Most Swiss pension funds have a sizeable real estate exposure and continue to reap the benefits. But their small property market is like black box, finds Barbara Ottawa

 


It is hard to get in as a foreigner and even harder to find official statistics about it. That is the Swiss real estate market in a nutshell from an outsider’s view. But if you are talking to Swiss Pensionskassen, they are virtually in love with their domestic property holdings.

“Real estate is very important for stability and return in the portfolio – the MPK had in the past 10 years a good overall return because of its high real estate exposure,” says Reto Schär, head of real estate investments at MPK, the €14.5bn Pensionskasse of the Swiss retailer Migros.

Even in the official report on the second pillar in Switzerland, issued in 2012 by the federal government, real estate is mentioned as “often the only source for the necessary minimum 4% net return over the last years”.

Credit Suisse confirmed that, in the fourth quarter of 2012, property was the second largest contributor to performance, behind domestic equities. Some Swiss Pensionskassen are even exceeding the legal maximum exposure of 30%, but the average exposure to real estate is around 20%.

The large share of property in pension fund portfolios triggered a debate in the Swiss newspaper Tagesanzeiger last autumn with an article entitled “Pensionskassen hold too much real estate”. However, supervisors can grant a higher property exposure if the Pensionskasse can argue its case.

Experts in the Swiss second pillar agree that the current limit is “no problem” for the pension funds and they see no need to change it. The limit had been cut from 50% in 2009 after a few major bankruptcies were linked to major real estate exposures in their pension fund.

In fact, Swiss real estate may be regarded as a safe haven by most investors and may have proven to be one for most of the time. But even the idyllic Swiss mountains have seen one or two property bubbles collapse around them in their time, and in 2001 Swiss real estate was one of the hardest things to sell.

Over the past two years, several banks including UBS and the Zürcher Kantonalbank and analysts have warned about real estate bubbles in some Swiss areas like Geneva but these warnings were more or less dismissed.

But to get more transparency into the market the Swiss government is planning to introduce an official real estate price index by 2017. So far, no official figures on development of property prices are available. There are only semi-commercial platforms gathering market prices and comparing them. The government explained the decision by saying real estate prices were “an important indicator for economic development and it has gained in significance over the last years in the wake of the international financial crisis”.

And at the moment, prices are going up, even in a market where most of the deals are done domestically, like the Swiss residential property sector. The so-called Lex Koller law is strictly limiting foreign investments in this market which is effectively only open to domestic investors. The law, issued in 1983, was almost abolished in 2007, but then some politicians lobbied to keep it in place.

In general, Swiss Pensionskassen are heavily overweight in residential domestic property, with commercial properties making up under one third of the property portfolios. And most large schemes have been active in the residential market as investors, landlords and mortgage providers for several decades now.

According to Ernst & Young, the Swiss commercial property market is “in theory” open to foreign investors but even there the consultants see various obstacles such as the limited size of the market: “Chances for foreign investors to get their share are most likely to be found in the top segment,” Ernst & Young noted in its real estate trends newsletter. It explained that there were not that many players in the Swiss market investing over CHF500m (€402m) but added there were not that many assets that size either.

The consultants warned that while Switzerland is deemed a safe haven, there are some “question marks” with the biggest risks lying in the general economic development, which will not be left unrattled by crises in other European countries. Further, the experts see rising costs for debt capital pushing real estate prices and a continued FX risk for foreign investors.

So what do Swiss Pensionskassen do in a market where residential prices are maybe already too high and foreign money is pushing into commercial property?

“We are focusing on core real estate but are looking into developing our existing properties by managing our portfolio more intensively,” says Schär.

“This has been an issue for institutional investors in Switzerland for the last decade now. Before that we had a pure holding strategy, but demands on return have grown and now better instruments for a more intensive portfolio management are available.”

Foreign property is only a marginal theme for Swiss Pensionskassen but some are already mixing it into their portfolios and providers like Schroder Property hope to make the asset class more attractive.

The real estate company has joined forces with the Swiss Zürich Anlagestiftung, a collective investment foundation for pension funds, to launch the “Immobilien Europa Direkt”, an open-ended European real estate fund.

The foundation provided both the structure and the investors in the €225m pan-European fund. The fund will initially target assets in Germany and France, although the foundation this week also cited the UK as a potential investment destination.

It remains to be seen whether other Swiss institutions will see the need to exit their comfort zone to go beyond the border to invest in real estate.

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