Corestate to step up investment in eurozone as result of ‘cheap’ euro

Swiss real estate investor Corestate Capital is planning on almost doubling its investment in the eurozone this year as a result of the recent unpegging of the Swiss franc that has seen the value of the euro tumble by more than 20%.

‘In light of the new investment conditions, we expect to increase investment this year to at least €1 bn, up from around €600 mln last year,’ Corestate founder Ralph Winter told PropertyEU.

‘Around 40% of our investor base is in Switzerland and I expect them to want to invest more in the eurozone this year in light of the favourable exchange rate, coupled with negative interest rates,’ he added.

In December, the Swiss National Bank, the SNB, imposed an interest rate of –0.25% on sight deposit account balances at the SNB, with the aim of taking the three-month Libor into negative territory.

Corestate is focusing largely on Germany, Austria and Spain because that’s where it sees the best investment opportunities, according to Winter. ‘In Germany, we are also looking at secondary cities, such as Freiburg and even smaller cities where we see good yields. Initial yields above 6% make it very attractive and you are fully-secured even when there is a downturn. There is huge demand among investors for assets like that.’

The Swiss firm has also shifted its focus in the past year from distressed assets with low cash flow to higher yielding assets which are more favourable today. ‘Subsequently, we have identified 50 cities in Germany in which to invest, based on the strength of the local economy, purchasing power etc. We’re investing in all asset classes, including offices, residential and retail properties. It’s about selecting the niche where you see additional value,’ Winter said.

Moreover, Germany is likely to become even more attractive to Swiss investors in light of the cheaper euro, he added. ‘The Swiss challenge becomes Germany’s opportunity – Germany is cheaper now especially for Swiss buyers.’

Spain is still undervalued, according to Winter, who acknowledged that ‘you have to hunt for the diamond there’: ‘Private equity groups have very deep pockets but they have been struggling to find large, income driven portfolios there. We’re targeting smaller assets, valued at between €50 mln and €200 mln – those aren’t really on their radar. We’re interested in refurbishing offices in key markets such as Madrid and Barcelona. We’re also looking at residential development in Spain because there has been practically no development in the past six years because it was impossible to get financing. It’s a lot of work but we see good opportunities. In general, Spain offers 20% higher initial yields compared to Germany,’ Winter said.

Corestate always invests via club deals because it’s ‘very momentum-driven’, said Winter. ‘When the market offers the opportunity for a quick sales scenario we might only hold an asset for a year or so. Our approach allows us to be fully focused on the best timing.’

Winter’s push into the eurozone has been accelerated by worsening conditions in Corestate’s home market. Since the SNB made the shock announcement in January to abandon its cap against the euro, the Swiss franc has soared by as much as 30% - a far cry from 2009 when the euro traded at CHF1.50. Following the unpegging, social media were quick to label it ‘Francogeddon’, while the CEO of Swatch, Nick Hayek, called it ‘a tsunami for the export industry and for tourism, and finally for the entire country’.

Winter echoed concerns in the market that it will have a negative impact on the labour market. ‘The new 1:1 ratio is a huge shift and results in a purchasing power mismatch. It makes Switzerland 20% more expensive for those in the eurozone. Swiss salaries are expected to be cut. In addition, companies who were thinking about opening offices in Switzerland are likely to re-think that and decide not to come. The office sector will suffer because demand will fall. Office rents are also likely to fall further,’ he warned.

Office vacancy rates rose in both Zurich and Geneva last year as occupiers consolidated their existing space to cut costs. Prime rents in Zurich are down 1.3% on a year ago at CHF750 per m2 a year, according to C&W. In Zurich, demand has shifted to small office units of about 300 m2 with few large lettings.

Switzerland’s residential sector, particularly at the top end, is also expected to suffer as a result of the strong franc. ‘The top end of the market is typically driven by foreigners, such as Russians, Middle Eastern buyers and Europeans relocating,’ said Winter. ‘These buyers have other options, too, and, in addition, they are suffering in their home market. This makes them less likely to buy homes in Switzerland. Subsequently, prices at the top end will definitely decrease.’

Corestate had €1bn of AUM as of end-December 2014.