SWITZERLAND - Real estate investors in Switzerland should be wary of an increase to the country's interest rates, as its knock-on effect could lead to property prices falling in a fashion not seen in 20 years, Towers Watson has said.

The warning comes after Swiss interest rates briefly fell into negative territory in August, with the LIBOR rate now hovering around 0%.

Edouard Stucki, senior investment consultant at Towers Watson in Zurich, said that while Swiss Anlagestiftungen - the property vehicle of choice for pension funds - would not be as badly affected, as they trade at net asset value (NAV), other investment vehicles would suffer under any increase.

He explained that the vehicles trading at a premium or discount over NAV would be at risk of rising interest rates.

"Why it hasn't happened is because they would tend to react a bit delayed to valuations, as these happen in three-year cycles," he said, explaining that this meant any actual decreases in value took several years to be reflected in returns.

He added that the country's loose monetary policy was also impacting valuations.

"There is a fear by the central bank, which has been voiced for a long time now, that the flood of extra Swiss francs is going into the real estate sector," he said. "This could be holding real estate prices steady."

Stucki said the country's pension funds preferred real estate investment as it offered them growth that would normally be in excess of their minimum returns. But he argued that the size of the Swiss real estate universe posed a problem.

He estimated that the entire value of listed real estate was around CHF40bn (€36bn), with further value coming from Anlagestiftungen.

"Contrast that with the capitalisation of the stock exchange and the bonds - it's dwarfed," he said.

He argued that the residential and multi-family market had grown in recent times, but that investors had "forgotten" about the impact of the last property crash in 1989 and 1990.