The SXI Real Estate TR Index, which maps the overall performance of listed real estate funds and companies, increased by almost 15% in 2014, more than compensating for 2013’s negative performance (-3.9%).
Suppliers of property investments exploited the strong investor demand for real estate based investments in order to strengthen the equity capital base of their portfolios by way of new issues. At the same time, real estate companies made good use of the attractive financing conditions to redeem existing bonds.
The favourable combination of high investor demand and attractive financing conditions in 2014 enabled Swiss real estate investment vehicles to attract almost CHF 2.8bn (2013: CHF 2.4bn) of additional investor funding (equity and loan capital). This equates to a 3% increase in the cumulative real estate assets of investment vehicles, although our analysis is limited to listed real estate funds, companies and investment foundations.
The additional funds will mainly be used by portfolio managers to expand their real estate portfolios and to make value-adding investments into their existing properties. However, the investment of new capital by means of acquisition for the purpose of portfolio expansion is being made difficult by the sustained shortage of adequate investment properties.
Real estate companies raised the most capital
Real estate companies have raised around 45% of additional investor capital. There has been an influx of 32% and 23% of investor capital into real estate funds and investment foundations respectively.
In 2014, real estate companies were mainly funded by new loan capital. Examples here are the issue of fixed interest bonds by Mobimo (CHF 350m), SPS (CHF 300m), PSP (CHF 200m), Allreal (CHF 125m) and Intershop (CHF 125m). The volume of refinancing has almost doubled since 2013. In 2014, the average interest rate for refinancing was at 1.6% p.a.
The second quarter of 2014 also saw the initial public offering by HIAG Immobilien Holding AG, with almost CHF 200m placed.
Of the listed real estate funds, the UBS «Sima» fund raised the most capital in 2014, around CHF 330m. A further major issue of CHF 228m was placed on the capital markets by the Credit Suisse «1a Immo PK» real estate fund.
Investment foundations enjoyed a warm reception from investors. The Swiss Life investment foundation successfully relaunched the «Immobilien Schweiz» investment group, raising CHF 500m of new capital. The UBS investment foundation raised CHF 133m of new capital for its «Immobilien Schweiz» and «Kommerzielle Immobilien Schweiz» investment groups. Both relaunches were massively oversubscribed («Immobilien Schweiz» 18 times and «Kommerzielle Immobilien Schweiz» 4 times). Investors appreciate the fact that investment foundations are less volatile than listed real estate funds and companies due to the limited trading frequency.
Are further price gains in the equity market possible?
This sustained high demand for listed real estate investments is also reflected in valuations, with a market capitalization weighted premium of 23.7% for listed real estate funds and 7.1% for companies at the end of 2014 based on the net asset value. The yield gap between real estate investment vehicles and Swiss government bonds justifies such premiums in the current low interest rate climate. Nevertheless, looking at the situation as a whole, further upside potential faces a stumbling block: most institutional investors must earn money with their investments in order to either realise returns for distribution or satisfy claims by lenders or insurance policyholders.
Influx of capital into indirect real estate investments in Switzerland in 2014
Source: KPMG Real Estate (click graphic to enlarge)
NB: This analysis is limited to listed investment vehicles and investment foundations. The influx of capital into non-listed investment vehicles is not included.