In times of negative interest rates and low yields on the bond market, pension funds tend to invest heavily in real estate. However, rising vacancy rates and declining yields are considerably reducing the contribution that such investments make toward overall pension scheme performance. By contrast, foreign real estate offers significant investment potential. These are just some of the findings revealed by the latest Real Estate Pension Fund Benchmark from KPMG.
Real estate currently accounts for almost one-fifth of the investments made by pension funds. In an environment marked by very low interest rates and volatility on the equity markets, this can do much to ensure that the savings capital held by compulsory occupational pension schemes achieves the minimum rate of interest of 1.00% per annum (2017). In conjunction with its annual Real Estate Pension Fund Benchmark, KPMG has once again studied the performance of real estate portfolios held by pension funds and occupational benefit plans.
The average gross yields within the real estate pool studied amount to 5.4% across all properties. At 5.3%, gross yields for the residential segment are below those for the mixed/commercial segment (5.6%). The high demand for residential investment properties is putting pressure on yields for this investment segment, with net yields falling from 4.7% in 2013 to 4.3% in 2016.
Residential properties make up 62% of the real estate pool studied, while 38% are for mixed or commercial use – most of these being mixed-use properties with a relatively high residential component. Investment in properties designed purely for commercial use remains something of a minority pursuit for pension schemes, while special-use properties hardly featured at all in the holdings of the pension funds studied.
The vacancy rate or loss of yield across all the real estate investments of the pension funds studied amounts to 3.6% of the target rent for the year. Residential properties are suffering an average loss of yield of 2.9% (2016: 2.4%), while the vacancy figure for properties associated with mixed/commercial use is 5.6% (2016: 4.0%). Compared with the previous year, therefore, both segments recorded a significant increase in vacancy rates.
As pension funds and insurers are investing more heavily in real estate and its supply is limited, identifying suitable opportunities for investing in Swiss property is becoming more difficult. Investment in foreign real estate has therefore increasingly become a focus for discussion in recent years. While many pension schemes are already exploiting the potential of the Swiss real estate market through a very high investment weighting, investments in foreign real estate remain relatively rare, accounting for just 1.3% of total assets.
“The increase in building activity in Switzerland and the falling benchmark interest rate are pushing vacancy rates up and causing rental income to stagnate or even fall,” says Ulrich Prien, Head of Real Estate at KPMG Switzerland, summing up the results. “This means that pension funds are now experiencing greater pressure on yields in this investment class too. One alternative is investing in foreign real estate, although pension schemes often have no expertise in this area.”
KPMG surveyed Swiss pension funds and occupational benefit plans of different sizes for its annual Real Estate 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. The study covers pension schemes based in German and French-speaking Switzerland, and the data that it uses is drawn from figures from property accounts for 2016. Time series analyses are also based on figures from accounts for the period 2013 to 2016.
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