The 2023 real estate study: How real estate funds are performing

Why did real estate funds lose value in 2022?

Rising inflation rates since the beginning of 2022 in Switzerland prompted the Swiss National Bank to raise interest rates for the first time since 2007 – the end of an era marked by negative interest rates and low inflation.

That was not a good sign for real estate funds and real estate equities. They are regarded as sensitive to interest rates, and the valuations of some were already fairly high. So, the correction in 2022 was correspondingly severe. For a while, real estate funds had fallen by 23% overall in 2022 compared to the beginning of the year.

The slump was probably exacerbated by institutional investors who invested in both direct and indirect real estate investments. The sharp corrections in the substantial equity and bond positions caused property ratios in their portfolios to skyrocket – in some cases, exceeding the strategic or regulatory maximums. For example, this is reflected in the real estate ratios of pension funds, which hit their highest annual closing at 25.9% in the fourth quarter of 2022. It is therefore likely that certain investors were forced to reduce their exposure to liquid real estate securities, dragging prices down further.

This means that, given the gloomy mood of real estate investors and the market turmoil in 2022, significantly less capital was invested in the various investment vehicles overall.

Swiss real estate not hit as hard

For real estate funds, 2022 was by far the worst stock market year since the index was created in 1995. At least they began to recover to a certain extent during fall. The overall performance also shows that Swiss real estate investors experienced a much smaller correction than their global counterparts.

Swiss real estate equities, which entered the downturn with lower valuations compared to funds, held up better with a relative performance of −9%.

What does the interest rate pivot mean for investors?

Rising interest rates make the situation more difficult for investors. However, the situation is not serious. After several years of virtually perfect conditions on the Swiss real estate market, things are simply getting back to normal. This means that the times of manageable risks and cheap financing conditions are over for now.

Indirect real estate investment forecast: How profitable will real estate funds be in the future?

1. The sometimes high real estate valuations are likely to come under increased pressure in 2023

   Inflation has not yet disappeared, and the Swiss National Bank’s key interest rate could climb to 2.25% by mid-year. When it comes to investment properties, the possibility that value corrections in the high single-digit to low double-digit range spread over several years therefore cannot be ruled out. However, high user demand, particularly in the housing market, and growing shortages should enable a soft landing.

2. Interest rate reversal calls for adjusting investment strategy

   The widespread and successful strategy of focusing on heavily weighted core properties in downtown areas in recent years is likely to lose its appeal due to low cash flow returns and rising discount rates. In the future, active portfolio management and balanced regional and sector diversification are likely to become more important. Listed real estate investments have already undergone a correction, meaning it is again possible to enter the market at moderate premiums. However, since high annual increases in value are probably a thing of the past, more and more attention is being paid to direct yields.