Real estate investments as a treatment for short-sightedness?

in Advisory, Real Estate, 26.04.2016

At the moment there is no loss of appetite amongst investors. However, the fact that so-called secure investments offer poor yields has caused something of a belly ache. There is a clouded view of the future.

Investors are confronted by uncertainties driven by economic developments falling below expectations but also by social and geopolitical events. The markets are now highly volatile.

Around the world, economies are looking for the shore around the floods caused by an overflow of reasonably priced capital. The results of this policy are well established: the interest rate offered by government bonds is approaching zero, or has gone into negative territory. According to Bloomberg, the outstanding government bonds with negative yields have already overtaken the USD 7 billion mark. The “Asset-Inflation” caused by this development has been driving up the values of tangible assets.

The search for returns

The task of the institutional investor is to invest capital in long-term tangible assets thereby securing at least an initial return. If the investments are made to provide funds in the future, they will also have to provide a yield reflecting the overall legal and demographic conditions.

This future yield should be achievable with diversified and preferably secure investments. However, in the current zero to negative interest rate environment, yields of this type are mostly identifiable only in less liquid and higher risk investment categories.

Far-sightedness is essential

The few exceptions include real estate investments. This asset class currently offers an attractive yield spread and low volatility compared to government bonds.

In the current market environment, we have to ask ourselves whether a pure focus on the current yield spread is not being too short-sighted. In fact, property investments are one of the most effective treatments for short-sightedness and, thanks to an attractive cash flow yield, they quickly open up a positive glimpse into the future.

However, the short-term yield can be misleading with regard to the potential risks assumed. Property investments are a long-term cyclical asset class. Their potential performance is subject to economic and demographic developments, and is focused increasingly on technical aspects. One of the principal characteristics is limited liquidity.

Yield Spread Real Estate Investments

yield spread real estate investments

 

Seeing more clearly

It is not only in Switzerland that there are increasing signs that hasty decisions regarding real estate investments will limit the freedom of investors in future. Therefore, the achievement of future investment objectives is becoming increasingly clouded.

Investors would be well advised not to grab the first piece of cake that comes along. It is worthwhile reading the instructions more carefully before deciding to take medication, prescribed to open ones’ eyes to the sustainable investment returns.

Please have a closer look at our analysis of the current developments on the Swiss real estate investment market. Our KPMG Real SnapShot! is called “There is no means of avoiding real estate investments”. Our special topic deals with logistic property.

 

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