Are Swiss Property Funds (REIT Equivalents) a Worthwhile Investment?

Although traded on stock exchanges around the world, REITs (real estate investment trusts) are not issued in Switzerland. REITs are a type of US investment vehicle that invests at least 75% of its assets in real estate. Established by law in 1960, they are viewed as income stocks because, among other requirements, they must pay out at least 90% of taxable income in dividends to shareholders.

On SIX, the Swiss stock exchange, REITs trade in the same way as any other listed security, although they are more correctly called Swiss property funds or real estate investment companies (sociétés immobilières, in French). Similar restrictions to those applied to American REITs are also in place on their investment and dividend policies.

The real estate fund cycle
Source: Credit Suisse

Through buying shares in their Swiss REIT equivalents, investors around the globe can access diversified portfolios of Swiss real estate without having to purchase or manage the properties themselves.

3 Swiss REIT Investment Strategies

1. Equity

As their name implies, equity investment companies – including Swisscanto, UBS, and Synchrony, among others – invest at least 75% of their assets directly in acquiring, managing, building, refurbishing, and selling a diversified selection of Swiss properties. They may also hold shares in other Swiss real estate investment companies, both listed and unlisted. Moreover, they could even invest up to 25% of their assets in overseas real estate, although that is uncommon.

While some Swiss REITs invest in any type of building, others specialize in specific regions (e.g., French- or Italian-speaking areas of Switzerland) or sectors (e.g., commercial, retail, residential, industrial, hospitality, etc.). These investment companies generate returns for their investors from both capital appreciation on the properties they hold and dividends paid from the rents they receive.

2. Mortgage

Mortgage REITs invest in mortgages usually taken out by the buyers of Swiss residential real estate, although some may invest in commercial mortgages. These companies often work in partnership with a bank or banks, from which they can source mortgage loans taken out by customers with superior credit histories.

In effect, mortgage investment companies are providers of private credit, also termed private debt. They are, therefore, part of an asset class that has seen exceptionally strong growth since the lending capacity of American and European banks was restricted significantly by the new regulations that followed from the Global Financial Crisis (2007-08).

Global private debt assets under management (in USD billion)
Source: World Economic Forum

These mortgage REITs are marketed to investors who aim for high levels of income and act as an effective hedge against the effects of rising interest rates because higher rates are, of course, a direct benefit to investors seeking income. By the same token, these funds tend to suffer when interest rates fall. Some managers offset this risk by offering funds that invest only in mortgages with a remaining life of not more than 12 months. However, while that approach may ensure stable asset values, it very much limits any chance of capital growth.

Another drawback is that very few vehicles are available to ordinary Swiss investors who invest only in mortgages. Those few are mostly private vehicles created for the clients of Swiss banks and investment managers, especially pension funds.

3. Hybrid

Finally, a hybrid Swiss REIT applies a mix of both equity and mortgage investment strategies. While that approach seems to provide an attractive mix of capital appreciation and income, no examples are currently available that focus on Swiss real estate in particular.

Historical Returns of Swiss REITs

The chart below compares the historic returns from investment in Swiss real estate shares, real estate funds (our closest national equivalent to REITs), the Swiss equity market as a whole, and direct holdings of Swiss real estate of all types.

Performance of Swiss real estate investments and Swiss investment properties compared to the Swiss equity market (Jan. 2000 = 100)
Source: Credit Suisse

The picture is more than revealing. While the real estate investment funds (in yellow) outperformed the main equity market (in dark blue), they suffered about equally during the downturn that began with the Russian invasion of Ukraine in February 2022.

Real estate shares (in pale blue) have also been affected by that downturn, but still remain far ahead of both the overall market and real estate investment funds. This reflects the fact that, during the bull market following 2009, many of those funds, most of which are closed-end vehicles, saw their share prices outperform the market value of their real estate portfolios, only for that premium to vanish, or even become a discount, during the downturn.

The brightest star has been real estate itself (in brown). Not only did it outperform all three of the other assets, but it did so with very low volatility. Indeed, there was almost no deviation at all from its steady appreciation over the two decades represented in the chart.

Direct Investment in Swiss Real Estate – What’s the Catch?

Despite all the pros economists attribute to direct investment in Swiss property, it also has some drawbacks. On top of the very significant financial commitment required, there is also the problem of illiquidity. You cannot sell a property in a few minutes, which is all the time it takes to dispose of a holding in a real estate ETF or a listed Swiss REIT-equivalent.

Given the prevailing global geopolitical uncertainties, many investors place a premium on the ability to quickly liquidate assets.

Some experts, however, believe those investors are looking through the wrong end of their “risk telescope.” Instead, they argue, those investors should understand that mutual funds, REIT-equivalents, and similar indirect approaches entail risks that are harder to measure than illiquidity. Those vehicles are managed by people of varying skill and experience – some highly competent, some not. This is, in effect, the fiduciary risk: people may make mistakes or fail to perform their duty of care to investors.

Unless the entry threshold in Swiss real estate is a barrier or your investment horizon is less than about 3 years – in which case, long-term assets such as real estate become unsuitable – most of the Swiss REIT-equivalents and other indirect property vehicles may not be your ideal investment. Yet, with enough due diligence, numerous attractive indirect real estate investment opportunities are available, with Swiss property still proving reliable over the long run.

Moonshot was created so that ordinary investors can get around the barriers of the high cost of access (minimum investment being as low as CHF 25’000) and poor liquidity in Swiss property (through Bulletin Board). Ultimately, however, your choice between direct and indirect (REITs and equivalents) investment in Swiss real estate should be based on your risk tolerance and timeline, with plenty of investment opportunities being available for either approach.