Swiss investors are upping their exposure to real estate in foreign markets despite taking a hit on their eurozone property when the Nationalbank abandoned the minimum exchange rate of the Swiss franc against the euro, PropertyEU has learned.

Swiss investors are upping their exposure to real estate in foreign markets despite taking a hit on their eurozone property when the Nationalbank abandoned the minimum exchange rate of the Swiss franc against the euro, PropertyEU has learned.

January 15th was a black Thursday for Swiss institutional investors holding property in the eurozone. Take Stiftung Abendrot for example: the Basel-based pension fund with €1.2 bn of assets under management lost 3.6% on its overall portfolio when the Swiss National Bank (SNB) abruptly terminated the minimum exchange rate of CHF1.2 to €1 which it had vigorously defended for three years. With the Swiss franc gaining more than 20% against the common European currency, the value of bonds and stocks from eurozone countries the pension fund had invested in fell by the same margin - as well as the value of the €300 mln property portfolio Stiftung Abendrot had acquired in Germany last year.

Even harder hit were the 35 pension funds that had invested the combined sum of CHF1.3 bn in AFIAA Global, a real estate fund set up by Zurich-based Anlagestiftung für Immobilienanlagen im Ausland (AFIAA). 'The rise of the franc led to negative valuation adjustments of 15% in the portfolio,' AFIAA CFO Reto Schnabel said.

However, in reality the actual bloodshed was not quite as bad as these figures might suggest. Most pension funds had hedged their real estate investments outside their home country against exchange rate risks. 'The majority of our clients had taken precautionary measures,' Schnabel noted. A prime example is BVK, the largest scheme in the country with CHF28 bn under management. The pension fund of the employees of Zurich canton told its 114,000 clients in a statement that it had 'prevented losses of CHF1.3 bn' through comprehensive hedging of its foreign currency positions.

While the rise of the franc led to a devaluation of foreign real estate in the books of Swiss institutional investors, the new unregulated strength of their currency makes further acquisitions in eurozone countries ever more appealing. 'Real estate in the eurozone is 20% cheaper now for Swiss investors,' noted Sven Schäfer, managing director of the Constance branch near the Swiss border of German realtor franchise Engel & Völkers. 'This makes property investments across the border very appealing to them.'

A couple of deals have already been inked in the last week or so. Geneva-based Global Gate Capital Management acquired four German logistics centres in Duisburg, Hamburg and Munich from UK manager InfraRed Capital Partners for €60 mln. Property investor Canfina, situated in Goldach near St Gallen, took over Stadtfenster, a mixed-use project in the German city of Duisburg, from Multi Development for an undisclosed sum. Zurich property firm Gold Tree paired with Frankfurt-based Continuum Capital in a €90 mln takeover of the Tulpenfeld office complex in the former German capital Bonn.

SWISS FRANCE IS 'MASSIVELY' OVERVALUED
And there are more deals to come. Ralph Winter, founder of Corestate Capital, told PropertyEU that the Swiss real estate investor will step up its investments in the eurozone by at least 67% this year. 'We expect to increase investment this year to at least €1 bn, up from around €600 mln last year,' he said.

Experts believe other Swiss investors will follow suit. Fredy Hasenmaile, Head of Real Estate Research at Credit Suisse in Zurich, gives one reason: 'Prime office buildings in Switzerland are currently traded at prices that yield less than 3%, while comparable real estate in neighbouring countries yield more than 4%.'

The currency exchange rate is another factor. 'Right now, the franc is massively overvalued,' according to Rudolf Minsch, chief economist of Economiesuisse, the umbrella organisation for Swiss businesses and corporations. 'Judging by purchasing power parity, an exchange rate of CHF1.28 to €1 would be reasonable.' Sometime in the future, the exchange rate will adjust to the purchasing power parity, he said. 'When that happens, Swiss investors will reap currency profits on top of the higher yields that foreign real estate offers.' Northern eurozone countries like Germany and the Netherlands are the safest place to invest in, he added. 'They have robust economies fuelling demand for office, retail and logistics properties.'

There is another reason for Swiss institutional investors to diversify their portfolio with foreign real estate. When the SNB unpegged the Swiss franc from the euro, almost all Swiss stocks nosedived because a stronger franc will hurt profits of the export-oriented corporations in the country. Part of the losses accumulated by the country’s pension funds stem from this crash on the Swiss Stock Exchange. 'The stock market is not a one-way street,' said Hans-Ulrich Stauffer, managing director of Stiftung Abendrot. 'Real estate investments on the other hand are less volatile and provide constant cash flow.' That, he added, is a good reason 'to look for further investment opportunities in the German property market as soon as we have consolidated our recent purchases.'