Real estate represents an attractive investment option for pension plans in today’s low-interest-rate environment. Swiss pension funds invest predominantly in centrally-located residential properties in Switzerland while investments in foreign real estate play just a minor role. KPMG’s first pension fund benchmark study revealed these insights and more.
KPMG’s Pension Fund Benchmark Study reveals that funds predominantly hold purely residential properties (60%) which are believed to be more stable in value than commercial properties in the current market environment. Existing uncertainties surrounding commercial properties were intensified even further with the scrapping of the minimum exchange rate. Continued declines in the demand for space can be anticipated and that is also reflected in price expectations for commercial properties.
Based on their market value, properties worth between CHF 10 million and CHF 50 million represent around half of the real estate pool managed by participants of the study. While properties worth over CHF 50 million account for the largest individual category of real estate investments in terms of market value, this category only represents 8% of the total when measured against the number of properties. Investments in individual properties valued at up to CHF 30 million are most frequent and account for over 80% of all properties. This evaluation clearly reveals that pension funds are mainly interested in properties that offer a certain minimum investment amount (CHF 10 million or higher) and thus enable economies of scale. The average investment amount per property is CHF 18.7 million. Average net yields of the real estate portfolios in the study came to 4.7% for the residential segment and 4.9% for the mixed-use and commercial segment. Moreover, 77% of the real estate is located in large urban population centers (50,000 inhabitants or more) or medium population centers (10,000 to 50,000 inhabitants). The study also shows that pension funds and occupational benefit plans largely invest in those areas where they feel at home and know the market.
Direct and indirect foreign real estate investments have only played a minor role in Swiss pension funds in the past: They accounted for just 1.3% of the total investment portfolio and 7.7% of the overall real estate portfolio. One reason for this lies in the critical investment portfolio size needed for making foreign investments both efficiently and professionally. Other factors include insufficient expertise, a lack of access to the relevant markets and the high cost of hedging foreign currencies.
For its Pension Fund Benchmark Study, KPMG surveyed Swiss pension funds and occupational benefit plans of different sizes, primarily in German-speaking Switzerland. The data analysis included real estate investments with a total market value of around CHF 13 billion, or around 10% of the total real estate assets of Swiss pension funds. The underlying data therefore allows representative conclusions to be drawn. The goal of the Pension Fund Benchmark Study is to furnish pension funds and occupational benefit plans with benchmarks which they can use to analyze and manage their real estate portfolios. Specifically, this study should make it possible for pension funds to compare the performance of their real estate portfolios with that of other pension funds.
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