Real estate funds offer attractive opportunities. Despite the coronavirus shock.
Market uncertainty due to the spread of coronavirus also did not spare real estate investments. It led to severe upheavals. However, Swiss real estate funds have since recovered. They are likely to continue to offer investors reliable returns, especially in the residential segment.
Real estate investments collapsed due to COVID-19
The coronavirus caused corrections on the financial markets that, in terms of speed and intensity, clearly exceeded even those of the global financial crisis of 2008. Ultimately, even indirect Swiss real estate investments were not immune. Despite this setback, however, Swiss real estate funds demonstrated their defensive qualities. Within barely a month, by March 17, the broad Swiss share index SPI lost 24%, while Swiss real estate funds and Swiss real estate equities proved to be more solid with losses of 19% and 20% respectively.
Additionally, and more importantly, real estate funds started to recover earlier than the equity market. Nonetheless, the total returns of Swiss real estate funds and real estate equities have been in negative territory since the beginning of the year. This is significantly less, however, than the international real estate investment markets. Swiss real estate stocks are likely to have benefited from a certain "safe haven" effect.
The coronavirus crisis also led to a collapse in real estate investments
Comparison of development of total returns of Swiss real estate funds and equities
Historical performance and financial market scenarios are not reliable indicators of future results.
Last data point: April 16, 2020
Source: Datastream, Credit Suisse
Real estate funds in the residential segment are recovering faster
In a first phase, the sharp correction in the wake of the coronavirus crisis affected a majority of the various listed Swiss real estate stocks to a similar extent. For example, between February 19 and March 17, 2020, real estate funds with a focus on commercial properties lost 18.8%, similar to the amount for residential real estate funds, which declined by 18.1%. However, the crisis will likely leave deeper marks on the commercial real estate markets in particular. Severe consequences are expected especially in the retail trade space market and for hotels.
The residential rental market is also likely to suffer in the short term, but defaults and contract terminations are unlikely. The security of the cash flow is therefore extremely high in the residential real estate fund segment. This is also reflected in the significantly better performance of these funds compared to commercial real estate funds and real estate equities since the beginning of the COVID-19 correction. For example, residential real estate funds once again showed a clear recovery trend from the second half of March.
Residential real estate funds have been showing an upward trend since mid-March
Extent of the correction in the various real estate asset classes
Historical performance and financial market scenarios are not reliable indicators of future results.
Last data point: April 16, 2020
Source: Datastream, Credit Suisse
Swiss real estate funds are attractive to investors
The unusually high market volatility affecting Swiss real estate investments is likely to continue in the coming weeks. In the longer term, however, there are a number of reasons that make Swiss real estate stocks attractive. The current environment offers attractive buying opportunities for investors with a longer-term time horizon.
The outlook for Swiss real estate funds especially should be relatively attractive compared to the global benchmark. In the short term, the fact that the new issuances announced for the second quarter of 2020 are well below the previous year's value should have a positive impact. In addition, the negative interest rates, the main performance driver of the last few years, will remain in place even longer, which further supports net asset values. Overall, it is expected that already more defensive, geographically well-diversified real estate funds with a residential focus will perform comparatively well. However, investment returns in the range of 5%–6%, which were the norm in recent years, are unlikely for the time being.
Swiss real estate funds offer stable returns
Investment returns of listed Swiss real estate funds; NAV: net asset value
Historical performance and financial market scenarios are not reliable indicators of future results.
Last data point: December 31, 2019
Source: Datastream, Credit Suisse
