The 2023 real estate study: How real estate funds are performing
Listed real estate funds and real estate equities had a severe reaction to the shift in interest rates in 2022. Following the correction, the market is beginning to regain its footing. Read the 2023 real estate study to learn about Credit Suisse's assessment of the real estate market's performance and what possible impact investors can expect.
Why did real estate funds lose value in 2022?
Rising inflation rates since the beginning of 2022 in Switzerland prompted the Swiss National Bank to raise interest rates for the first time since 2007 – the end of an era marked by negative interest rates and low inflation.
That was not a good sign for real estate funds and real estate equities. They are regarded as sensitive to interest rates, and the valuations of some were already fairly high. So, the correction in 2022 was correspondingly severe. For a while, real estate funds had fallen by 23% overall in 2022 compared to the beginning of the year.
Real estate investments experience sharp correction in 2022
Historical performance and financial market scenarios are not reliable indicators of future results.
Sources: Refinitiv Datastream, Credit Suisse
Last data point: February 24, 2023
The slump was probably exacerbated by institutional investors who invested in both direct and indirect real estate investments. The sharp corrections in the substantial equity and bond positions caused property ratios in their portfolios to skyrocket – in some cases, exceeding the strategic or regulatory maximums. For example, this is reflected in the real estate ratios of pension funds, which hit their highest annual closing at 25.9% in the fourth quarter of 2022. It is therefore likely that certain investors were forced to reduce their exposure to liquid real estate securities, dragging prices down further.
This means that, given the gloomy mood of real estate investors and the market turmoil in 2022, significantly less capital was invested in the various investment vehicles overall.
Real estate investing: Real estate ratio of pension funds is at its highest level
Source: Credit Suisse
Last data point: Q4 2022
Swiss real estate not hit as hard
For real estate funds, 2022 was by far the worst stock market year since the index was created in 1995. At least they began to recover to a certain extent during fall. The overall performance also shows that Swiss real estate investors experienced a much smaller correction than their global counterparts.
Swiss real estate equities, which entered the downturn with lower valuations compared to funds, held up better with a relative performance of −9%.
Real estate investments characterized by negative overall performance in 2022
| Indirect real estate investments | Overall performance in 2022, in % | |
| Switzerland | SXI Real Estate Shares | −9.0 |
| SXI Real Estate Funds | −15.2 | |
| Swiss Performance Index | −16.5 | |
| Worldwide | MSCI World Real Estate | −22.9 |
| MSCI World: Office REIT | −27.5 | |
| MSCI World: Residential REIT | −32.4 |
Source: Refinitiv Datastream, Credit Suisse
What does the interest rate pivot mean for investors?
Rising interest rates make the situation more difficult for investors. However, the situation is not serious. After several years of virtually perfect conditions on the Swiss real estate market, things are simply getting back to normal. This means that the times of manageable risks and cheap financing conditions are over for now.
Indirect real estate investment forecast: How profitable will real estate funds be in the future?
- The sometimes high real estate valuations are likely to come under increased pressure in 2023
Inflation has not yet disappeared, and the Swiss National Bank's key interest rate could climb to 2.25% by mid-year. When it comes to investment properties, the possibility that value corrections in the high single-digit to low double-digit range spread over several years therefore cannot be ruled out. However, high user demand, particularly in the housing market, and growing shortages should enable a soft landing. - Interest rate reversal calls for adjusting investment strategy
The widespread and successful strategy of focusing on heavily weighted core properties in downtown areas in recent years is likely to lose its appeal due to low cash flow returns and rising discount rates. In the future, active portfolio management and balanced regional and sector diversification are likely to become more important. Listed real estate investments have already undergone a correction, meaning it is again possible to enter the market at moderate premiums. However, since high annual increases in value are probably a thing of the past, more and more attention is being paid to direct yields.
Credit Suisse's preferred real estate investments in 2023
Summary assessment of individual real estate segments and preferred properties
| Segment | General assessment |
| Residential | Thanks to strong demand from tenants and declining construction activity, earnings prospects have improved significantly, even in suburban and rural regions. Interest rate hikes are making value corrections more likely, but they are likely to be offset by rising returns – at least partially. Core properties in prime locations, whose returns no longer offer a sufficient risk premium, are particularly exposed here. |
| Office space | Thanks to people working from home, the reduced demand for office space is likely to become more obvious due to the economic situation. However, digitalization and job growth should help reverse this trend in the longer term. Furthermore, the sluggish construction activity will keep the supply from being exceeded. |
| Retail space | The normalization of consumer behavior and shopping tourism is putting pressure on sales. In addition, the shift to e-commerce has not advanced very far in Switzerland, which is why retail spaces are likely to see corrections on both the revenue and price sides. |
| Logistics | Logistics spaces are benefiting from growing online retail sales and urbanization. In Switzerland, the supply is limited due to land scarcity; this means that further appreciations in value can be expected in the longer term. |
| Hotel and hospitality industry | The food service and vacation hotel sectors are on the path to recovery. However, due to the sharp increase in the number of beds available in many major centers, it will probably take longer for capacity utilization to return to pre-crisis levels. |
Source: Credit Suisse
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