Answers to Swiss pension funds’ frequently asked questions about international real estate investments
There are good reasons for Swiss pension funds to look beyond national borders and consider investing in international real estate.
Traditionally, real estate is a popular asset class for Swiss pension funds. Domestic investments make up the lion’s share, with foreign real estate currently accounting for no more than 2.5 to 3 percent of the total portfolio (Swisscanto Pension Fund Study 2024). The main advantage of investing abroad is an obvious one: international investments allow Swiss pension funds to achieve a broader diversification of their real estate portfolios while minimising local risks. To help decision-makers at pension funds navigate the options and identify the key aspects of international real estate investments, we have put together a set of answers to FAQs below.
The Swiss property market has thrived for years. Why look abroad?
Over the past few years, the Swiss real estate market has remained stable and continues to be an attractive proposition for pension funds. However, focusing exclusively on the domestic market can lead to cluster risks, especially in a comparatively small market like Switzerland. Investing internationally allows for broader diversification and reduces the risk inherent in a purely domestic real estate portfolio.
Added to that, foreign markets offer a significantly larger investment universe along with higher levels of liquidity. In many cases, these markets correlate less with other asset classes, making the overall portfolio more stable. They also open up investment opportunities in growth markets and sectors that have little or no presence in Switzerland, such as logistics hubs, data centres or specialised healthcare properties. As a further advantage, real estate investments traditionally offer some protection against inflation.
Which are the most popular regions for international real estate investments?
The focus is on markets whose hallmarks are economic strength, positive demographic trends, a high degree of market transparency and political stability.
Accordingly, Swiss pension funds primarily invest in established markets in Europe, North America and the Asia-Pacific region. These regions provide reliable legal frameworks, well-developed capital markets and comparatively high liquidity, which makes it easier to buy and sell investments.
Which investment strategies work for Swiss pension funds?
Given the specific characteristics of pension funds, lower-risk strategies tend to be favoured. Core and core-plus strategies are particularly common, offering stable income, long-term leases with financially sound tenants and properties in prime locations.
In terms of sectors, logistics, residential and office properties play a dominant role. While logistics properties are benefiting from the growing importance of e-commerce, residential properties form the basis for stable returns. A shortage of housing in major global centres, coupled with rising construction costs, helps to drive rental growth and ensures stable rental income. Office properties have significant potential, particularly in regions with strong economies, limited space and substantial demand for modern workplaces.
Which investment vehicles are suitable for Swiss pension funds?
Swiss pension funds have various options when it comes to international real estate investments. As with domestic property, direct investments and investments in unlisted real estate funds are among the most popular vehicles.
- Direct investments provide a high degree of transparency and direct influence on the portfolio properties through active asset management. They are particularly suitable for larger pension funds with the appropriate expertise and the ability to invest large sums.
- Unlisted real estate funds offer broad diversification and higher liquidity, especially if a multi-manager approach is employed. Investments also take less time to realise, as fund units can be traded more easily on the secondary market than direct investments.
Both types of vehicles can be held via investment foundations, which has additional advantages, among them reliable governance structures under Swiss law, co-determination rights and professional management of the real estate or real estate fund units by experienced managers.
What returns can be expected?
Generally speaking, international real estate performs similarly to Swiss real estate over the long term. Comparison of the MSCI Global Quarterly Property Fund Index with the KGAST Immo-Index, for instance, confirms this. However, many international markets are more volatile than the Swiss real estate market.
The expected returns for core real estate investments range from 5 to 7 percent p.a. (in local currency) over a full real estate cycle of 7 to 10 years. Depending on their objectives, pension funds can choose a strategy that prioritises either diversification or a specific outperformance.
How can currency risks be addressed?
Exchange rate developments can have a significant long-term impact on investment performance. Given that pension funds keep their accounts in Swiss francs, they are exposed to potential currency fluctuations when investing in international markets.
Currency hedging can be useful for levelling out exchange rate fluctuations, although this depends on the investment horizon. Investment foundations often offer two options for an investment vehicle: one with currency hedging and one without. The choice depends on the pension fund’s risk tolerance and expected returns, but also on any overarching currency hedging via an overlay solution.
Are you interested in international real estate investments?
Valuations on foreign property markets have corrected sharply in 2023 and 2024. This is therefore an opportune moment for Swiss pension funds to enter the market.
We offer Swiss pension funds both direct and indirect international real estate investments. For direct investments, choose the AFIAA Global investment group; for indirect investments, choose the AFIAA Diversified indirect investment group.
More about AFIAA Global More about AFIAA Diversified indirect
The details provided in this article are for information purposes only and do not constitute an offer or a recommendation to buy or sell financial products. No liability is accepted for the completeness and accuracy of the information. Qualified advisers should be consulted before any investment decisions are taken. Past performance figures and information on market trends are no guarantee for current and future results. The investment value and return are affected by the market and valuation cycle fluctuations inherent in real estate investments as well as exchange rate movements.
