2015 was a tough year for pension funds. The launch of negative interest rates and generally weak performance of stocks have left their mark on bottom lines. These and other factors have helped transform real estate into one of the most important asset classes over the past few years. KPMG revealed this and more in its latest Pension Fund Benchmark Study.
With the overall performance of pension fund investments at just 0.95% in 2015, they clearly missed the target return needed to meet their long-term obligations. Many funds are being forced to draw on their capital in order to guarantee the required minimum rate of interest. The stock market slump in early 2016 and the Brexit’s negative repercussions on capital markets have caused the second half of 2016 to get off to a disappointing start, as well. Additionally, government bond yields have come under further pressure and hit a historic low.
Against this backdrop, the past few years have seen real estate advancing to become one of the most critical asset classes for pension funds and one that is having a substantial impact on funds’ overall performance. Direct real estate investments in particular have made a major contribution to the positive total return generated by pension funds in this turbulent capital market environment. An allocation of 20% results in a 1.3% contribution to performance. Real estate has thus taken on a new and pivotal role in the pension funds’ investment mix and is being treated as an independent asset class, as an alternative to bonds, with the goal of generating excess returns. Yet expanding direct real estate portfolios is proving difficult at present given the dearth of suitable investment opportunities. Instead, existing real estate portfolios are being analyzed to identify potential for densification and expansions.
All in all, indirect real estate investments performed well again last year. Listed real estate investments reported average performance of nearly 6% (previous year: 15%). Despite the weaker year-on-year result, activity on the capital market remained brisk. Investment foundations offer another alternative to directly held real estate investments: They reported a total return of 5.8% for the past year (previous year: 5.1%).
The scarcity of real estate investment opportunities coupled with high prices on Switzerland’s direct investment market have prompted many pension funds to take a greater interest in foreign real estate. A glance at the figures reveals twice as many commitments of this nature over the past two years. Yet with these accounting for a total of 1.3% of the entire allocation ratio, the percentage is still far below the regulatory maximum of 10%. Nearly 80% of investments in foreign real estate are made via indirect products like funds. The role played by direct real estate investments in foreign countries, on the other hand, is still very minor.
KPMG surveyed Swiss pension funds and occupational benefit plans of different sizes for its annual Pension Fund Benchmark. The data analysis included real estate investments with a total market value of around CHF 20 billion, or around 15% of the total real estate assets of Swiss pension funds and 35% of directly held real estate assets. The underlying data therefore permits representative conclusions to be drawn.
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