What advantages does investment on real estate securities provide compared with direct investment?
If a private investor would like to invest in real estate as an investment class, there are essentially two forms available. The first option consists of investors directly acquiring one or more properties for the purpose of rental (direct investment). In any case, direct investment in real estate is subject to problems, especially in case of low investment volume. Relative to other investment classes, high transaction costs result from taxes and fees required for purchasing and selling. Significant searching and information costs can also result. Throughout the complete investment period, efficient management of commercial and legal (possible rental and tax laws) skills is required, which typical private investors do not possess. Furthermore, the high investment per property only provides institutional investors sufficient risk diversification according to region and usage.
The second option for real estate investment, besides a real estate fund, is to invest in a publicly traded real estate company. The quotation provides continuous market valuation of the securities as well as increased liquidity relative to a direct real estate investment. The purchase of shares in a real estate company at relatively low transaction costs therefore permits participation in the developing value of a diversified, professionally managed property portfolio in spite of low investment volume, which enables the investor to avoid the disadvantages of direct investment.
How do your define competitive advantage compared to publicly listed Swiss real estate companies?
Several real estate companies resulted after giving up their main business activity and then concentrating on the management and development of former company properties and other properties. Often, the divested real estate was rented back immediately, which enabled the seller to remain in the same building, although hidden reserves accrued on the real estate were at least able to be partially realised. Based on these conditions, several existing stock exchange-listed real estate companies in Switzerland have also been forced to take over real estate that does not necessarily perform or that simply does not match the portfolio strategy of the respective company. Divestments can only be made in this case with great difficulty; repurposing of former industrial areas can be difficult in some cases. SE Swiss Estates AG, on the other hand, does not have to struggle with inherited liabilities, which we consider to be our most important competitive advantage. In any case, it should be fairly noted that the exchange quoted real estate companies in Switzerland have mostly developed positively over the past few years, even if the previously mentioned inherited liabilities have caused certain difficulties.
How does the diversification potential of real estate securities react?
According to the Markowitz portfolio theory, the correlation of the relative share of a certain investment in a portfolio consisting of multiple investments to the other investments, besides the expected income and standard deviation, is what is important. In this case, the lower the correlation to the other investment categories is, the stronger diversification effects may be utilised. Real estate securities possess this feature. Depending on the risk preference of the investor, diverse studies have revealed that optimal real estate shares made up between 15 and 50 percent of their portfolio to take advantage of diversification effects as best as possible.
How would you appraise long-term opportunities for profit?
For the mid-term, we assume performance of 8 - 10 percent per year, althoug this expectation depends on numerous factors and cannot be gauarnteed in any way.
SE Swiss Estates AG mainly invests in residential properties. What kind of development do you expect in the area of rental apartments?
SE Swiss Estates AG only invests in urban centres in Switzerland. These are characterised by very low vacancy rates, e.g. 0.55 percent in Zurich (06.2005). Although the economic condition deteriorated overall in 2005, rental interest remained stable. The result was in fact a rental interest reduction due to lowered mortgage interest rate, however lower rental interest due to economic problems did not material across Switzerland. On the contrary: Slight rental interest increases were observed both for larger as well as smaller apartments. We expect this trend to continue, especially in the medium price segment.
What options does Swiss Estates AG have to increase the value of its securities for the long term? What are the actual value drivers?
SE Swiss Estates AG foresees the following options in this case:
- Increasing rental interest income. In this case, there are basically four options: Reduction of vacancy rates (if present), minimising rent fluctuation (optimal renter mix), re-rental at more attractive conditions, further development of the real estate to achieve increased income.
- Acquisition of real estate with potential for increased value. Active portfolio management versus the conventional "buy-and-hold" strategy Real estate or entire portfolios with potential for increased value are purchased in order to sell them after this potential is reached.
- Reduction of capital costs. Optimisation of the capital structure due to extensive asset liability management. Minimising risks for the given income.
- Reduction of operating costs. Considerations in connection with in and outsourcing of facility management, since profit is only possible starting at a certain size of scale earnings.
- Structure of intellectual capital. This is the significant requirement and central link in the previously mentioned value driver. Investors expect the same professionalism from real estate companies as they do from other publicly listed companies. This includes comprehensive research, detailled controlling, efficient portfolio and capital management, and clear decisions with regard to property management. A value-increasing strategy for the company can only be found against this background, and communicated to the investors via corresponding investor relations procedures.
What investment duration do you recommend for investments in Swiss Estates AG?
In spite of the quotation of SE Swiss Estates AG on the BX Berne eXchange, the liquidity of the market and therefore the fungibility of the titles will develop rather leisurely. The titles are therefore not always tradable due to liquidity reasons. Due to these conditions, we recommend a holding period of at least three years and discourage potential investors with short-term motivation from participating.
Which investors do you consider suitable for an investment in Swiss Estates AG?
We believe that potential investors should generally inform themselves about what a planned investment actually looks like. We consider an investment in SE Swiss Estates AG a sensible diversification for wealthy private individuals and institutional investors.In particular, smaller and more inexperienced investors should be clear about the risks involved with this kind of investment, and they should seek expert advice from a third party.
What effects does an investment have on my taxes?
An investment in SE Swiss Estates AG has been optimised in terms of taxation insofar as dividends are not paid out, but rather profits are retained by the company. This is important ebcause the dividend payouts must be taxed regularly by private persons. The condition that the expected profit remains in the company will naturally increase the net asset value overall. Considered for the long term, this should lead to a corresponding linear increase in the price of the title, since real estate securities are naturally valued at a rate very close to their net asset value. The sale of shares or participation certificates should essentially be free of capital gains taxes for private persons in Switzerland according to "private speculative profit" provisions. Basically, we recommend investors consult with a technically competent tax lawyer for these questions. These statements are non-binding.
What benchmark is applibale to real estate securities in Switzerland?
Since 30 December, 1999, the Swiss Stock Exchange SWX has quoted the SWX Real Estate Index. The SWX calculates two sub-indexes for the Real Estate Index: the Price Index and the Total Return Index.