Indirect Real Estate Investments are Attractive – Even in Mixed Portfolios
In a declining interest rate environment in Switzerland and with still strong fundamental drivers, indirect Swiss real estate investments have once again come into the focus of investors.
Jan Elmer and Elias Lipp
The current interest rate environment ensures that Swiss real estate has regained attractiveness, especially compared to Swiss bonds. While the ten-year swap rate was still almost 2.5% in autumn 2022, it is currently, despite the recent increase, still significantly below 1.0%.
Additionally, the following factors support Swiss real estate investments:
- Continued high net immigration: According to the latest forecasts for the Swiss real estate market (only in German), prepared by Zürcher Kantonalbank, a net immigration of 80,000 is expected for the current year 2025. Last year it was around 83,400 and in 2023 at a record high of 98,900.
- Low construction activity: The aforementioned forecasts also indicate that construction activity will continue to be insufficient to meet demand. It is expected that the number of vacant rental apartments will fall below 40,000 nationwide in 2025.
What does the reduction of the reference interest rate imply?
The strong fundamental picture should not change due to the current reduction of the reference interest rate from 1.75% to 1.50%. Thus, 40% of the inflation accumulated since the last rent adjustment and the general cost increase (depending on the region and local conditions between 0.25% and 1.0%) can be offset. On balance, the experts at Wüest Partner expect an average rent reduction of between 1.7% and 2.4% for those tenants who demand a rent reduction.
A further decline in the reference interest rate is currently unlikely, as fixed-rate mortgages are being refinanced at higher conditions again after the recent rise in long-term interest rates. The forecast of Zürcher Kantonalbank for the Swiss real estate market therefore expects a reference interest rate that remains stable in the medium term. This has not changed due to the recent key interest rate cut by the Swiss National Bank.
What speaks for indirect real estate investments in a portfolio context?
Even in a portfolio context, indirect Swiss real estate has proven itself in the past. The return-risk characteristics over the past ten years have been roughly between those of Swiss bonds (SBIDGT Index) and equities (SPI Index). While no positive return could be achieved with Swiss bonds, indirect Swiss real estate funds (SWIIT Index) generated 4.73% per year. This was imminently behind Swiss real estate stocks (REAL Index) and the broad Swiss stock index (SPI Index). Due to the lower volatility of listed Swiss real estate funds, the same return-risk ratio was achieved as with Swiss real estate stocks and the broad Swiss stock market. Additionally, the low correlations to the aforementioned asset classes speak for indirect Swiss real estate. Over the past ten years, the correlation of the monthly returns of the SWIIT Index to the SBIDGT and SPI Index was 0.27 and 0.45, respectively. From this, it can be derived that listed Swiss real estate funds can positively contribute to portfolio diversification, depending on the desired risk profile of an investor.
Risk-return profile for the period from February 28, 2015 to February 28, 2025
Comparison of key figures for selected indices
| Return p.a. | Volatility p.a. | Return-risk Ratio | |
| Swiss Bond Index® Domestic Government (SBIDGT) | -0.01% |
6.56% |
0.00 |
| SXI Real Estate® Funds Broad Index (SWIIT) | 4.73% |
8.52% |
0.56 |
| SXI Real Estate® Shares Broad Index (REAL) | 6.31% |
11.30% |
0.56 |
| Swiss Performance Index (SPI) | 6.75% |
12.01% |
0.56 |
What speaks for indirect Swiss real estate investments compared to direct ones?
Even compared to direct real estate investments, indirect Swiss real estate investments have some advantages:
- Diversification: Indirect real estate investments allow investors to diversify their portfolio with a small investment without having to buy and manage properties directly. This can reduce risk while providing access to a broad range of properties.
- Liquidity: Compared to direct real estate investments, indirect investments generally offer higher liquidity. Shares in real estate funds or stocks can be traded on the stock exchange, making entry and exit easier.
- Alpha potential: By delegating to experts within indirect real estate with many years of experience in managing mandate or fund-of-funds solutions, there is alpha potential through active positioning.
Conclusion
For these reasons, many institutional investors also allocate part of their assets to indirect real estate investments. In particular, the aspect of liquidity is appreciated to actively manage portfolio allocation within a manageable timeframe. Besides the advantages, however, an investor must be aware that indirect real estate investments are associated with ongoing costs and listed investments can exhibit high short-term price fluctuations. Due to the high fixed costs and the need for specific expertise, an investment in direct real estate is usually only worthwhile from a high investment sum.
What are indirect real estate investments?
Indirect property investments include, among others, property funds and property shares listed on the stock exchange. Investors can also diversify their investments by investing in funds of funds.
Associated Funds
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© Zürcher Kantonalbank. All rights reserved.
This document only serves advertising and information purposes and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF).
This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective published legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com/. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088.
The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision.
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The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933). Data as at (where not stated otherwise): 11.2024
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