Are Swiss real estate funds with low premiums a cost-effective investment or a risky choice?

The increase in interest rates has put pressure on the premiums of real estate funds, but investors and savers should take a closer look. Swiss real estate is popular not only for direct investments but also for indirect investments such as real estate funds. The number of real estate funds in Switzerland has grown to 42 in recent years and their total market capitalization was 58.9 billion francs in April this year. UBS dominates the market, with several of the largest funds under its management.

Investors are usually willing to pay a premium on the intrinsic value of real estate funds, also known as “agios.” However, in recent years, the premiums of Swiss real estate funds have fallen substantially. Factors such as expected future property values and rental income, as well as discount rates based on interest rates, play a key role in the valuation of these funds. With rising inflation and interest rates since 2022, the discount factors used for property valuation by the funds may be too low.

Real estate funds can provide opportunities for diversification in portfolios, daily liquidity through trading on the stock exchange, and potential tax advantages compared to direct investments. However, investors in real estate funds have no control over the fund manager and associated fees, and the funds are influenced by the stock market. Asset liquidations can also occur at unfavorable times due to the fund’s structure or economic influences.

It is essential for investors to consider their personal financial situation when investing in real estate funds. Overexposure to real estate assets, such as through pension funds or personal home ownership, may lead to an overweighted position in this asset class. In this case, further involvement in real estate funds may not be the most suitable option.