André Keller: Yes, in Switzerland we have ten-plus billion francs of direct real estate, which we manage mostly for internal clients but also for collective investment vehicles such as investment foundations and investment funds.
We have an entire team – more than 200 people – dedicated to covering the whole value chain in Real Estate Investment Management, so from transactions and acquisitions to portfolio management, asset management, project development and construction management, property management and facility management. Overall, we cover the entire value chain and this mainly in the Core and CorePlus segment.
This is mostly residential and commercial, but the predominant part is residential.
"The Swiss capital market, is small, which is also due to the Swiss government not having that much outstanding debt compared to other European countries."
André: Yes, especially in our Swiss life insurance portfolio. This is where we have the highest allocation of, roughly, 20% - and this is what you're seeing also with other Swiss franc liability insurance companies, because it's also our very long-term obligations that we have on life obligations.
The Swiss capital market, on the bond side, is small, which is also due to the Swiss government not having that much outstanding debt compared to other European countries. So, by nature, we have a small government bond market in Switzerland, and we have some large pension funds and insurance companies, which means you need to match the long-term liabilities with high-quality assets.
Real estate, especially Swiss real estate with stable cash flows, is a good matching asset for very long-term liability. It’s also in our pension and savings portfolios in Switzerland and it's one of the core pieces there.
"Rising yields will put some dampening on the expected price increases. We’re ready to see a bit of flattening to some weakening but not a housing crash."
André: You have seen with low interest rates and negative yielding Swiss interest rate market that prices in real estate have risen strongly – though not as much as in other countries.
In Switzerland, you have very low vacancy rates, and higher immigration rates and the issuance of construction permits has not increased, so we do not see a crash around the corner.
Rising yields will put some dampening on the expected price increases. We’re ready to see a bit of flattening to some weakening but not a housing crash.
André: It's a change not only due to the economic environment or market of the last few years, but rather a gradual change that we have seen over the last years toward more private market exposure and more credit exposures in different areas. The key goal was to broaden the diversification of the whole portfolio.
That's the key thing - to make the portfolios more robust given the economic regime. What we’ve done is increased the private markets in infrastructure, in private debt, and selectively in higher yield credit.
What we have not done is increased emerging market exposure. We have stayed within developed markets and have applied selectively derivative overlays, especially in currency exposures and equity markets. We use some overlay currency hedging that we apply systematically, and we keep a moderate risk profile in equities.
"For life portfolios, we have a larger part in illiquid assets than for non-life or
specialty and reinsurance portfolios."
Currently, we prefer a bit more credit than public equities and still a bit more US than the eurozone and emerging markets.
André: It depends on the liquidity and duration of the portfolio. For example, for life portfolios, we have a larger part in illiquid assets than for non-life or specialty and reinsurance portfolios.
Because life is a long-duration liability, we can have much higher levels of illiquidity in that portfolio; whereas non-life traditional is around a five-year duration, so we have still a more liquid portfolio. For specialty lines and reinsurance portfolios, which is short-term duration, we have the most liquid portfolio – so it depends.
We are a liability-driven investor, and illiquidity is dependent on the balance sheet.
