Swiss property investor looks overseas for returns

Tue May 3, 2011 10:03am EDT

* Swiss real estate now offers little value to investors * Pension funds, insurers may need better yields * Manager likes Hong Kong, Australia, U.S. properties

By Martin de Sa'Pinto

ZURICH, May 3 (Reuters) - Investors in Swiss Real estate such as pension funds and insurance companies are paying too much for low returns and need to look further afield for yields and growth potential, said a fund manager at Zurich-based investment company 4IP.

While supply constraints and rental values have kept Swiss real estate buoyant, the typical 3-5 percent return is too low to help many pension funds match future assets and liabilities, 4IP portfolio manager Claudia Reich-Floyd told Reuters on Tuesday.

"The problem is they have to diversify outside the country to be able to generate the yields they need to satisfy their coverage at some point in the future," she said.

"But if they wait too long, they might again invest pro-cyclical instead of getting in at a reasonable price."

Swiss property may also involve hidden risks.

While prices tumbled in the rest of Europe and the United States in the financial crisis, Swiss property held its value and even rose. But Reich-Floyd said it now offered limited value.

"Swiss prices may remain high for a couple more years, but the entry prices elsewhere are lower, have more growth potential and might not remain so attractively priced," she said.

Moreover, even a slight fall in Swiss real estate prices could force many of the country's pension funds to write down the value of their positions, worsening a funding gap which is in some cases already alarming, she said.

Reich-Floyd likes the rental office market in Hong Kong, and retail properties in Australia and parts of the United States, as well as U.S. commercial properties like data centres and biotech office space.

As the fund wants to create a low-risk, stable income vehicle, it is avoiding more volatile emerging markets, where regulatory issues also make it difficult for pension funds and insurance companies to invest, she said.

Reich-Floyd's company invests in commercial and residential properties around the world by buying into international real estate investment trusts, known as REITs, and Real Estate Operating Companies (REOCs).

"The intrinsic value of a real estate company can be measured with a lot more precision than companies in other sectors like biotech or banking," said Reich-Floyd.

"We know when leases are rolling over, at what level they were signed, what cap-ex can be expected from the properties and other details that allow us to predict future cash flows."

Reich-Floyd said another advantage of REIT Investments was fast access to real estate markets without heavy set up costs. Even smaller institutions can diversify globally, which would not be possible if they invested directly, she said.

"Also, compared to stocks in other sectors, REITs provide attractive dividend yields, a higher inflation hedge, but still benefit from economic growth," she said.

"The main issue investors don't like is the volatility, since the stock price of a REIT reacts immediately to any market fears driven by economic or political events."

(Editing by Jane Merriman)

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