The chart shows that the yield on 10-year Confederation bonds is negatively correlated with the premium/discount of real estate funds. This means if interest rates rise, premiums fall. As can be seen, certain swings such as 1993, 2001, 2008, 2015 and 2018 cannot be explained by the interest rates alone. The other factor that had an impact in these years was the performance of the Swiss equity market.
Premiums at a low level
As we predicted last year, premiums have fallen further. The premiums are now back at levels that are only slightly above the values of the financial crisis in 2008. In view of the still low interest rates in the long-term comparison and the still positive economic situation in Switzerland compared internationally, premiums are likely to stabilise instead of continuing to decline.
Summary
Higher interest rates will slow down the persistently higher valuations of real estate, but as long as the long-term interest rates remain below the discount rates of the valuers, there will be no significant valuation corrections in directly held real estate. In the case of listed funds, premiums have already suffered greatly from rising interest rates and have now reached a level that we consider to be attractive.
Real estate – whether in the commercial or residential sector – continues to offer good protection against inflation, because rents in the commercial sector are generally linked to inflation. For residential real estate, the foreseeable increase in the key interest rate will lead to rent increases this summer.
Excursus: Comparison with the 1970s
How did real estate investments develop in the turbulent 1970s and what can be learned from this for the current market situation? We already looked into this issue last year; this time, we are also showing how similar the current inflation trend is compared to back then.
In 1971, a turning point in monetary policy was reached
The trigger of this turning point in monetary policy was US President Richard Nixon, who detached the dollar from gold. Since then, the world's reserve currency has only been a paper currency that can be arbitrarily inflated. Nixon needed more liquidity. The USA had to finance the Vietnam War and the comprehensive "Great Society" social programme.
In 1973, another serious incident followed.
In the Yom-Kippur war, a coalition of Arab states led by Egypt and Syria fought Israel. Since the USA provided military support to Israel, the Arab states issued an oil embargo against the entire West. This led to sharply rising commodity and gold prices and an inflation shock. Like today, the central banks initially only acted tentatively to counteract this. A wage-price spiral was set in motion due to the greatly expanded money supply. Inflation became self-propelling. It could only be stopped with drastic interest rate hikes in the early 1980s by the President of the US Federal Reserve, Paul Volcker.
Parallels to today
As already pointed out last year, today's situation is similar to that in the 1970s. The chart shows US inflation in the 1970s compared to today, and the trend so far is surprisingly similar. Whether inflation will also make a second wave this time remains to be seen.
US inflation in the 1970s and today