Swiss slump eases – slowly
Swiss real estate is now in its ninth year of depression, with low rents and prices. However, prices are stabilising, although the number of transactions remains low.
Statistics indicate a slight recovery in residential building in some regions. But in general, even historically very low interest rates could not stimulate the sleeping market. In city centres, empty space makes up about 10% of commercial real estate. But these figures are criticised because an un-known number of buildings are taken out of the statistics when they are no longer marketed.
However, market participants are busy. Several open-end funds have been set up, and an increasing number of listed (or to be listed) investment companies are entering the business. Switzerland is discovering securitisation of real estate. More pension funds, industrial and insurance companies or banks are selling parts of their property or change it for shares.
“Allreal Holding” has become the prototype in this emerging market. Founded by Bank Vontobel and Patria, an insurance company, and the pension scheme of Kanton Basell and as first investor, it took over the Sfr350m (E218m) of properties of industrial company Oerlikon Bührle. Now it is building up a Sfr1bn portfolio.
The fund’s Bruno Bettoni is promising “performance clearly above existing closed end funds by shifting from a buy and hold-strategy to a developing and active portfolio-management”. This business model fits most upcoming new real estate companies and contrasts with the large number of existing open funds, which traditionally follow passive investment policies.
However, the origins of the new players are different. Maag, a listed company, sold all its loss-making industrial businesses and emerged as a pure real estate player, with well-situated space in Zurich as starting point. In only 15 months, it bought 87 office buildings from UBS and Spaltenstein Immobilien. Now it owns assets of SFr1.1bn. In addition, it has cross-holdings with German RSE-group which plans to merge with WCM to become the biggest real estate company in Germany) and Spanish Prima Immobliaria. Maag chief executive Samuel Gartmann says: “The “vision of an internationally recognised real estate company is well on track.”
Züblin, a listed construction company, is shifting toward real estate, and is intending to invest quickly up to Sfr1bn in real estate. The midterm target is SFr2bn, “because only such a size allows it to optimise risks and guarantee constant returns”, says Franz Hidber, chief executive. Unlike Maag, Hidber did not bid for the UBS portfolio.
A&A Actienbank is building up another company aimed particularly at inviting pensions schemes to exchange their real estate for shares of A&A Immobilien. It is also targeting assets of SFr2bn, which seem to be the standard asset size. A&A Immobilien is below its target because of the constraints of legislation and taxation.
Similar problems in building up an attractive portfolio has affected Intershop, a listed company controlled by Credit Suisse and Martin Ebner’s BZ Holding. Intershop is paying back capital to shareholders after selling foreign investments and shopping centres with respectable gains.
There are restrictions on foreigners wanting to invest in real estate companies. Philippe Mueller from Kuoni, Mueller & Partner says many international investors wish to buy Swiss real estate, especially commercial projects. Several billions of Swiss francs, he says, could be allocated. While there is a considerable number of offers, the difficulty is on the demand side, due to the small size of property developments in Switzerland.
Low transparency and uncertainty are hindering new market participants too, says Daniel Tochtermann of Wuest & Partner, a leading counselling company. Foreign investors complain of insufficient documentation on the properties offered and a lack of essential information. Asymmetrical information between local sellers and foreign buyers is offsetting the advantages of political and economic stability in Switzerland, he adds.
While information was sufficient for traditional buy-and hold-investments, it did not reflect forthcoming portfolio-strategy requirements, where risk management and market liquidity play an important part.
But Tochtermann believes that, in the near future, real estate ratings, publicly available benchmarks and indices will emerge.
Misdescription and cheating are still common, states Koni Koch, editor of Finanz und Wirtschaft, a Swiss financial newspaper. If sellers – particularly banks – were to reveal the extent of property for sale overhanging the market, they would also have to revalue the remaining stock. Because of the lack of suitable objects, Koch believes, the gap of bid and asking price will increase, and only new properties could cause a breakthrough. The time is ripe for risk capital, he believes.
New buildings are in a superior position because old fashioned planning – and construction processes are being revised, thus making them cheaper. For example, after a misleading scheme of incentives for general contractors has been eliminated, the costs could be cut by 30%, according to estimates by Interessengemeinschaft Privater Bauherren, an association of private real estate investors. Because of such cost-cutting programmes in 1999 budgeted investments of the IPB-members will fall to Sfr3.5bn from Sfr 4.8bn in 1998, while volumes remain at a comparable level. However, a lot of cartels of suppliers remain to be eliminated, so cost-cutting will keep the prices of existing buildings down for some time.