Attractive despite changes in conditions
“Investors who compare less liquid real estate investments with high-quality government bonds will have noticed that spreads have fallen to a historically low level. We’ll explain to you why real estate investments nevertheless remain attractive, in addition to describing the options that are available for investing in real estate.”
Kerstin Hansen, Research Analyst – Real Estate DACH
Although concepts like inflation and interest rates had nearly been forgotten in the past decade, we have been reminded of them in dramatic fashion over the last 18 months. Initially kick-started by the pandemic-related supply-chain problems in the fall of 2021, inflation worsened significantly with the outbreak of the war in Ukraine and the associated increases in energy prices starting in the spring of 2022.
The central banks – after initial hesitation – responded to this by significantly raising prime rates. Though inflationary pressure has abated, a higher level of interest rates is expected for an extended period, with reductions not anticipated before the second half of 2024. Besides inflation, which also has a direct impact on the real estate sector through higher prices for building materials and energy, the situation on the real estate market is particularly marked by the rise in interest rates. First, higher interest rates make it considerably more expensive to finance real estate projects, which in turn reduces returns. By contrast, however, the expectations of investors for returns go up, since other investments, like bonds, have become less attractive – in other words, the time of TINA (“There Is No Alternative”) is over.
In addition, the higher interest rate environment is having an effect on investment properties through higher discounting rates. In recent years, the market for real estate investments was characterized by a lack of alternative investments. Now, the focus is again increasingly on the characteristics that make real estate an attractive asset class compared to competing investment products.
This report looks at how the changing macro circumstances are impacting the market for Swiss real estate, outlines some of the key characteristics of real estate investments and the possible areas of advantage for investors.