Global Real Estate: A Tactical Entry Point

Why Global Real Estate?

An investment in global real estate appears particularly appealing due to four key reasons:

1. Attractive Valuations & Rebound Potential

The significant price corrections in the international real estate markets over the past two years were principally induced by high inflation and subsequent interest rate hikes. Central banks undertook a series of rate cuts last year in response to inflation nearing target levels and continue to adopt a dovish stance towards monetary policy. This has led to a decline in financing costs and stabilised valuations. As a result, unlisted U.S. and European real estate funds have delivered positive quarterly performance towards the end of last year, suggesting that the rebound has begun.

Historically, substantial international real estate corrections have been followed by strong rebound phases, as capital re-enters the market once valuation adjustments have been fully absorbed. The magnitude of recent corrections suggests a favourable opportunity for long-term investors looking to capitalise on the growth phase of the next market cycle.

2. Outperformance Relative to Swiss Real Estate

While Swiss real estate has historically demonstrated stability, global markets - particularly U.S. unlisted real estate (measured by the NFI-ODCE Index) - have delivered higher returns. Since 1998, the NFI-ODCE Index has outperformed Swiss unlisted real estate (KGAST) by an average of +1.1% per year, even after adjusting for currency hedging.

Although global real estate markets have exhibited higher volatility, they offer superior long-term return potential, especially in sectors supported by trends and fundamentals. Currently, we expect industrial/logistics, multifamily, senior housing, medical offices, student housing, and data centers to deliver strong returns over the next cycle.

3. Diversification & Risk Reduction

Swiss investors are often heavily overweight in domestic real estate, which exposes them to localised risks such as regulatory changes, demographic shifts, and supply-demand imbalances. Expanding into global real estate markets offers:

• Diversification benefits, as U.S., European, and Asian real estate cycles often behave independently from those in the Swiss markets.
• A lower correlation to Swiss real estate, enhancing risk management and stabilising portfolio returns.

4. Normalised Yield Spreads and Relative Attractiveness

Real estate yield spreads have widened significantly, increasing the relative attractiveness of real estate investments compared to other asset classes.

• The spread between U.S. residential real estate yields and 10-year U.S. Treasuries has moved to a level that is in line with long-term historical averages, reinforcing real estate’s role as a high-yield alternative in a shifting rate environment.
• With additional interest rate cuts, this spread is likely to become even more favourable, further boosting the relative attractiveness of real estate compared to bonds and other fixed-income instruments.

Key Investment Themes & Market Trends

The U.S. Real Estate Market: Positioned for Recovery

In recent years, the U.S. real estate market has experienced one of the sharpest price corrections in its history, particularly in the office sector. However, several sectors have offset valuation declines with strong rental increases and are expected to drive returns in the next growth phase:

• Industrial/logistics: The ongoing rise of e-commerce, supply chain realignments, and a projected increase in tenant demand in reaction to new governmental policy should fuel demand for logistics hubs and warehouse space.
• Multifamily residential: The chronic undersupply of housing in the US and low homeownership affordability levels are expected to drive residential demand.
• Medical office & senior housing: The significant expected rise in the 65+ age cohort over the next two decades is projected to drive demand for medical services and age-restricted accommodation.

Despite these tailwinds, investors must remain selective, as the Fed has signalled fewer rate cuts than previously expected. Identifying and creating exposure to structural drivers remains imperative to achieving outperformance over the next cycle.

European Real Estate: Select Opportunities Amidst Slower Economic Growth

The European Central Bank (ECB) is expected to implement more aggressive rate cuts in 2025 than the US, given the region’s lower economic growth forecasts. It has experienced a similar correction to the U.S., however, overall, commercial real estate valuations were more insulated due to a less pronounced work-from-home movement and strong tenant demand for prime assets in the office sector.

Certain segments continue to attract high demand from institutional capital, particularly:

• Prime-location residential assets, which benefit from Europe’s housing shortages.
• Student housing, especially in undersupplied markets is gaining traction and generating attractive rental growth.
• Logistics & last-mile distribution centres, as supply chain transformation and e-commerce growth is driving demand for well-positioned warehouses.
• Tourism-driven real estate in Southern Europe (Spain, Portugal, Italy), where hospitality and mixed-use developments are subject to heightened demand.

Emerging Market Real Estate: Cautious but High-Potential Play

Emerging markets have experienced mixed performance, with China’s real estate sector struggling due to weaker economic growth and a stark supply/demand imbalance in the residential sector. Other countries, such as India and the UAE, have seen strong investor inflows into residential and commercial properties. While emerging markets offer attractive growth potential, they are also more sensitive to interest rate fluctuations and currency risks, requiring a more tactical investment approach.

SFP’s Global Real Estate Strategy: Accessing a High-Quality Global Real Estate Portfolio

For investors seeking structured exposure to global real estate, SFP offers a diversified solution through its multi-manager platform:

• SFP AST Global Core Property Hedged CHF (GCP) provides exposure to core, unlisted global real estate in developed markets with diversified geographical and sectoral allocations. The product is Hedged to CHF and targets attractive, stable long-term returns
• Target geographical allocations:
  • U.S. – 45-50%
  • Europe – 20-30%
  • Asia-Pacific Region – 20-30%
• Target sectoral allocations:
  • Residential (multifamily, senior & student housing) – 35%
  • Industrial/logistics – 35%
  • Alternative real estate (medical offices, life sciences, self-storage, hotel, data centers) – 10%
  • Office (prime location focus) – 10%
  • Retail (prime location focus) – 10%

Conclusion: A Strategic Time to Expand Global Real Estate Exposure

With global real estate markets at an inflection point, long-term investors should consider increasing exposure to international real estate as we head into the upswing of a new cycle. Several factors support this shift:

• Interest rate trends are favourable, reducing financing costs and the asset class’s appeal on a relative basis.
• Swiss investors remain underexposed to international real estate, missing out on high potential returns.
• Selective investments in logistics, residential, and alternative real estate sectors offer attractive risk-adjusted opportunities.

While Swiss real estate continues to offer stability and resilience, expanding globally at this stage of the cycle provides a unique opportunity to capture future growth. Investors that adopt a disciplined and diversified approach can position themselves to profit from the next phase of the real estate market cycle.