Swiss pension funds invest an average of 26 percent of their portfolios in real estate. They do this for a good reason. Real estate offers attractive risk-adjusted returns, stable income and the opportunity to increase real estate values through active asset management. In addition, real estate provides partial protection against inflation and contributes to the diversification of the portfolio. Historically, Swiss pension funds prefer domestic strategies for their real estate investments. Although the Swiss real estate market has many positive characteristics, this concentration also harbors risks. In addition, a broader spectrum of investment opportunities remains unutilized. This article argues that Swiss investors can complement the advantages that they enjoy in the domestic real estate market by investing globally.

The key to this argument lies in portfolio diversification, improved liquidity and access to an expanded universe of investments. In addition, investors can participate in stronger growth opportunities and enter the market at a favorable time. Let's look at these aspects one by one.

The Swiss real estate market has generated attractive and stable returns for more than two decades (Figure 1).

Figure 1: Total return components of the MSCI/ Wüest Partner Switzerland Annual Property Index, %

It is worth noting that capital value losses were recorded only in 2023, when the real estate markets adjusted to a new interest rate environment. In the global context, however, this was a mild and harmless correction. The strong performance of the Swiss real estate market is a result of the stable economy, the historically supportive interest rate environment, the smoothing effect of the local valuation approach and the robust domestic investor base. The Swiss real estate market is unique because it offers interesting sectors for institutional investors (Figure 2).

Figure 2: Sector capital value weights of the MSCI/ Wüest Partner Switzerland Annual Property Index, %

Almost 50 percent of the market that is eligible for institutional investment consists of residential properties. This proportion remains remarkably constant. No other market in the world has such a high exposure to this sector (Figure 3).

Figure 3: Estimated market size by country and property type as at end 2023, %

This is due to the regulatory environment in Switzerland, which severely restricts foreign investment in the residential sector. Swiss pension fund investors have benefited from these restrictions. However, these restrictions could also have unintended negative consequences. Future regulations, particularly in the rental market, could change the yield profile of the residential sector. The latest developments in Basel and the political mood in the canton of Zurich regarding rent regulation deserve attention. Insufficient opportunities to adjust existing rents to the current market rent level could impair the income characteristics of the sector. Lower valuations or reduced liquidity could be the result.

The Swiss real estate market is the tenth largest in the world; with a real estate market that is eligible for institutional investment amounting to just under USD 400 billion, it accounts for 3 percent of the global market (Figure 4). According to the Pension Fund Study 2024 by Swisscanto, domestic pension funds invest over 90 percent of their real estate allocation in this 3 percent of the global real estate market.

Figure 4: MSCI Real Estate Market Size Estimate (2023), % of total

In addition, the Swiss real estate market is dominated by a relatively homogeneous investor base. The fact that this further restricts the transaction market is reflected in the national transaction ratio, which relates transaction volumes to market size. According to MSCI data, Switzerland has the lowest transaction ratio of all developed countries. This means that only a few real estate properties routinely change hands (Figure 5).

Figure 5: Turnover ratio (the ratio of transaction volume to market size) in 2023, %

Swiss pension funds therefore have a considerable allocation in a small market with limited liquidity. If more sales become necessary in response to a changing housing regulation environment or due to an increased need for liquidity, due to the decumulation of pension assets for example, this could present a challenge. One way to reduce liquidity risks is to increase real estate allocations in more liquid real estate markets, such as the United States (U.S.) market. It has a significantly higher turnover ratio than Switzerland.

Global real estate offers attractive diversification benefits compared to Swiss real estate. The global markets are in different phases of their economic, real estate and credit cycles. That is why they tend not to be fully synchronized. This is reflected in the diverging performance of individual countries (Figure 6).

Figure 6: Annual total returns by country, % in local currency

The hierarchy of returns shifts regularly. The correlation of these returns therefore varies over longer periods of time. A comparison of the period between 2006 and 2023 shows the relative attractiveness of global markets. The markets in the Asia-Pacific region and the United Kingdom in particular offer convincing diversification benefits. However, North America and some European countries also offer additional opportunities (Figure 7). 

Figure 7: Real Estate Market Total Return Correlations 2006 – 2023, local currency

In addition to increasing diversification, global real estate can also contribute to increasing portfolio returns. The returns on Swiss real estate are known for their stability. However, they are often only in the middle to lower range of the global ranking of real estate returns (Figure 8).

Figure 8: Range in global real estate total returns by country, per annum, local currency

During market upswings, Swiss real estate yields have often underperformed compared to the global average. Investors who keep their allocations in Switzerland are thus accepting underperformance compared to the global opportunity universe. However, it should also be noted that Switzerland was the best-performing market worldwide during the global financial crisis in 2008. That is why diversification is important!

Diversification means going beyond country allocations. Swiss pension funds that limit themselves to the local market that is eligible for investment are missing out on a broader spectrum of sector opportunities. The real estate markets in Europe and the U.S. have developed differently in the past compared to Switzerland (Figures 9 and 10).

Figure 9: Sector capital value weights of the MSCI European Property Index, %

Figure 10: U.S. sector capital value weights of the NCREIF Property Index, %

Over the past five years, there has been a reorganization of the universe that is eligible for investment that has taken structural trends into account. While the dominance of the office and retail sectors declined, the industrial and residential sectors have gained in importance. The importance of other sectors, such as hotels, student accommodation, self-storage, life sciences and data centers, has also grown. In Switzerland, these types of real estate are often not operated institutionally, and in many cases they are too small. To participate in this expanding universe of investment opportunities, investors need to look beyond Switzerland's borders.

The expansion of Swiss real estate portfolios through global investments is supported by cyclical growth characteristics and trends that may be more pronounced outside of Switzerland. The 2025 Real Estate Outlook "Divergent Paths at an Inflection Point" shows that the global economies and their real estate markets are recovering after several challenging years. However, this development is being hampered by geopolitical and structural challenges. In Europe, for example, the growth momentum among the largest economies has reversed. Countries that were responsible for the sovereign debt crises of the last decade are now leading the way in terms of growth. Germany and France, on the other hand, are struggling with domestic problems. Due to close trade relations, these developments also impact Switzerland. Divergence is also visible with respect to Asia's two largest economies. Like Japan a few decades ago, China is now suffering from deflationary pressure and a weakening housing market. Japan, on the other hand, appears to be emerging from its deflationary phase, which has lasted around 30 years. The current global economic variation clearly shows the importance of country diversification within a real estate portfolio.

There are also structural growth drivers. Alternative property types are gaining in importance due to various mega-trends. Demographic change, technological advances, increasing decarbonization and deglobalization play important roles here. These forces affect different regions to different degrees. These trends can also be observed in Switzerland. From a real estate investor's perspective, it may therefore be easier and more rewarding to take advantage of opportunities outside of Switzerland.

The argument for increasing exposure to global real estate markets is complicated by currency fluctuations. The Swiss franc has appreciated against numerous major currencies over the long term. This development affects currencies in some of the world's largest real estate markets (Figure 11).

Figure 11: Various currencies relative to the CHF, 100 = January 1, 2000

In the long term, a stronger Swiss franc will reduce the returns achieved in the local currency. That is why Swiss investors should demand higher returns than investors using the local currency. Since 2006, the difference in returns achieved in Swiss francs compared to those achieved in the local currency in 15 global real estate markets has been between 130 and 360 basis points. The average value is around 280 basis points (Figure 12).

Figure 12: Annual total returns by country, % in CHF and local currency (2006-2023)

Despite these problems, investments in global real estate can be considered promising. Real estate investors can hedge their returns against the potential currency risk by using various financial instruments and strategies.

In contrast to the global real estate markets, real estate performance in Switzerland has been remarkably stable in recent years. According to MSCI and NCREIF, global yields have had their worst run since the global financial crisis. However, the real estate markets had also performed exceptionally well for a decade. Their growth did not slow down until the pandemic – a once-in-a-lifetime event. This called for massive fiscal and monetary stimuli. A decline was therefore unavoidable. Between the second quarter of 2022 and the fourth quarter of 2024, capital values in the Asia-Pacific region fell by 8 percent, in the U.S. by 13 percent and in Europe by 18 percent (Figure 13 and 14).

Figures 13 and 14: Cumulative capital value movement Q2 2022 to Q4 2024, %

However, there are strong reasons to believe that the global real estate markets have reached a turning point. Interest rates are the most important reason. Real estate performance is stronger in an environment with falling interest rates. The available data shows a strong relationship between interest rates and fund returns (Figure 15).

Figure 15: European fund performance by vintage year (% IRR) and change in European interest rates, bps

In three periods in which interest rates were either flat or negative, the average fund returns were positive. If interest rates rose, as in the years 2005–2007 or 2019–2023, the average yields were negative. With the European Central Bank having cut interest rates by 185 basis points since their peak in 2024 and hinting at further easing this year, we are now clearly in an environment where, historically speaking, real estate fund returns should do well. In fact, capital values in Europe have already risen in almost 50 percent of the city/sector combinations of the MSCI European Quarterly Property Index (Figure 16).

Figure 16: Share of rising, flat or falling capital values. Pan-European MSCI Global Property Classification sectors, %

The next real estate cycle has already begun in Europe. In the U.S., the performance of the NCREIF real estate index also indicates strong development following major value corrections (Figure 17).

Figure 17: Five-year NCREIF NPI total return before and after capital value through, %

From a historical perspective, the period immediately following the bottoming-out of capital values has offered a particularly strong five-year return window. The capital values of valuation-based funds should have bottomed out. Experiences following the savings and loan crisis, the dotcom bubble and the global financial crisis suggest that 2025 could be an extremely attractive time to invest capital in the European and U.S. markets.

Savvy investors with an eye on ongoing performance know that the best cyclical returns often result from periods following value corrections. That is why now is probably the right time to invest.

In this article, we have argued that Swiss investors can extend the advantages they enjoy thanks to their Swiss real estate by investing globally. They can optimize their portfolio return profile through diversification, improved liquidity, the exploitation of growth opportunities and access to an expanded universe that is eligible for investment. The advantages are so diverse and convincing that Swiss pension funds are considering shifting their allocations toward a global focus. The Zurich Investment Foundation offers a unique product platform for committed investors. Zurich's long-term and historically extremely successful investment philosophy is tailored specifically to Swiss pension funds and provides efficient access to attractive markets. More information can be found here.