Real estate investments in the time of COVID-19

The COVID-19 pandemic has made it very clear that the real estate market has many dimensions. The crisis has affected the various market segments to different degrees and has confirmed existing trends. While retail has suffered, Credit Suisse Asset Management sees tremendous potential in investments in logistics and residential real estate.

August 3, 2020

Real estate investments are typically a robust asset class. They not only provide a significant diversification benefit to the portfolio, they also generally generate attractive returns. The COVID-19 pandemic has influenced the various real estate segments in different ways and its impact on forecasts has thus also varied.

Reinforcing existing trends

For months, closed business and empty office space have shaped the image of cities. While there have been major short-term effects, the medium-term effects of the pandemic strongly confirm existing trends. The retail business has been under pressure for some time because online shopping has been claiming an increasing share of retail sales. While this has hurt retail spaces, logistics properties – such as warehouses and distribution centers – continue to be significant beneficiaries, especially in the current situation.

The trend toward working from home has also been confirmed. It is currently not possible to predict to what degree this new reality will remain in place and what new working models will be used in the future. The bottom line is that the market for office space is likely to consolidate, temporarily compounded by the decline in employment levels resulting from the crisis. The office sector remains attractive, especially for spaces in prime locations. In the current environment, it benefits not only from low vacancy rates and robust returns, but also structurally from limited supply and low interest rates.

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Housing market positioned for a rapid recovery

There have been two main effects on residential real estate: First, market activity has slowed due to the pandemic, and second, lower net immigration has resulted in weaker demand. This latter factor is probably more significant for the Swiss residential real estate market. But residential real estate is typically the sector least sensitive to economic trends, and Switzerland has one of the most stable housing markets. Immigration is expected to recover and return to its old growth path, which could lead to a renewed housing shortage. The residential rental market is also likely to suffer in the short term, but defaults and contract terminations are unlikely. Multi-family dwellings are particularly likely to remain popular among investors, as the risk of a loss of earnings is manageable in comparison to commercial properties, when viewed across an entire portfolio. This will have little impact on valuation, as persistently low interest rates make an increase in discount rates unlikely. We therefore expect this segment to be the least affected in the medium term.

Temporary slump in rental apartment demand

2019: estimate, 2020/2021: forecast. Source: Swiss Federal Statistical Office, Credit Suisse.

The collapse in demand for rental apartments is likely to be temporary. The effect of the pandemic runs counter to existing trends, which point to healthy return prospects in this segment. A rapid recovery will probably set in once the crisis has been overcome.

Investing in real estate funds remains attractive

Real estate remains an attractive investment, particularly in the portfolio context. Rigorous risk management, diversification, and regular adjustments ensure sound portfolios. The real estate market develops cyclically; this makes it particularly important to be aware of when a fund was launched. Portfolios that have existed for some time have been able to benefit from price fluctuations in past cycles.

Fund managers of real estate vehicles continually review the properties in their portfolios and find new opportunities. For funds holding prime residential real estate, we continue to see particularly high potential and good prospects for achieving return targets for the medium and long term.

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Source: Credit Suisse, unless otherwise indicated.
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The key risks of real estate investments include limited liquidity in the real estate market, changing mortgage interest rates, subjective valuation of real estate, inherent risks with respect to the construction of buildings and environmental risks (e.g., land contamination).

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