Direct real estate investments: Logistics properties offer opportunities
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The COVID-19 pandemic has taken a toll, but direct real estate investments still offer relatively attractive returns. Investors with high net worth and large portfolios will find excellent opportunities in logistics properties to earn additional returns and diversify if they possess the appropriate expertise in this area. Multi-family dwellings also remain a rewarding option for investing in real estate.

Logistics properties offer great potential

The COVID-19 outbreak in early 2020 threw financial markets around the world into major turmoil, which also negatively impacted real estate investments. The uncertainty and fears of recession among investors caused the prices of listed real estate investments to collapse in Switzerland as well. However, not every segment of the market has been affected to the same extent. Investments in logistics properties, for example, have bucked the trend over the past year, posting positive growth, and continue to show major potential. These are benefiting from the growth in e-commerce as a result of the pandemic, since vendors are dependent on large spaces for their extensive ranges of products and services. Furthermore, many manufacturers will be expanding their logistics spaces once again in the coming years.

Demand is likely to rise accordingly. At the same time, however, supply in Switzerland is limited. This will lead to higher prices and pressure on gross yields, which have already fallen from 8% to 5.9% since 2011. Nevertheless, the high demand will also create new potential when it comes to rent levels. Especially in the case of state-of-the-art and oversized warehouses in prime locations, effective rental income is also likely to increase in the future.

Investors need a great deal of specific know-how for successful direct market access to logistics properties. It may be worthwhile to take a look at the segment despite its high level of complexity, especially for investors with large real estate portfolios. There are three reasons for this:

  • Logistics properties can make a positive contribution to the portfolio's overall return. Their return premium (net cash flow yield) versus that of office and retail spaces, for example, was over 150 basis points in 2019.
  • Logistics properties contribute to the diversification of an entire real estate portfolio because their returns are driven by different factors than those of residential and office real estate.
  • The scarce supply, when combined with the positive outlook for demand, is a good indicator that logistics properties will also experience positive growth in the future.

Returns on logistics properties are not tied to retail space

Total return according to the Swiss Real Estate Index (MSCI)

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

Source: MSCI
Last data point: 2019

Residential segment remains enticing for direct real estate investments

Despite the pandemic, direct investments in residential and mixed-use investment properties posted positive performance over the past year with gains of 3.2% (transaction-based). At the same time, yield compression continued, with initial yields and net cash flow yields on multi-family dwellings reaching new lows. However, the persistent negative interest rate environment will likely continue to create room for market values to rise, offering positive returns on valuation. Multi-family dwellings therefore remain an attractive investment for wealthy investors and are likely to continue to generate a total return of 4.0% to 4.5% in 2021.

Prices for direct real estate investments in the residential segment rising in many regions

Growth in market values of multi-family dwellings by MS region, 2019; arrows: trend compared to long-term average since 2010

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

Source: REIDA, Meta-Sys, Credit Suisse, Geostat
Last data point: Dec. 2019

Commercial properties losing their appeal

In contrast, real estate equities and commercial property funds in particular still have yet to completely recover from the collapse caused by the COVID-19 pandemic. In addition to losses due to rent waivers during the lockdown, this can be attributed to the fact that uncertainty regarding long-term demand for retail space, office space, and hotel beds created underlying skepticism among investors regarding these types of commercial spaces.

Temporary declines are unlikely to have an impact on the market values of these properties. For these, what counts more is the long-term prospects, such as future trends in e-commerce or a sustained home office boom. Apart from prime locations, however, commercial spaces are threatened over the longer term by a decline in demand, the extent of which cannot be estimated at present.

Investing directly in real estate still offers opportunities

The returns on direct real estate investments are under pressure in many places. Nevertheless, they will remain attractive compared to the available alternatives as long as negative interest rates persist. Over the long term, interest rate hikes are the biggest risk to investors with real estate portfolios because they could lead to significant corrections in price levels.

For the time being, however, the most likely scenario for commercial properties in prime locations, logistics properties, and residential properties is that values will appreciate slightly. For investors, careful monitoring of demand trends and appropriate adjustments to their investment strategies are crucial to success with direct real estate investments.

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