Good news from the Swiss real estate industry: in principle, a significant proportion of investors are prepared to forego returns in the short term in order to invest in sustainability. At the same time, however, the real estate industry is struggling with increasing regulation by the authorities. As a result, renovations and new residential construction will increasingly be carried out in urban areas rather than in the city. These are the findings of a new study by Lucerne University of Applied Sciences and Arts.
"Alice is out of Wonderland" - this is the diagnosis of a newly published study on real estate investments by Lucerne University of Applied Sciences and Arts (HSLU), in which 208 pension funds, insurance companies, investment foundations (AST) and funds took part. The parameters on the investment market are currently going crazy: interest rates, the economic situation, varying demand in regions and sectors on the one hand, increased political influence, more regulations and socially responsible behavior on the other are shaping the complex game. The average real estate ratio for pension funds in Switzerland currently stands at 24.3 percent and thus remains one of the most important asset classes after equities and bonds. Although the relative share of real estate has fallen, mainly due to the rise in the value of equities and other asset classes, investors want to increase their real estate share again in the future.
The mortgage volume for pension funds has doubled since 2015 and is around 2-3 percent. Growth in mortgage lending is significantly higher for pension funds than for banks. Stable income, security and low volatility will remain the main reasons to invest in mortgages in 2024.
Great need for clear rules of the game
Regulations in the form of laws, ordinances and decisions by the authorities are becoming increasingly challenging for institutional investors. The complexity and duration of processes with authorities are perceived as particularly restrictive. This was mentioned with great emphasis by 92 percent of all respondents. Objections (81%), complex building regulations and design plans (81%) and tenant protection (79%) are also a problem for investors. More than half also attach great importance to noise protection and, at 50 percent, to spatial planning. The value-added tax is seen as less restrictive (23%). "Political regulations clearly restrict the market economy activities of investors in real estate investments and have undesirable side effects for both tenants and landlords. Above all, the economy needs predictable and binding behavior from the authorities," concludes co-author John Davidson.
Investors’ reactions to the increasing regulations are increased investment in urban and rural areas (86% approval) and the postponement of renovations, which are often no longer economically viable (74%). This has an undesirable impact on the supply of housing: lower quantity and therefore higher rents in urban areas with excess demand and lower living comfort for residents due to a lack of refurbishment.
Surprising: outsourcing of sensitive topics is on the rise
In terms of organization, the real estate industry continues to be very flexible when it comes to outsourcing administrative and investment tasks. The outsourcing rate for data sovereignty is surprisingly high: at 74% for small and 55% for large pension funds, the figures are remarkable, as this step involves a high level of dependency. The outsourcing of functions that require a great deal of responsibility on the part of the service provider, such as portfolio and asset management, is also surprising. This outsourcing rate of between 29 and 42 percent is significant. "Investors are faced with the challenge of outsourcing services, but ensuring that assessment competence and responsibility remain in-house," summarizes co-author of the study Dr. Stephan Kloess.
On the other hand, the outsourcing of commercial and technical management is less surprising. Investors outsource individual functions due to insufficient resources, a more favorable cost base and a lack of expertise.
Sustainability and profitability often go hand in hand in the long term
Around half of all investors are prepared to postpone the realization of target returns in favour of sustainability. What is striking is that large pension funds (44 percent) are relatively reluctant compared to funds (81 percent). Increasing political pressure, but also growing social expectations, are influencing the decision to postpone investment returns. "Put simply, sustainability is a priority, but it has to pay off economically in the long term through higher returns and values," explains co-author Daniel Steffen. The majority of these pension funds expect the decision to pay off within 7-10 years in the form of higher returns and values. Funds and AST even expect an earlier payback within an average of five years, a quarter of the funds even within two years.
Profitability therefore remains the central aspect for investors. However, they are convinced that ecology and economy go hand in hand in the long term. However, this togetherness harbors the risk that the social aspects will have to bear the costs: social sustainability lags well behind economic efficiency and ecology in the list of priorities.
A research team from the Institute of Financial Services Zug (IFZ) at Lucerne University of Applied Sciences and Arts has conducted a broad-based study for the third time in a row to examine developments in investments by institutional investors in real estate and mortgages. The study, which is conducted annually with the support of Auwiesen Immobilien AG, Fundamenta Group (Schweiz) AG and Helvetia, is based on a broad-based survey of 208 institutional investors (pension funds, insurance companies, investment foundations, funds). With an investment volume of 542 billion, the study covers around 51 percent of the total assets of pension funds, includes a large proportion of real estate funds, investment foundations and insurance companies and was conducted in Switzerland in June and July 2024.
