Swiss real estate funds are generally regarded as a solid investment. This assumption has been put to the test over the past two years, as the cycle of interest rate hikes initiated by leading central banks in the fight against inflation has triggered sharp price fluctuations in this asset class. Since then, the prices of real estate funds have stabilised, but the market as a whole is still trading below its previous highs.
A year of upheaval
2022 was a year of extremes for Swiss real estate funds. As the Swiss Exchange's real estate fund index shows, the year got off to a promising start, with the SXI Real Estate Funds Broad Index (SWIIT Index) climbing to an all-time high at the beginning of January 2022.
However, after the successful start to the year, sentiment changed. This was triggered by a shift in monetary policy, as the Swiss National Bank (SNB) raised key interest rates in June 2022 for the first time in 15 years in order to curb rising inflation. Four more rate hikes followed until June 2023. The upheaval in the interest rate environment led to a significant correction in listed real estate funds. The SWIIT index fell by almost 25% over 2022 and ended the year down by around 15% – almost as much as the Swiss equity market, which lost almost 17% as measured by the Swiss Performance Index.
The interest rate environment affects property investments through various mechanisms. For example, rising interest rates can lead to higher financing costs for real estate projects. In addition, investment alternatives such as bonds become more attractive than real estate investments when interest rates rise. Interest rates are therefore an important, but by no means the only driver of real estate fund performance. The various influencing factors mean that real estate funds rarely trade at the price of the underlying net asset value (NAV). Usually, the stock market price is higher than the NAV, so investors pay a premium for the real estate investment. In general, the premium tends to rise when interest rates are falling and fall when interest rates are rising.
Room for improvement
Today, the interest rate environment in Switzerland has changed again, providing a tailwind for real estate funds. The SNB has already cut its key interest rate twice this year. Economists at Zürcher Kantonalbank expect the central bank to decide on a further 25bp cut at its upcoming meeting in September, while financial markets are pricing in as many as two 25bp cuts by the end of the year.
The SWIIT index has already started to recover: since the beginning of November, when it reached its low in 2023, the index has gained a whopping 17%. Nevertheless, it is still well below the record levels of early 2022. For investors, this situation offers entry opportunities.
However, property fund valuations have also rebounded after coming under pressure in 2022 and 2023. The average agio is currently 22.5%, which is very close to the historical index-weighted average of 21.5%, according to an analysis by Zürcher Kantonalbank. There are significant differences between individual funds and segments though, with commercial property funds having a much lower premium than residential property funds.
How investors can participate
The ZKB Tracker Certificate on Basket 'Immobilien Direktbesitz' (Valor: 42980389) is a simple and efficient way for investors to participate in the Swiss real estate market. The certificate invests exclusively in real estate funds that hold property directly. The objective is to replicate a broadly diversified Swiss real estate portfolio, both geographically and in terms of sectors. The composition of the underlying is actively managed by the real estate experts at ZKB Asset Management.
Disclaimer
This communication is for marketing purposes. It is neither an offer nor an invitation to submit an offer, to purchase or to subscribe to securities and does not constitute investment advice. You should consult your advisors before making an investment decision. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, financial condition, development or performance of the issuer to be materially different from any future results, financial condition, development or performance expressed or implied by such statements. The present document has not been drawn up by the research department as defined in the rules of the “Directives on the Independence of Financial Research” published by the Swiss Bankers Association, hence these rules do not apply to this document. If securities are mentioned in the communication, the base prospectus, the final terms and any key information document may be obtained free of charge from Zürcher Kantonalbank, Bahnhofstrasse 9, 8001 Zurich, VRIS, and from www.zkb.ch/finanzinformationen.
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