of international investments provides a Swiss real estate portfolio with correspondingly excellent characteristics of diversification. What's more, many real estate markets outside Switzerland offer extreme liquidity and a high degree of transparency, and with that comes a wide variety of opportunities.
The five cities of New York, Los Angeles, London, Berlin, and Tokyo alone saw real estate transactions with a collective value of over CHF 175 billion executed in the 2021 pandemic year. That amount is equivalent to several times the transaction volume in Switzerland. Especially in today's market environment with comparatively low growth rates and low interest rates, real estate investments provide relatively stable, predictable, and long-term income streams. After all, investing in real estate as an asset class can offer a certain amount of protection against inflation because rental income in many markets is tied to the growth of inflation.
In addition to outlining these major advantages, it is also important to perform a careful analysis and address the risks of international real estate investments. The primary risk is the limited liquidity of real estate compared to other asset classes. The property segment after which the fund is named also means that changes in taxes or regulatory conditions can be avoided only to a limited extent. That makes portfolio diversification and close monitoring of market developments even more essential.
International real estate investments as an ideal supplement to any portfolio
Only a few years ago, there were hardly any investment solutions for institutional investors in Switzerland that offered access to foreign real estate investments. The market has made significant advancements in the meantime in line with the growing allocation to this segment. First, the offering for Swiss clients today consists of funds or investment groups with direct real estate investments outside Switzerland as well as multi-manager solutions. The two approaches can be easily combined with one another.
Thanks to their beneficial characteristics of diversification, international real estate investments are an excellent complement to the portfolios of institutional and private investors. Depending on a client's specific needs, directly investing real estate funds, multi-manager solutions, or a combination of both may be ideal.