Review 83rd Swiss Real Estate Conference: "Niche investments as a way out of yield compression".

With its theme, the latest 83rd edition of the Swiss Real Estate Discussion, moderated by Prof. John Davidson, lecturer and head of studies at the Lucerne University of Applied Sciences and Arts, also hit a "nerve" in the industry.

Editorial - 29 September 2021

On 21 September 2021, well over 100 participants attended the event at the Metropol restaurant in Zurich. Many real estate investors are currently trying to find "a way out of the yield compression", especially since the prospect of continued low to negative interest rates in an environment of rising vacancy rates for commercial properties is increasing interest in investment alternatives.

Logistics & Life Science Real Estate

For example, investments in logistics real estate, an already established institutional asset class. "Logistics remains interesting not because of the low cap rates for core logistics properties, but because of the potential rental growth and strong demand," explained Sven Schaltegger, MRICS, Head Multi-Manager Real Estate at Credit Suisse Asset Management. E-commerce as a catalyst ensures a steady demand for logistics real estate from a broad and also global tenant base; further advantages are usually full indexation or fixed annual rent increases - this with relatively low, ongoing investments (CapEx) by the owners. According to Schaltegger, rental costs have so far accounted for only around 5 to 10 percent of a typical logistics tenant's total costs compared to staffing (25-30%) and transportation (45-55%). As a case study, the CS expert cited a joint venture by Credit Suisse Asset Management in Spain to acquire an existing portfolio of "last mile" logistics properties and in Madrid and Barcelona with a building value of around EUR 78 million, with which an attractive return is being targeted. Two construction projects are expected to be completed in the second half of 2021.

Credit Suisse Asset Management also expects an attractive return on a life science investment in the most important life science hubs in the US and UK. The life science sector is currently one of the world's fastest-growing economic sectors, and demand for real estate is therefore high. According to Schaltegger, the attractiveness of the multi-manager real estate portfolio is characterized, among other things, by the fact that the properties have the potential to increase in value due to the rents being below the respective market rents; the fund has further yield potential due to the existing development pipeline.

Yield must be appropriate

"Niche investments can be very attractive," explained Robert VarleyFund Manager Pan European Property at Schroder Investment Management (Switzerland) AG. Moreover, niches have long been part of a balanced portfolio - if only for reasons of diversification. All in all, niche investments in Europe accounted for only 8.5 percent of the transaction volume in absolute terms, with the R&D (research & development) sector in particular recording strong growth in recent years. For the Schroders expert, however, "yield compression" is not synonymous with "niche pressure". For one thing, niches would not remain niches forever - and would therefore not always offer more returns. Varley compared a hotel real estate project in Barcelona with an investment in the life science sector in Stein. In the case of the capex project in Barcelona, the yield after repositioning the hotel was > 5 per cent on a 25-year lease (75% indexed) with a large hotel chain. For the state-of-the-art R&F center in Stein, a 30-year lease (triple net, 100% indexed) had a net yield of <4 percent on the bottom line.

On the other hand, niches usually also needed specialist knowledge and further AM/IM skills, Varley pointed out: "Niches sometimes carry different risks, so the returns achieved must be commensurate with the strategy."

Senior Housing and Student Housing

Alternative investment opportunities with high future potential Nils Linsi, Portfolio Manager at Swiss Life Asset Managers in view of demographic developments and the health megatrend in the senior real estate segment. The spectrum is very broad: it ranges from living at home, to living with services suitable for the elderly, to intermediate forms of living (residences, assisted living) and living in a retirement home, to nursing care living (para-medical and medical institutions), whereby the cost intensity also increases depending on the intensity of care. Here, cooperation with specialists is recommended, said the Swiss Life expert: "Retirement homes are suitable as diversification in a real estate portfolio with the right partner." As a practical example, he cited the "Oase Rümlang - Wohnen im Alter", a retirement residence comprising a house with 33 nursing places as well as a restaurant, fitness and four houses with a total of 41 assisted modern apartments, parking spaces and ancillary areas. "The right mix is crucial in locations like Rümlang or Obergösgen," Linsi said. In Rümlang, he said, there is a long-standing partnership with the Oase Group and a 25-year lease with Oase Service AG.

In view of the continuing growth in student numbers, Swiss Life Asset Managers also sees opportunities in the area of student housing, says Linsi, pointing to the example of the "Triaudes" student residence on the EPFL campus in Lausanne, which offers a broad mix of studios and 2.5-, 3.5- and 5.5-room apartments. The gross yield on the property, which was built in 2018 under a building lease, is 5.4 percent, Linsi said. "Over the past decade, EPFL's growth has been over 60 percent; the campus now includes over 28,000 students and faculty."

CONCLUSION

At the end of the informative event, it was clear - and not just to moderator John Davidson - that niche investments can be worthwhile, although it is important to look very carefully when purchasing such properties or project developments: As is always the case with special real estate, well-founded expert knowledge is required, which in many cases suggests cooperation with specialized partners. And last but not least, the right choice of location is crucial for the success of such investments - in-depth research is therefore indispensable.