Changing investment strategies due to rising interest rates
The real estate market, previously considered a safe haven, is facing new challenges. Increasing demands in the areas of Environmental, Social, and Governance (ESG), rising vacancy rates in office spaces, objection trends, and recent interest rate hikes are putting pressure on this asset class. These developments are forcing investors to rethink their strategies, as real estate investments can no longer be considered the only alternative.
Just as sailors avoid the Bermuda Triangle, investors must also consider the risks of their investments. The magic triangle of investment strategy – liquidity, profitability and security – is now being expanded to include ESG factors. This step is also supported by the “Lost in Transition” study by the Lucerne University of Applied Sciences and Arts. Institutional investors are placing greater emphasis on ensuring that their investments are sustainable in the long term, even if this leads to lower returns in the short term.
A look at Swiss pension funds
Swiss pension funds have diversified their investments, although the proportion of real estate varies from fund to fund. The analysis of the Swisscanto Pension Fund Study 2023 shows that real estate is gaining in importance compared to equities and bonds. This trend can also be observed among other institutional investors, whereby the real estate ratio in the portfolio should be between 10% and 25% in order to ensure optimal diversification.
The impact of rising interest rates on the asset classes
Rising interest rates have a negative impact on all three main asset classes – equities, bonds and real estate. For bonds, interest rate rises lead to price losses, while for equities they reduce their attractiveness. Real estate investments become more expensive, which leads to a decline in demand and thus to a fall in prices. Institutional investors are reacting to these developments by realigning their portfolios and reducing their real estate holdings in order to lower their leverage ratios.
The difficult market environment and its impact on real estate investments
Sentiment on the real estate market is subdued due to rising interest rates and uncertainty on the financial markets. This is reflected in the Swiss Real Estate Sentiment Index, which measures the expectations of market participants. Investments in real estate are becoming less attractive, but the current market environment also offers opportunities, especially for investors who are prepared to invest for the long term and weather the market fluctuations.
Rising interest rates pose a challenge for institutional investors, especially those who have invested in real estate. A realignment of the investment strategy and prudent portfolio optimization are crucial to achieving long-term returns and minimizing risks.