Is the correction on the international real estate markets a good time to get in?
Valuations on the international real estate markets appear to be nearing a cyclical low point. In the past, these phases often provided attractive opportunities to enter the market. Pension funds should therefore consider their positioning for the new property cycle.
Real estate markets operate in cycles, just like economic cycles, i.e. lows are followed by upturns and then booms. In the past, real estate cycles have lasted around 7 to 10 years (see chart). With property values rising for more than 20 years, the Swiss real estate market stands out as an exception.
Property cycles vary from country to country, based on economic trends, the interest rate environment and the rental markets. These factors allow pension funds focusing on Switzerland to selectively diversify their real estate portfolio by investing in international real estate markets.
Total returns generated by office properties in % p.a. since 1990. Source: own chart, AFIAA Real Estate Investment AG, April 2024.
How have the international real estate markets performed in recent times?
The years 2022 and 2023 were dominated by a cyclical shift. Hikes in central bank interest rates, which fuelled the cycle worldwide, were followed by the transition to a correction phase. Yields on real estate investments, expressed in so-called cap rates, climbed significantly, resulting in substantial devaluations on the international real estate markets.
An important indicator used to assess the real estate market is the transaction volume, i.e. the total volume of property purchases and sales. With rising interest rates making prices difficult to establish, buyers and sellers have recently often failed to come together. As a result, transaction volumes fell substantially worldwide. Now that the first transactions are taking place again, there are signs that the market is bottoming out.
Top-quality properties (core risk profile) usually form the core component of Swiss pension funds’ investments in international real estate. In the past two years, markets relevant to core property, such as Europe, the USA and Australia, have also seen some substantial devaluations – not only in the office sector, but also in other sectors, such as residential and logistics.
What’s next on the international real estate markets?
Both the sharp corrections in property values and the resumption of transactions indicate an imminent transition to a bottoming phase and the start of a new cycle. Market participants expect inflation to remain higher but under control and anticipate a cut in key interest rates by central banks in Europe and the USA in the second half of 2024. In addition, they believe that transaction volumes will pick up further in the second six months of 2024.
On the rental markets, demand for modern office space in prime locations with high sustainability standards remains strong in Europe. There is also consistently high demand for residential space in Europe and Australia. This allows owners to raise rents and increase income yields, which in turn boosts property valuations.
While valuations on the Swiss real estate market have remained stable, international markets have seen significant corrections. It is, of course, difficult to predict exactly when the low point will be reached and the upturn will begin. Nevertheless, correction phases have often been a good time to invest in international real estate in the past. Swiss pension funds should therefore consider their positioning for the new cycle to ensure that they plan and realise their investments in good time.
Are you interested in international real estate investments?
We offer Swiss pension funds both direct and indirect international real estate investments. For direct investments, choose the AFIAA Global investment group; for indirect investments, choose the AFIAA Diversified indirect investment group.
More about AFIAA Global More about AFIAA Diversified indirect
The details provided in this article are for information purposes only and do not constitute an offer or a recommendation to buy or sell financial products. No liability is accepted for the completeness and accuracy of the information. Qualified advisers should be consulted before any investment decisions are taken. Past performance figures and information on market trends are no guarantee for current and future results. The investment value and return are affected by the market and valuation cycle fluctuations inherent in real estate investments as well as exchange rate movements.
