Review 89th Swiss Real Estate Conference - RICS about Risks

Inflation, rising interest rates, the threat of a slide into recession, and geopolitical uncertainties: The organizers of the 89th Swiss Real Estate Talk had hit the bull's eye with their theme, which alluded to the risks on the Swiss and international real estate markets, which have increased significantly in recent months. The event, which was jointly organized for the first time by IMMOBILIEN Business magazine (Galledia Fachmedien AG) and the Swiss section of the Royal Institution of Chartered Surveyors (RICS), was hosted by Prof. Dr. Michael Trübestein FRICS, President of RICS Switzerland, and welcomed 260 guests to the Mariott Hotel in Zurich in November.

"Island of the Blissful"
Trübestein started the evening with an image: the real estate industry as an "island of the blissful." Because so far, he said, the real estate industry has been in a consistently positive environment: "Things have been going steadily uphill with the global capital flows of the world's real estate markets."
But clouds are now gathering over the island of the blissful - new geopolitical uncertainties, interest rates rising again for the first time, higher inflation rates and political restrictions. With Marie Seiler, Head Third Party Real Estate Switzerland at Swiss Life Asset Managers, Cornel Widmer, Global Head of Real Estate at Zurich Insurance, Ulrich Braun, Head of Business Development Credit Suisse Asset Management, as well as Jürg Syz, Partner at Asia Green Real Estate, four renowned speakers provided an insight into the market situation in Switzerland, Europe, the USA and Asia, highlighted the current transaction environment and showed where there are exciting future market opportunities.

Switzerland: Solid Fundamentals
"The Swiss real estate market is a major exception," Marie Seiler MRICS of Swiss Life Asset Managers began her presentation, cautioning, "You still have to manage risks smart at all times." To describe the current situation, she cited the results of a recent survey of pan-European investment managers by PwC and ULI: According to the survey, investors are currently cautious on the capital market. While there is no significant withdrawal of capital from the real estate sector, she said, growth is difficult this fall. Therefore, the smart thing to do these days is to "keep your feet still and wait for better sentiment in the capital market." Turning to the capital market, she announced Swiss Life Asset Managers' interest rate expectations. According to this, risk-free yields are likely to stabilize at 1.6 percent beyond 2024. "In this environment, real estate investments remain relatively attractive," Seiler said. While nominal interest rates on risk-free assets have risen, so have inflation expectations, he said. Thus, there is still an expected excess return on most real estate investments. The fundamental market in Switzerland is particularly optimistic, said Seiler. In the cities, i.e. where Swiss Life Asset Managers is predominantly invested, vacancy rates are below one percent and thus lower than the Swiss average; at the same time, immigration is increasing significantly compared to previous years. As a result, the supply of apartments has fallen by 17 percent compared with the previous year. This shortage is further exacerbated by lower residential construction, Seiler continued. She expects that the reference interest rate could rise for the first time in 2023. The bottom has also been reached in the average interest rate for all mortgages, she said. She also said that demand for office space is increasing due to job and employee growth: 27 percent more space was absorbed in the second quarter than in the previous year. Retail space also improved in the second half of 2022, he said, with asking rents rising significantly. In the major cities, the increase had already been observed since 2020, along with retail sales growth.

Europe: Robust labor markets
Cornel Widmer, Global Head of Real Estate at Zurich Insurance, opened his eyes to the European markets. He, too, sees no reason to leave the "island of the blissful. The fact that people are currently talking about risks again is a positive development: "Because risks exist" - even if this has been somewhat forgotten in recent years, when real estate investments were virtually without alternative.
Anyone who gets into trouble in view of the latest developments has not done their homework - because risk management, especially for a relatively illiquid asset class like real estate, is not only necessary when a crisis is looming. It is "a permanent task" - so that you can still sleep soundly even when storm clouds are gathering. In all investments, therefore, care must be taken to ensure that they are made in segments and markets that can "deliver" in the medium to long term in terms of earnings - in other words, that stable to growing cash flows can be expected.
According to Cornel Widmer, the European markets are "still going strong" in view of the fundamentals - such as the robust labor markets. And this will remain the case, provided there is no deep recession. Nevertheless, the selection of each individual asset is becoming more relevant for investments in real estate. The ESG issue in particular - especially in the case of existing properties - poses challenges for the real estate market. Ultimately, it is a matter of putting the built environment in order, says Widmer: "This is our job."

USA: Local economic momentum decisive for returns
The situation is different in the U.S. real estate market, as Ulrich Braun of Credit Suisse Asset Management reported. This is because the Fed has reacted to the increasing inflation - regardless of the shocks to be expected in the real estate market as a result - with a rapid and relatively high increase in the key interest rate. Today, this rate stands at 4 percent, which Braun does not wish for Switzerland. A look in the rearview mirror shows that yields are too low in relative terms, he said. "Capital growth is at a high level, but it will slow down," Braun says. Differences between sectors (office, residential, industrial, retail) would remain large. Unlike Europe, prices were rising in U.S. suburbs, rather than downtowns. "The key to protecting long-term returns is to take the growth effects with you," Braun says. Real estate could serve as a hedge against inflation if it can benefit from growth effects. After the turnaround in interest rates, rental growth will be particularly relevant to total returns, he says, as the tailwinds from falling interest rates fade and no longer drive the market. Increasingly, local economic dynamics, i.e. demographics and infrastructure projects, are determining differences in relative total returns. Going forward, he said, a detailed understanding of sectors alone is therefore no longer enough: "We also need to understand the dynamics of cities." Looking at medium- to long-term dynamics, Braun expects the focus on ESG factors to increase and demand to shift to energy-efficient buildings. The risk of stranded assets is also increasing, he said.

Asia: impetus from rapidly growing middle class
Finally, the focus was on the Asian real estate market. Jürg Syz, partner at Asia Green Real Estate, showed that while Asia continues to have a strong presence among companies, it is underweighted in portfolios. One driver of economic growth in Asia, he said, is the rapidly growing middle class. By as much as 1.5 billion people, the middle class in Asia is expected to grow by 2030, Syz predicted. "That's a huge steamer," he said, because people will buy a TV first, then a refrigerator, then a car, then an apartment - which is expected to provide a strong boost to real estate markets in the Far East, even in the longer term. It is therefore a risk not to invest in Asia, he said.
Syz singled out three markets for illustration. The most important gateway to Asia is Singapore. The city has recovered strongly after Covid, and prices and rents rose strongly after the pandemic. In addition, the city-state is characterized by long-term GDP growth and steady population growth, he said. At the same time, the city offers high political stability and is known for its security and excellent infrastructure, he said. "Singapore is clearly Asia's preferred gateway city for multinational companies," Syz says. In Indonesia, too, a young population and the growing middle class are ensuring long-term growth. The latter is expected to rise from 85 million to 170 million by 2030. The capital Jakarta is becoming increasingly important. It is an increasingly preferred destination for the expansion of international companies, both as a production and office location. Since summer 2022, demand in the office and residential sectors has also been increasing noticeably. China continues to be of lasting relevance as an economic driver. Here, too, the middle class is growing, which is leading to continued strong demand for real estate. It is true that many real estate developers are currently facing challenges, as the combination of a regulatory reduction in the leverage ratio and restrictive covid measures has put many real estate developers in liquidity difficulties. But Syz said the residential and office markets are resilient: "The overall market is robust."

Conclusion: Numerous exciting opportunities and niches
In a concluding panel discussion, the key risks and opportunities were critically analyzed. In summary, Michael Trübestein reiterated his initial thesis: "The music on the real estate markets, the island of the blissful, is getting quieter in some segments, nevertheless there are numerous exciting opportunities and niches worldwide. These are suitable for diversification and offer attractive risk/return profiles, but must be analyzed in a structured and targeted manner."

The 90th Real Estate Meeting will be held on Wednesday, March 22, 2023 at the Metropol Restaurant. Log in here