Positive annual performance expected from indirect Swiss real estate investments

Indirect investments in Swiss real estate experienced value adjustments last year. These turned out to be an overreaction. The price-risk ratio is very attractive once again. We therefore expect a positive annual performance from real estate funds and equities.

Indirect real estate investments got off to a good start in 2019

Swiss real estate investments are a comparatively stable investment option in uncertain times. Although even they were unable to escape the downward pull of the markets last year, their value adjustments were moderate when compared to other investments. Swiss real estate companies yielded a total return of minus 2.1%, while real estate funds were at minus 5.3%. At the same time, however, the general SPI share index registered a minus of 8.6%.

This value correction ultimately turned out to be an overreaction. Indirect real estate investments began the new year with attractive valuations. Since real estate is considered low-risk in the current environment, many investors opted for these investments. This allowed part of last year's losses to be offset in the first few weeks of 2019.


Value adjustments in Swiss real estate funds and equities

Overall performance of indirect real estate investments, Index: January 1, 2017 = 100; return on 10-year Swiss government bonds.

Source: Datastream, Credit Suisse
Last data point: March 6, 2019

Returns on real estate investments are at an interim high

Real estate investments are receiving a strong tailwind thanks to interest rate developments. Long-term interest rates have fallen significantly since the end of 2018. As a result, Swiss real estate funds and equities are registering high return premiums when compared to government bonds.

At the same time, the surcharges on the purchase price of listed funds – i.e. premiums – dropped as a result of the negative performance: on average, the surcharge on the purchase price fell from 28.3% in 2017 to 15.6% in 2018 and was thus below the long-term average for the first time. This figure had risen again to 21.6% by the end of February 2019.


Real estate fund premiums return to their long-term average

Development of premiums for listed real estate funds (right scale) and capital market transactions.

Source: Datastream, websites of various fund providers, Credit Suisse

Demand for indirect real estate investments in office space

Real estate equities and funds with a commercial focus are in high demand right now. Office space is benefiting from the favorable economic situation in particular. Conversely, the housing market is still marked by oversupply.

Investors are therefore paying more attention to vacancies. This can be seen in the premiums: at 11.3%, residential real estate funds with above-average rental income shortfalls exhibited lower premiums at the end of February than those with below-average shortfalls, which registered a premium of 23.6%.

Real estate equities and funds: when to invest in what

Real estate equities are benefiting from the current economic upturn more than real estate funds. However, they also behave more cyclically and would be affected more by a possible downturn. Conversely, real estate funds are especially sensitive to interest rate changes. Rising long-term interest rates would lead to a weaker performance of these funds.

As a result, investors who expect the economic upswing to continue should be overweight in real estate equities, whereas those who expect low interest rates should invest in real estate funds.


Real estate funds are more sensitive to interest rates than real estate equities

Annualized returns of indirect real estate investments and share indices; * Q1 1990 – Q4 2018,
** Q1 1995 – Q4 2018

*** Q1 1999 – Q4 2018

Source: Bloomberg, Datastream, Credit Suisse

2019 is likely to be an attractive investment year for indirect real estate investments

Low expectations for interest rate changes and the ongoing favorable economic situation should continue to support demand for indirect real estate investments over the course of the year. A positive annual performance is therefore in store for real estate funds and equities.

In addition to interest rate expectations rising in the future, vacancies on the rental housing market remain the main concern. As a general rule, investments with low rental income shortfalls, good regional diversification, and manageable premiums are likely to have a clear advantage.

More on the 2019 Swiss real estate market

Download the 2019 real estate study This link target opens in a new window
Do you have questions concerning indirect real estate investments? We would be more than happy to help. Call us at 0844 200 114 or arrange a personal consultation.