The 2022 real estate study. Focus on residential real estate funds.
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The 2022 real estate study. Focus on residential real estate funds. 

The overnight shift from working in an office to working from home has also affected real estate funds. The results of the 2022 Credit Suisse real estate study show what impact the pandemic has had on the real estate market. What investors need to know about residential real estate funds. 

Real estate funds leave real estate equities trailing since start of pandemic

The COVID-19 pandemic is leaving a lasting impact on the real estate market, in the form of shifts in demand as well as between the different segments of the market. These developments are reflected on the capital markets.

The Swiss real estate funds contained in the SXI Real Estate Funds Index displayed their defensive qualities and bond-like character once again in year two of the pandemic, achieving a total return of 7.3% in 2021. The return did fall significantly short of the return generated by the wider equity market, with the SPI up 23.4% during the same period and the MSCI World Real Estate having gained as much as 32.1%. Once again, however, Swiss real estate funds left Swiss real estate shares and their European peers trailing, with the SXI Real Estate Shares index, for example, advancing by just 4.4%. 

Swiss real estate funds record solid growth

Swiss real estate funds record solid growth since start of pandemic 

Total performance of indirect real estate investments; index: January 2017 = 100

Historical performance and financial market scenarios are not reliable indicators of future performance.

Source: Datastream, Credit Suisse

Last data point: 28.02.2022

Residential real estate is key to success for real estate funds 

One of the key factors behind the success of listed Swiss real estate funds is likely to be the fact that they are over 50% invested in multi-family dwellings. Fact is, asset classes that are focused on the office or retail segments have not yet fully recovered from the slump seen at the outset of the pandemic. Pandemic-related structural effects such as reduced demand for office property due to the recommendation to work from home continue to affect the performance of commercial property space. This is impacting global real estate investment trusts (REITs) as well as Swiss real estate shares, which are over three-quarters invested in commercial space. 

Results of the real estate study show a falling rate of loss of rental income in 2021 

Real estate funds are increasingly supported by their fundamentals, with the rate of loss of rental income falling for the first time in four years in 2021 – from 6.0% to 5.7%. The decrease was entirely attributable to commercial real estate funds: Thus pandemic-related defaults due to rent reductions and losses on receivables fell again in this sector last year. The declining vacancy rate for rental apartments suggests more and more residential real estate funds will likewise benefit from a falling rate of loss of rental income. 

Real estate study shows turnaround in rate of loss of rental income

Real estate study shows turnaround in rate of loss of rental income 

Rate of loss of rental income (as % of target rental income) of listed Swiss real estate funds

Source: Annual and semi-annual reports of real estate funds, Datastream, Credit Suisse

Last data point: September 30, 2021 

Investments in real estate funds provide an opportunity for profit-taking 

The secure returns enjoyed by residential real estate funds come at a price. Not only are the premiums charged for these products high at the moment, but their direct yield is low at an average of 2.1%.

Although the cash flows of residential real estate funds are deemed highly secure, there is nonetheless a risk of significant price corrections in the event of a sharp rise in interest rates. Current valuations are therefore regarded as high against the backdrop of the existing increase in capital market returns; hence the fact that there is little room for further growth in value.

For more growth-oriented investors with a longer investment horizon, it therefore seems worth considering taking profits on some positions in residential real estate funds and investing the proceeds in commercial real estate in Switzerland or abroad. Direct yields of 3.4% on average can still be achieved with Swiss commercial real estate funds. 

Record premiums for residential real estate funds

High premiums for residential real estate funds

Premiums of real estate funds and those of real estate equities as % of the net asset value; commercial real estate funds incl. special properties, excl. mixed funds

Historical performance and financial market scenarios are not reliable indicators of future performance.

Source: Datastream, Credit Suisse

Last data point: January 31, 2022 

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