Attractive international focus for real estate investments
Aligning real estate portfolios globally: For pension funds and other institutional investors, the international real estate market offers a wide range of opportunities worldwide.
The past two years have posed major challenges not only for Swiss real estate investments, but also for international ones in particular. Many real estate markets abroad have experienced sharp declines. After around two years of restraint, Swiss investment foundations and real estate funds are now collecting capital again. Now also seems to be a good time to enter the international real estate investment market.
2022: Sharp correction for real estate funds
Swiss pension funds recorded losses in their equity and bond investments in 2022. As a result, many have pushed the relative real estate ratio in their portfolios close to or above the limit. As a result, some investors had to reduce their exposure to liquid real estate securities. As Swiss real estate funds suffered considerably from this development, there was a sharp correction. Measured by the SXI Real Estate Funds Broad Index, listed real estate funds lost 15 percent in 2022. In the case of publicly traded real estate REITs (real estate investment trusts), the decline measured by the FTSE EPRA/NAREIT Global REITs was even more pronounced at more than 20 percent. Due to the past market turbulence and negative investor sentiment, significantly less capital flowed into the corresponding investment vehicles.
Low interest rates support the real estate markets
As the macroeconomic environment has changed and the stock markets, among others, have developed positively, the situation has eased over the last few months. As a result, the real estate quota of the pension foundations has automatically decreased, which means that the bandwidths are being adhered to again. The real estate fund indices have risen again by more than 10 percent over the year. The turbulent times on the real estate markets therefore appear to be over. However, it is still unclear whether this positive trend will continue. The fact that interest rates are currently falling is encouraging. Although forecasts are difficult, further interest rate cuts are expected, assuming that the overall situation remains more or less the same. If there are further interest rate cuts, the positive trend could continue globally, giving the real estate market a boost.
The timing seems favorable for an entry
As unlisted real estate investments have different characteristics due to their illiquidity, their situation must be viewed in a differentiated manner. However, the latest edition of INREV Market Insights also shows that confidence in European unlisted real estate is on the rise. The consensus indicator reached a record high in September. This also marked the third consecutive quarterly increase. The total return on European real estate as measured by the INREV All Funds Index has improved. Particularly optimistic is the fact that the change in value yield showed positive values again for the first time since the second quarter of 2022 (see chart). For investors, this means that the time to build up or increase international real estate positions currently appears to be extremely favorable.
The global real estate market has completely different dimensions
Swiss pension funds have extensive experience as investors in the domestic real estate market. However, the international market offers far more investment opportunities. These represent an ideal complement to investments at national level. Swiss pension funds that decide to invest exclusively in the world's largest real estate market, the USA, as well as in the most dynamic European real estate markets in the UK, Germany and France, can already cover around two thirds of the global market (see figure). In addition, the individual countries have different economic cycles. There is also a relatively low correlation in yields between the various markets. It is precisely this heterogeneity that provides the necessary diversification in an international real estate portfolio.
Estimated market size in US dollars Billions of selected countries
.Investment opportunities in Switzerland are severely limited simply due to the limited size of the market. However, the investment potential offered by foreign real estate is not yet being fully exploited by Swiss pension funds. Investments abroad lead to the diversification of risks and thus increase the chance of higher returns in the long term.
Invest globally with experienced real estate experts
Due to their high investment volumes, institutional investors have the best access to investments on the global markets. The key to success is always selecting the right real estate investments. Comprehensive specific real estate knowledge, a great deal of experience and, above all, a good local network are essential when investing abroad. Equally important is conscientious management with in-depth ESG knowledge in order to manage real estate efficiently. This expert knowledge is also required if transactions are to be correctly analyzed, structured and ultimately successfully implemented.
