Swiss residential real estate in particular seems to be enjoying a moment in the sun right now. What is your take on the current situation, and what kind of investments do you think are worth considering? You are pursuing an anticyclical investment strategy for your product Swiss Prime Site Solutions Investment Fund Commercial (SPSS IF Commercial). Can you tell us more about this?
In the past, many investors have focused on homes. At the same time, a variety of factors mean that the commercial market offers attractive investment opportunities with relatively appealing risk/return profiles. We want to seize these market opportunities for the investors in our SPSS IF Commercial by taking an anticyclical approach. Our successful first issue in December 2021, which had a volume of roughly CHF 145 million, confirmed that investors are also very interested in commercial real estate investment solutions at present.
We firmly believe that the right selection of commercial properties – be that in the office, retail, commercial, logistics or healthcare segment – can produce an attractive return for our fund investors over the medium to long term. The fundamental data and trends on the real estate market signal growing demand for commercial space in future.
What major trends do you currently see in the office and retail asset classes?
In the medium to long term, we expect demand for office floor space to remain stable or to increase. This is due in part to societal changes and a shift in working methods that lead to increased screen work – a product of digitalisation. The employment rate in Switzerland is also set to rise by about 10%. Across all sectors as a whole, the proportion of office work is forecast to jump from 45% today to 60%. This share amounted to 34% in Switzerland in 2000. Taken together, these factors will drive up demand for office floor space in Switzerland.
We also regard the recovery in the retail market as intact because the removal of Covid restrictions will increasingly see foreign visitors spending their money in Switzerland again. Online shopping will continue to exert pressure on bricks-and-mortar retail, although there are natural limits to this trend, with consumers still wanting the shopping experience. Our view is that this will result in continued polarisation: good locations will continue to benefit, while poor ones will face even greater challenges. When investing in the retail segment, it will therefore remain critical to have the right mix of sectors in the right locations.
In the commercial segment, which adds an element of diversification, we see a trend away from globalisation towards shorter supply chains. The strong economic outlook for Switzerland also suggests that additional floor space will be required for the manufacturing, life sciences and healthcare sectors.
These are the major trends in evidence in office, retail and commercial property, which we invest in anticyclically through the SPSS IF Commercial real estate fund.
What potential do commercial rental contracts offer, e.g. with regard to expectations of higher inflation?
At times of increased inflation pressure and rising interest rates, commercial property offers a competitive advantage over residential real estate as indexed rental contracts mean that rental income keeps pace with the cost of living. Indexation of rents to the national consumer price index (CPI) thus provides timely protection against inflation. On average, 92% of rental contracts in the SPSS IF Commercial are indexed to the CPI.
In contrast, rents in existing lease agreements are tied to the reference interest rate, which is rather sluggish. Under a scenario of rising interest rates, residential and commercial real estate assets could come under pressure. Whether or not this actually materialises will depend on the portfolio’s cash flow performance. The inflation indexation of commercial rental contracts means that investors in commercial property receive a real yield on their investment.
So is it still the case that «cash is king»?
I don’t think so. In an inflationary environment, money that is not invested productively is eroded in value by inflation. Studying the current interest rate environment and expectations for the Swiss National Bank’s reference rate, we expect to be around the 0% mark at the end of 2023/start of 2024. If we compare this with the yield on commercial real estate assets in Switzerland, that still means a healthy additional yield of 5 percentage points. On top of that, private investors also need to bear in mind the tax advantage applying to wealth versus income. This makes it all the more attractive to put money into a Swiss real estate fund rather than holding it in a bank account.
And on the topic of investing in funds: is cash or real assets the way to go?
Our SPSS IF Commercial real estate fund pursues both. During the upcoming capital increase, investors will be able to subscribe to the fund between 14 and 25 March 2022 by investing capital.
Real estate owners can acquire units in the fund through contributions in kind of real assets that fit the strategy and yield expectations. Our fund is tax-exempt (income and wealth) for private investors – a compelling argument for capital investors and for those contributing real assets in return for fund units.
"At times of increased inflation pressure and rising interest rates, commercial property offers a competitive advantage over residential real estate as indexed rental contracts mean that rental income keeps pace with the cost of living."
