Swiss investors remain faithful to real estate investments

When the coronavirus turned into a global pandemic in 2020, not even listed real estate investments managed to escape the severe market corrections. Credit Suisse's 2021 real estate study shows why commercial properties have been especially hard hit and what that means for investors.

Investors feared recession on the real estate market

The COVID-19 pandemic caused massive upheaval on global real estate markets, especially for commercial properties. First, investors were afraid of a prolonged and deep recession, which would also encompass the real estate market. Second, worldwide lockdowns were imposed that made it temporarily impossible for tenants to generate sufficient revenues using the spaces they had leased.

Continuing uncertainty about real estate investments

In spite of massive fiscal stimulus packages and rapid production of vaccines, there remains a degree of uncertainty regarding the long-term impact of the pandemic. That uncertainty is reflected in the global performance of listed real estate investments. As of March 18, 2021, some sector indices, such as retail space (-17.8%) and office space (-14.2%), were still far below their levels at the beginning of 2020. By contrast, investors consider the logistics property segment to be the "winner" of the crisis (+18.9%).

Investors in Switzerland also started turning their backs on commercial properties at the beginning of the pandemic. The expression of that has been seen in the negative performance of real estate stocks (-8.0%) and commercial real estate funds (-3.9%) since January 1, 2020. Residential property funds, by comparison, have reported positive returns. Direct investments in residential and mixed investment properties in 2020 generated a (transaction-based) total return of 3.2%.

COVID-related exodus from commercial properties

Total returns on global REIT indices (MSCI) by sector compared to Swiss real estate investments, since January 1, 2020
Sources: Datastream, IAZI, Credit Suisse
Last data point: March 18, 2021

Limited losses thanks to rent waivers

The sustained skepticism regarding commercial properties can also be attributed to the fact that many owners were confronted with demands for rent waivers. Primarily affected were commercial properties in sectors hit by the lockdown, such as retail stores, restaurants, and hotels.

According to the annual and semi-annual reports of listed real estate funds and real estate investment companies, they waived roughly CHF 36 million, or 1.7%, of their rental income in 2020. The median for rent waivers issued by commercial real estate funds was 3%.

Still plenty of room for increases in value of real estate investments

Temporary declines in rent are unlikely to have an impact on the market values of these properties. The key question is how the accelerated rise of e-commerce, a sustained home-office boom, and the collapse of business tourism will affect rental income over the long term.

The initial impact is already being felt on the transaction market. For instance, gross initial yields on office space rose again last year for the first time since 2015. By comparison, initial yields on multi-family dwellings in downtown areas (2.7%) and outside city centers (3.7%) once again reached new lows. Net cash-flow returns on investment properties declined further in 2020, according to IAZI. Given the persistent negative interest rate environment, the yields generated by the rental income from these properties continue to make them attractive, however. That creates room for positive yields on valuation going forward, particularly on residential investment properties, which have been less affected by COVID-19.

Investors see falling initial yields on multi-family dwellings

Transaction-based gross initial yields (median) of institutional investors; urban: major centers plus Lucerne, Lugano, St. Gallen, Bellinzona, and Chiasso
Sources: REIDA, Meta-Sys, Credit Suisse
Last data point: December 2020

Investors targeting residential investment properties

The pandemic has created major uncertainty about future demand for commercial space. Therefore, careful observation of demand trends and corresponding adjustment of individual investment strategies will be crucial to the success of real estate investors in the coming years.

On account of that uncertainty, investors will be turning their attention even more to residential investment properties. However, appreciations in value are expected to be less than in previous years. The reasons for that include the growing risk of oversupply on the rental apartment market. That is why a total return of 4% to 4.5% can be expected in 2021.

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