Swiss institutional investors target German real estate

A yield crunch in the Swiss real estate market is forcing pension funds in the Alpine country to expand their investment horizon to neighbouring Germany.

Frankfurt-listed GSW Immobilien is focussed solely on Berlin's residential real estate market with a portfolio of 52,100 apartments in the German capital. However, the shareholders of the company with a market capitalisation of €1.6 bn are not confined to the city limits - or the country's borders.

About 3.8% of GSW’s shares, representing a value of €60 mln, is now owned by Credit Suisse Hedging-Griffo, a fund manager for Swiss institutional investors. In November last year, GSW attracted even more money from Switzerland when Swiss pension funds subscribed to 7% of a €183 mln seven-year-bond issued by the recently floated real estate company.

‘We have seen a growing interest from Swiss institutional investors in our company and in German real estate in general,’ GSW’s CFO Andreas Segal told PropertyEU.

Since last summer, a growing number of Swiss pension funds have begun to target real estate in neighbouring Germany. Zurich-based Migros Pensionskasse with CHF16.8 bn (€13.5 bn) under management joined a syndicate set up by German listed real estate company Patrizia to acquire a portfolio of 21,000 apartment units from regional bank Landesbank Baden-Württemberg for €1.4 bn. The exact stake that Migros acquired in the deal has not been revealed, but sources familiar with the transaction point to a triple-digit million-euro figure.

The list does not end there. Zurich-based Acron AG has collected €147.5 mln from pension funds in Switzerland for investments in hotels and retail properties in Berlin and Vienna. And Duisburg-based Hamborner REIT AG, which focusses on commercial property in large and mid-sized cities in Germany, has seen a number of Swiss pension funds acquire shares.

The volumes are low, but Hamborner’s CEO Rüdiger Mrotzek expects more money to flow from the Alpine country into the company’s shareholder base. ‘We have built solid contacts with Swiss investors, and many of them are interested in joining us on our growth path,’ he said.

The push for German real estate constitutes a fundamental change in the investment strategy of Switzerland's 2,190 Pensionskassen with assets of CHF700 bn (€564.5 bn) under management.

In the past, the pension funds of the small German-speaking country with a population of just 8 million people had concentrated their real estate investments almost solely on their home market, but that trend has driven up prices and pushed down yields to record low levels. ‘Prime real estate in Switzerland has become so expensive that yields in some places have fallen below 2%,' said Bernhard Köhler, CEO of fund analysis company Swisslake Capital.

As a result, a rising number of Swiss pension funds is no longer meeting mandatory earnings levels set by the Swiss government. According to the latest report by the Oberaufsichtskommission, the watchdog for the Swiss pension fund sector, 17% of all funds were underfunded at the end of 2011 compared with 10.7% the previous year. As a result, the total earnings gap came to CHF41.5 bn (€33.5 bn) at the end of 2011.

‘The pension funds are feeling the yield crunch on the Swiss real estate market,’ Manfred Hüsler, director of the Oberaufsichtskommission, said. ‘Neither commercial nor residential properties currently offer attractive yields in the Swiss market,’ he added.

In a bid to improve their earnings, more and more pension funds are eyeing foreign real estate markets. ‘We see a growing interest in cross-border investments,’ Hüsler said.

Austria and Germany are the main targets, according to Jochen Reith, head of institutional clients at Patrizia. ‘There is no language barrier and the investment culture in all three countries is very similar,’ he said.

Swiss pension fund managers, like their Austrian and German counterparts, prefer low-risk real estate, Reith added. ‘They are all looking for solid cash flows, they don’t want to bet on fast capital gains,’ he said.

The shift in strategy will result in a considerable outflow of money from Switzerland into Austria and Germany in the coming years, Thomas Beyerle, chief research analyst with German real estate investment corporation IVG, predicted. ‘We are not talking about a flood washing over the markets, but a stream large enough to be felt,’ he said.

According to a report by Credit Suisse, as of June last year Switzerland’s pension funds had allocated 16.5% of their total assets to real estate, representing a total value of around CHF115.5 bn (€93.1 bn). Of that figure only 1.2% was located outside the country - an extremely low percentage compared to institutional investors in other European countries.

In Germany, 38% of all property holdings of institutional investors is located outside the country, according to a recent survey by Feri EuroRating. At the end of the third quarter of 2012, the net value of foreign real estate held by Germany’s institutional investors totalled €36.4 bn, or 2.3% of the €1.6 trn of total assets under management.

Last year, the Bern-based pension fund sector watchdog recommended in a report that Swiss pension funds should increase their foreign property exposure to 30% of their overall real estate investments. If that were to happen, no less than €26.8 bn would pour into foreign markets, with a considerable amount of the total flowing into Austria and Germany.

That prospect has prompted investment managers to rush in to get a slice of the new business. UK-based Schroders recently closed a new €225 mln fund for Swiss institutional investors, focussing primarily on core real estate in Germany and France. Most of the funding was provided by the country’s pension funds, with insurance companies accounting for only a small amount, Schroders said.

However, most of the money flowing out of Switzerland into foreign real estate will not go into direct property holdings but into the shares and bonds of real estate corporations in other countries, IVG analyst Beyerle said. ‘Swiss institutional investors prefer listed vehicles over direct investments so that they can pull out their money out at any given time,’ he explained.

Zurich-based Acron has taken that into account in its investment drive across the border. The funds targeting real estate in Berlin and Vienna have been set up as listed single-asset vehicles or Ein-Objekt-Aktiengesellschaften, under Swiss law. ‘This set-up allows investors to sell their assets in the funds at their discretion,’ Acron‘s CEO Kai Bender said. On top of that the vehicles - like real estate stocks - offer a further advantage compared to direct investments, Bender added: 'Investors cannot be held responsible should a fund fail to properly service the financing.’