Real estate can be an important part of a diversified portfolio. Does it also fit your investment strategy?

Gone are the days when real estate was just for personal use. It now offers attractive investment opportunities for female investors. This is confirmed by the figures. One in six mortgages is taken out with the aim of re-renting the property (NZZ, 2020).

Three reasons that speak for real estate investments

  • In the current low interest rate environment, real estate offers higher return opportunities than other asset classes such as bonds, which generate hardly any returns.
  • Inflation protection: as a real asset, real estate loses less value as prices rise.
  • Depending on the type of real estate investment, returns from real estate may have a lower correlation with returns from traditional asset classes such as equities. This means that real estate investments as part of your portfolio can reduce your overall risk.

    Find out in this article how you as an investor can invest directly or indirectly in real estate.

    Direct investment: real estate as an investment

    With the current low mortgage interest rates, faibles capital for the purchase of a property can be raised relatively cheaply. This allows real estate to be purchased for re-renting – be it an apartment or a multiple-family unit.

    As an investor, you have the prospect of regular returns from rental income and can also benefit from any appreciation in value.

    But direct investments in real estate also entail risks, so you should factor in management and renovation costs. In addition, there is often no risk diversification because a lot of capital is tied up in a single property. If one or more apartments are vacant, this reduces your return on investment. You should therefore find out about regional returns and vacancy risks before investing.

    Alternative: Indirect investment in real estate

    To invest in real estate, you as an investor do not have to buy an apartment, a house or a multiple-family unit right away. Various investment instruments allow you to invest indirectly in real estate, even with smaller investment amounts.

    There are three investment options:

    Real estate funds

    Similar to “classic” investment funds, real estate funds also pool the capital of several investors and invest it in real estate. These real estate assets consist of developed and undeveloped land, residential and commercial properties, and industrial buildings.

    A distinction is made between two types of real estate funds. Open-end real estate funds manage multiple properties and allow investors to trade the units at any time. As a rule, closed-end real estate funds do not allow for ongoing inpayments and outpayments – instead, the investment mass is clearly defined from the beginning.

    The advantages of investing in real estate funds are, on the one hand, regular distributions and, on the other hand, the fact that you can benefit from any appreciation in value. In addition, investments in real estate funds are more broadly diversified from the outset than when buying a property.

    But real estate funds are subject to regular fluctuations in value and are not exempt from the risk of loss in value. In the worst case scenario, a fund may even be closed. Moreover, Swiss real estate funds are currently valued at historically high levels. And last but not least, there are fees for the administration as well as for the trading of the funds.

    Real Estate ETFs

    Just like traditional exchange-traded funds (ETFs), real estate funds track a specific index or other underlying assets. Real estate ETFs usually invest in other real estate funds or real estate stocks. UBS Real Estate ETFs are just one example.

    Real estate ETFs offer similar advantages to real estate funds. In addition, administrative costs are often lower as the ETFs are passively managed.

    But there are also disadvantages similar to those of real estate funds. What’s more, there are only a few real estate ETFs in Switzerland, and foreign real estate ETFs are subject to currency risk. Real estate ETFs, which invest to a large extent in real estate stocks, also have a higher correlation with developments on the stock market.

    Real Estate Investment Trusts (REITs)

    REITs are a special form of indirect investment in real estate. A REIT is a company that owns, manages and finances income-producing real estate and is usually traded on the stock exchange. Unlike in other countries such as Germany or the USA, they are not licensed in Switzerland, but can be traded on foreign stock exchanges.

    REITs promise comparatively high returns because special regulations apply to them. For example, they are generally tax-exempt at corporate level, and in countries such as Germany, a 90 percent profit distribution is required by law.

    But REITs also have one or two drawbacks, such as the volatility of the stock markets, the foreign currency risk, or the fact that REITs tend to be poorly diversified compared to traditional real estate funds.

    Real estate as part of a diversified portfolio

    Real estate promises positive distribution yields in the current low interest rate environment. But this is not the only reason why it can be worth opting for real estate in a broadly diversified portfolio. It also helps ensure risk diversification in the portfolio as an additional asset class.

    Whether and how much you should invest depends on your current investment strategy. Other asset classes may be better suited for helping female homeowners achieve broader diversification.

    Are you too interested in a real estate investment, but are not yet sure which one best fits your investment strategy? We will be happy to help you during a personal consultation.

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