28. June 2024 | Thomas Hauser
Over the past 25 years, indirect Swiss real estate investments have contributed to satisfactory results for many investors, including pension funds. But “how they are packaged” has led to varying outcomes. What can we learn from this?
When we compare real estate funds with real estate investment foundations, the returns were about the same at 5.0% and 4.9% per annum, respectively. However, the measured fluctuations (volatility) were significantly higher for funds at 7.9% compared to investment foundations at 1.0%. Are the latter safer? In economic terms, no. If comparable properties are held, the risk of changes in value, vacancies, etc. remains the same, regardless of “how they are packaged”. Investment foundations are subject to accounting smoothing, as estimates of property values are equalised over time. However, this comes at the price of increased illiquidity in times of stress: Investment foundations extend the notice period for redemptions or close down altogether, while funds can (almost) always be sold – although not necessarily at the desired price.
The third option is a publicly listed property company. At 6.2% p.a., property company shares have generated far better returns, but with a greater volatility of 10.6%. The main reason for this difference in returns is likely to be that, in addition to a generally slightly different business model involving development, publicly listed property companies use more debt (leverage) than funds. On average over the years, the amount of debt has been around 44% for such property companies and 14% for funds. This makes publicly listed property companies a quite attractive – and very liquid – long-term alternative or addition to the other two forms of investment.
