The rising interest rates have put pressure on the premiums of real estate funds. Investors and savers should pay close attention.
## Swiss Real Estate Funds: A Popular Investment Choice
Swiss real estate is popular among investors, not only through direct investments but also through indirect investments like real estate funds.
### Growth of Real Estate Funds
In recent years, the number of real estate funds has grown to 42, compared to their previous image as the “wallflowers” of the capital markets. These funds are included in the SXI Real Estate Funds Broad (Swiit-Index), which comprises all real estate funds primarily listed on the SIX Swiss Exchange, with at least 75% of their assets invested in Switzerland.
### Market Capitalization
As of April this year, these funds had a total market capitalization of CHF 58.9 billion. Following the acquisition of Credit Suisse, UBS has emerged as a dominant player in the market, managing several of the largest funds.
## Significant Reduction in Premiums
Real estate funds represent a pool of real estate assets, with their prices determined by the market. Investors are usually willing to pay a premium, known as “Agios,” on the intrinsic value of real estate funds. According to a report by Bank J. Safra Sarasin, the Swiit index showed a premium of 18.1% at the end of May.
In recent years, the premiums of Swiss real estate funds have significantly decreased. Katja Gisler, Senior Investment Strategist at Wellershoff & Partners, notes that since 2022, Agios have halved and are now at historically low levels.
## Overvalued or Undervalued?
Are Swiss real estate funds currently undervalued? Gisler believes that some real estate funds are actually significantly overvalued. She explains that the valuation of funds is based on the expected future value of the real estate and rental income. However, due to the ongoing increase in inflation and interest rates since 2022, the discount rates used for real estate valuation in the funds may be too low.
The discount rates for real estate valuation have remained almost unchanged in the past two years, while capital market interest rates have risen significantly. Gisler suggests that considering these factors, the valuation of Swiss real estate funds may need to be adjusted to account for higher discount rates.
## Impact of Rising Interest Rates
Taking these factors into account, the evaluation of Swiss real estate funds appears different. Gisler estimates that the premium for Swiss real estate funds could double from around 20% to 40%. This adjustment, along with higher inflation, may lead to a higher valuation, but it may only partially offset the value loss due to higher discount rates.
The overvaluation of real estate funds could worsen if interest rates in Switzerland are not sustainably low, according to Gisler, who sees potential for long-term interest rate increases.
## Varied Premiums of Real Estate Funds
Beat Seger, Partner and Real Estate Expert at KPMG, highlights the significant differences in premiums of real estate funds. Some products even have discounts, known as Disagios, which reflect the potential or risk that investors attribute to investing in a real estate fund. Seger emphasizes that historical low premiums do not necessarily mean that the assets of the funds are cheap.
## Opportunities and Risks for Investors
### Diversification and Liquidity
Investors have the opportunity to diversify their portfolios with real estate funds, avoiding the “concentration risk” that comes with owning a single property. Additionally, the daily trading on the stock exchange provides liquidity, and there may be tax advantages compared to direct investments.
### Performance and Risks
The Swiit index posted a positive performance of 3.31% this year, but over three years, the annualized return was -0.86% due to a significant decline in 2022. However, the seven-year performance shows a more favorable return of 3.3% per year.
### Risks of Real Estate Funds
Investors in real estate funds have no control over the fund manager or associated fees. The funds are also subject to market influences, and depending on the fund structure or economic factors, there may be untimely asset liquidations. Personal financial situations should be considered, especially for those already heavily invested in real estate assets through pension funds or private property ownership.
In conclusion, the evaluation and risks of Swiss real estate funds have become more complex due to rising interest rates and market dynamics. Investors should carefully assess the premiums, discounts, and overall valuation of these funds to make informed decisions about their investment portfolios.