Review of the 80th Swiss Real Estate Conference: "Traditional real estate investments put to the test".

"Is it really a cycle without end?", asked at the beginning of the 80th Swiss Real Estate Talk at Zurich's Metropol Fredy Hasenmaile. His answer: "You can't be too sure, but what is clear is that low interest rates will be with us for some time," said the head of Swiss Real Estate Economics at the Credit Suisse AG. Among other things, this would determine whether it is worthwhile to readjust one's own real estate investment strategy now. "Neither the financial crisis nor the Corona crisis seem to be able to stop the cycle," Hasenmaile continued. Various indices continue to show stable price levels. So did Corona not leave any traces at all?

"Not at all! We are seeing a massive push in the office and hotel asset classes in particular," Hasenmaile explained. Due to the lockdown and the ongoing pandemic, there would be clear changes in these two markets. Both have been catapulted from a phase of expansion into a downturn phase within a very short time. In addition, one must now distinguish between city and mountain hotels in the lodging industry. The latter are doing better, mainly because many domestic tourists have been able to compensate for the loss of business with overseas guests. Business tourism, on the other hand, will likely take years to recover from the Covid-19 setback, Hasenmaile said. In the meantime, he sees the market, which was still expanding at the turn of the year, now entering a slowdown phase for special real estate such as logistics, data centres and, in some cases, healthcare properties and industrial space.

A look at the performance of listed Swiss real estate investments also reveals a differentiated picture: While the losses from the correction phase between mid-February and mid-March have already been recouped in the case of residential funds - and this also applies to the SPI, for example - there is still a wait for an incipient recovery in the case of real estate stocks, which recorded an average loss of over 20 percent. The situation is similar for commercial real estate funds: The minus of almost 20 percent could be compensated in the last six months just about a quarter. And he identified another Covid 19 trend: The importance of apartments has risen. There is now an increasing demand for larger apartments, possibly with an additional study and outdoor spaces such as balconies, terraces and gardens. In addition, locations within cycling distance of the place of work were increasingly preferred. Peripheral residential locations would also become more attractive. According to Hasenmaile, the urbanization trend that has been apparent up to now could weaken. However, he does not expect a total reversal of this trend.

It is now necessary to focus on regions with high growth potential and to analyse vacancies in detail. The requirements also include building up niches whose growth prospects are intact. The pressure to invest in investment properties in the residential segment has increased once again. Here, the focus should increasingly be on higher-yielding project developments. In the case of properties for sale, there will be a portfolio adjustment in many places. However, it is still too early for opportunity purchases.

"Survival of the fittest" expected in the retail segment

Roger Hennig From Schroders Real Estate then puts on a European perspective. A comparison of many national economies shows that the development towards a V- or U-shaped recovery is already underway. In terms of GDP growth forecasts for the coming years (up to 2024), the Scandinavian countries of Denmark, Norway and Sweden are in the lead, as are Austria and the UK, followed by Switzerland, says Hennig. Annual GDP growth rates of 1.3 to 1.5 percent on average are predicted for these regions, he said. "In general, however, more robust growth is also evident in urban economies," such as Copenhagen, Stockholm and Oslo, in each case compared to the nationwide trend. This also applies - but in a much more moderate form - to Switzerland with its major cities of Geneva and Zurich, he said. Clear outperformers in Germany are Berlin and Munich, in Italy the Milan region and in Spain the Malaga region.

In the European office property markets (excluding the UK), an increase in the vacancy rate is expected in 2020 and 2021, followed by a sideways movement at a level of around seven or eight percent. Net absorption of office space across continental Europe is set to creep back up to just under one per cent of stock between 2022 and 2024, he said. This year will be the first time in eleven years that there will be negative net absorption in the markets, Hennig predicts. But the home-office impact on office demand is likely to be modest, he said. "Headlines heralding the death of the office are too pessimistic." The Corona crisis, he said, showed how important the office is to people's interactions. In addition, people would prefer a separation of work and home. "The office will remain central to employee communication and collaboration," Hennig said. What continues to gain in importance is location, accessibility and quality of equipment. In general, however, working from home has experienced a significantly higher level of acceptance.

Growth will continue in the retail segment, but primarily in online retail. The in part very significant decline in stationary trade of ten to 15 percent this year will be followed by a recovery in 2021, but only with growth rates of five to ten percent. In the following years, sales are expected to shrink again in the low single-digit range. In contrast, online retailing will continue to grow and will reach a share of more than ten percent (Italy, Portugal and Spain) or even more than 20 percent (Sweden, Austria, Germany, Denmark and the Netherlands) in many European countries by 2024. The UK will remain the frontrunner in this respect, with more than a quarter of all retail purchases taking place online in 2024.

"The Corona crisis is leading to accelerated polarization here," Hennig explained. Non-food retail in particular has been hit hard, as evidenced by the higher rate of rent defaults or deferrals. In this sub-segment of the retail trade, especially brands in the mid-price segment, which had already been under financial pressure before the virus - probably even despite state aid - would not survive. Here he expects a "survival of the fittest". However, the polarisation will also affect the locations (prime versus secondary locations) and the formats (shopping centres versus specialist and supermarkets). Overall, rising vacancy rates and further downward pressure on rents are to be expected. In addition, the logistics asset class is receiving support thanks to online retailing. At the same time, however, speculative new developments could cause vacancies to rise in the short term and dampen the prospects for rent increases. In the meantime, initial yields for core logistics products have also slipped below four percent in many European cities.

Vacancy reduction in commercial space gets "tougher"

Axel Schärer presented in his following speech the current strategy of the Profond Investment Foundation before. The target asset allocation with regard to real estate is 28 percent. As of the end of June 2020, this share was already 26.5 percent. A good seven tenths of this was made up of direct investments (via the investment foundation), with the remaining almost 30 percent in indirect real estate investments. With over 50,000 insured persons, Profond Pensionskasse currently has more than nine billion francs in capital assets under management. In addition to real estate, the strategic investment allocation includes around 20 percent in Swiss equities, almost 29 percent in foreign equities and 12.6 percent in bonds (Swiss francs and foreign currencies), as well as 3.7 percent in alternative investments. The average return on retirement assets was recently four percent. Profond performance averaged a return of more than five percent. Only in 2018, 2011, 2002, 2001 and 1994 was this negative.

The investment foundation commenced operations in 2016 and invests primarily in properties in Switzerland, Germany and Austria. The 168 residential, commercial and logistics properties have a market value of CHF 2.1 billion. The foundation is a legally independent entity that is wholly owned by Profond Vorsorgeeinrichtung. The buildings are divided into the investment groups Real Estate Switzerland and Real Estate Germany/Austria. While around 1.6 billion of the market value consists of domestic properties, around 495 million euros of real estate assets are located in the other two German-speaking countries. The domestic portfolio consists of 51 percent residential, 22 percent retail, 17 percent commercial and ten percent offices. The foreign real estate portfolio, on the other hand, has a significantly larger exposure in the asset classes retail and office, with a total of 60 percent. In addition, 22 percent of the properties there are in the logistics sector, while the residential share is comparatively low.

In German- and French-speaking Switzerland, Schärer prefers regions or large and medium-sized centres or associated agglomerations with growing populations. "In the residential segment, we prefer well-thought-out, efficient floor plans and not too large areas." Tickets for investment should be in the range of ten to 75 million francs per property. In exceptional cases, the lower limit could also be five million and the upper limit 100 million. Profond's investment strategy, influenced by Covid-19, envisages a focus on residential properties and a significantly lower retail share, Schärer said. For office space, the focus will be even more on micro-location quality, he added. "For commercial locations, the central and exclusive location is now much more important." In addition, tenant creditworthiness has become a much more central factor.

So far, vacancies in the Profond real estate portfolio have not increased significantly in any type of use, said Alex Schärer. However, the reduction in vacancies is becoming "more difficult", particularly in commercial space. In addition, due to the prevailing pandemic situation, exchanges with large commercial tenants in particular have been greatly intensified. The expected Corona-related reduction in yield on an annual basis is likely to be less than 2.7 per cent. However, it is still necessary to wait and see how the Covid law will be formulated with regard to rent reductions. The forecast reduction in the cash flow yield due to Corona is probably less than 20 basis points. The effect on the change in value yield is uncertain, he said. "As things stand at present, we expect a trend towards a black zero by the end of the year," said Schärer.

• The upcoming 81st Swiss Real Estate Talk will take place again on 3 November 2020 from 5 pm at the Metropol Restaurant in Zurich. The topic then: "New user behaviour - new real estate strategies". Here you can find the Link to the registration.

o Presentation Fredy Hasenmaile (Credit Suisse)

o Presentation Roger Hennig (Schroder Real Estate)

o Presentation Axel Schärer (Profond Investment Foundation)