Real estate for shares - a "swap" on the rise

The trend is currently gaining momentum, particularly among pension funds with smaller real estate portfolios: Instead of managing these themselves, they prefer to transfer the objects to professionally managed investment vehicles in the form of a contribution in kind. In return, they receive shares in this investment vehicle.

In the past two years, for example, the real estate transaction team of Zürcher Kantonalbank's Asset Management successfully integrated four real estate portfolios into the Swisscanto Investment Foundation. In total, these transactions comprised 14 properties in mostly good to excellent locations in German-speaking Switzerland. Most recently, three fully let residential properties in the city of Zurich were acquired from the Bally Pension Foundation at the beginning of March 2024.

The reasons for no longer holding real estate portfolios directly lie in the increasing requirements for managing these successfully in the long term. The challenges are complex. These include the following:

• Dealing with market fluctuations and vacancies
• Investments in sustainability & renovations/refurbishments
• Adaptation to political and regulatory changes
• Influence of the interest rate turnaround on financing and property values

Such challenges can be reduced by transferring one's own real estate to a professionally and efficiently managed property vehicle. In addition, the risk/return profile of real estate investments is significantly optimised by the generally higher geographical and use-specific diversification of the acquiring investment vehicle. The portfolio of the Swisscanto Investment Foundation, for example, comprised almost 250 properties throughout Switzerland as at 30 June 2023. The balance sheet value of the properties was around CHF 9.5 billion with a low debt ratio of 6.5%. Around half of the portfolio income comes from residential properties. The majority of the remaining income is generated by the office, commercial and retail sectors. Last but not least, a contribution in kind can also open the doors to an investment vehicle that would otherwise be closed to new subscriptions.

Growth opportunities for property vehicles

The potential advantages for the acquiring real estate vehicles are also obvious: attractive properties are added to the existing portfolio without having to acquire them in a wide-ranging bidding war with a wide variety of buyer groups. In addition, contributions in kind do not require liquid funds to finance the acquisition price. Debt capital has become more expensive in the current interest rate environment and new equity has become scarcer. The inflow of new funds into the indirect real estate market via capital increases has remained at a low level since mid-2022. Ultimately, the vehicle's investor base can be expanded through a contribution in kind.

Mutual due diligence a must

Irrespective of the advantages, contributions in kind must be analysed carefully. Zürcher Kantonalbank's asset management focuses explicitly on high-quality non-cash contribution portfolios. The quality and intrinsic value of all properties are comprehensively scrutinised - in line with standard acquisitions - and any takeover bids are only made in the interests of existing investors. The same must also apply to the contributors in kind, who wish to secure their pension obligations in the long term with the newly acquired shares. Therefore, in addition to the takeover price, the quality assessment of the acquiring real estate vehicle and its management should be at the centre of the decision-making process for a contribution in kind. Once the contribution in kind has been made, the development of the pension assets is linked to the long-term performance of the investment vehicle. It is therefore important to proceed selectively.