Is the swiss real estate market at a turning point?

First rule of investing, fish where the fish are - Charlie Munger

Our investment strategy is to acquire mid sized projects which can be transformed cost efficiently by utilizing our in-house staff (architects, project-, construction-manager and construction staff). Once the construction is completed, we find tenants and offer the building at market price to yield seeking investors such as pension funds, family offices or private individuals. Our business model carry low interest rate exposure since we capture the entire value between the selling price and total cost. We typically turn a property into finished state within 18 months. We have a 30% margin of safety for each project, which means that we do not expect to incur a capital loss even if the market value were to drop -30% versus our initial expectations. This is in stark difference to a pure buy and hold strategy, which carry more interest rate risk.

The returns are made at the time of purchase but for that you need to uncover value, and uncovering value is never easy. Outside of real estate perhaps even more so. The equity market is (still) very expensive. One way to illustrate that is through the Shiller PE multiple (www.multpl.com/shiller-pe), but you can take almost any valuation metric and it paints a similar picture.

Recent reports by big banks call for a higher normalized valuation level. This could be the true, and if investors believe rates will remain supressed "forever", stocks may actually be inexpensive! At the most extreme levels with as capitalization rates approach zero, the fundamental values theoretically approaches infinity. Forever is however a long time in finance, and perhaps a better approach would be to identify value. The value investor community has been destroyed over the past 10 years as growth has been dominating performance. Given where valuations are, however, there might be an upcoming Renaissance. Some (surprisingly good) companies in the current market, believe it or not, trade at 10x PE.

From a bond perspective, it is looking if possible even duller as BBB rated credit can finance for 0.5% in CHF (chart data courtesy BKB)

Banks still charge negative interest on cash accounts. This means we still have a strong tailwind for alternative investments, ours included. In the next month(s) we plan to re-open our

Guaranteed Sustainable and Affordable Living Bond?that pays investors 6.25% in CHF.

Stay tuned!

Real estate outlook - evidence points to more of the same

The Swiss real estate market is robust and we expect prices to continue its upward trajectory in the near term. Supply remains tight as vacancy rates have fallen to 1.5% across the country. Higher construction costs and increased administrative complexity are in our view expected to dampen the supply growth. It is also plausible to expect that most of these new developments require a relatively high price in the market to be profitable. At the same time, current owners are sitting tight in a low rate environment with no pressure to sell. The economy has for most parts withstood the pandemic better than expected. From a demand point of view, we think regions outside of the main city centres will do relatively better. The work from home policies may reverse at some point, but given the latest developments with Omicron, we see 2022 shaping up to be much like 2021. Investor capital is abundant and the hunt for yield is stronger than ever. That is another major support. Inflation in general is positive for real estate prices as well, and although the Swiss CPI is reportedly low, rising cost can be felt everywhere. The Swiss central bank should in my mind have normalized interest rates a long time ago, but remains seemingly content with negative 0.75%. Even if they raised rates by 1%, it would not largely impact the housing market in our view. We have already seen evidence of this in for instance New Zealand where their central bank hiked the rates by 0.5%, while the house prices continued to increase.?If rates expanded beyond that, pricing risk could become a topic of discussion.

From our point of view, we neither bank on rising real estate prices nor the level of interest rates. As mentioned, we are built to withstand even a -30% price drop at any given point during an 18 month development cycle without losing investment capital. If our working assumptions are wrong, and market price were to drop, we are in prime position to capitalize on the higher number of properties being offered for sale in the market. That would even be a welcomed development.