From Amsterdam to Tokyo: global residential markets are rife with opportunities
Finding suitable residential properties in Switzerland is no longer an easy task for pension funds. Supply is scarce and prices are high. At the same time, the global residential sector is presenting new investment opportunities, ranging from traditional apartment buildings to specialised segments.
Traditionally, Swiss pension funds have focused primarily on domestic residential real estate, which has been regarded as a stable source of income for institutional portfolios for many years. However, the supply of properties in the domestic market is limited and valuations are high. Increasing regulation of the Swiss residential market is further reducing options for investors.
Residential real estate abroad – wider market, broader diversification
Swiss pension funds might therefore benefit from extending their horizons beyond the national borders. While many markets have seen significant value corrections in recent years due to higher key interest rates, rents for residential real estate continued to rise during this period.
In the last 10 years, the proportion of residential properties in global real estate portfolios has doubled, reaching just under 23% today (MSCI Global Quarterly Property Fund Index). At the same time, the spectrum has broadened: alongside traditional apartment buildings, segments such as senior housing, student accommodation or affordable housing have emerged as new investment opportunities.
The case for global residential property investments
Essentially, the growth drivers for residential property investments abroad are the same as in Switzerland:
- Population growth: The population in the world’s major business centres is growing continuously. Demand for housing is on the rise, particularly in central locations, contributing to a housing shortage in these areas.
- Household size: With the number of people per household declining in countries from Japan to Canada, the demand for additional space is increasing.
- Limited supply: Given that new construction activity has declined significantly in recent years, the number of new flats coming onto the market is insufficient.
Scarce supply and rising demand are leading to higher rents in many markets. In addition, further interest rate cuts are expected in Europe and the US, bringing down financing costs and making global real estate investments even more attractive for institutional investors.
Global residential property strategies in practice
The AFIAA Diversified indirect investment group invests in unlisted real estate funds around the world, with residential strategies making up a significant portion of the portfolio. Tailored to the needs of Swiss pension funds, the strategies provide stable returns and diversification across markets and segments. The following three examples show how the investment group invests in the international residential sector.
- Senior housing in the UK: The fund invests in high-quality, purpose-built residential facilities for senior citizens in the UK. The long-term, inflation-linked tenancies on these properties offer stable returns and protection against inflation. Driven by demographic trends, demand for senior housing is relatively immune to economic fluctuations. What is more, the fund makes a social contribution by providing high-quality care in an underserved market.
- Housing for young professionals in Japan: The fund invests in high-quality apartment buildings in Japan, primarily in Tokyo and Osaka. Its focus is on studio apartments and one-bedroom flats within a ten-minute walk of train stations, properties that are in particularly high demand. The fund benefits from high wage growth and high tenant demand, as home ownership is relatively expensive in these cities. Aside from providing stable income, the fund also realises development projects, which can generate additional returns.
- Urban living in the Netherlands: Focusing on the Dutch rental housing market, the fund invests in properties targeted specifically at young professionals and students. Its geographical focus centres on the highly sought-after Randstad region, which includes dynamic cities such as Amsterdam, The Hague and Rotterdam. Thanks to favourable market conditions, including limited supply and rising rents, the fund generates stable rental income. Its pronounced focus on sustainability is reflected in a high GRESB rating.
Conclusion
Driven by urbanisation, demographic change and scarce supply, demand in the global residential sector remains high. At the same time, the sector offers broad diversification and a combination of stable returns, protection against inflation and long-term structural growth. These are qualities that play an important role during economic downturns.
Following the recent corrections, the global residential real estate markets are showing signs of a turnaround. Institutional investors can expect attractive returns and higher values in the future. For Swiss pension funds, this is a promising time to add global residential property investments to their portfolios.
Access to global residential real estate investments
The AFIAA Investment Foundation offers Swiss pension funds broadly diversified access to international real estate markets through its AFIAA Diversified indirect investment group. The group invests in over 20 unlisted real estate funds worldwide, with around one third of the portfolio allocated to the global residential sector.
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.
