Property Sector Financialization: The Case of Swiss Pension Funds (1992–2005)

Abstract

Financialization is a major trend in Western economies. This paper shows, on the one hand, how it changes the management criteria and, on the other hand, the limits to financialization in the property sector. Between 1992 and 2004, about 15% of Swiss pension funds' wealth was invested in property. As far as their investment policy is concerned, pension funds have two choices. First, they can directly own, and have management responsibility for, the properties in their portfolios. Alternatively, they can buy shares in mainly Zurich-based investment vehicles. In the first case, pension funds require staff with the relevant expertise along with the knowledge of property markets. Investments have a regional focus and are assessed internally by the funds. In the second case, pension funds are merely investors and investment appraisals and comparisons are made on the basis of market criteria such as yield, diversification in relation to risk and liquidity. In this case, property investments focus solely on the country's main urban areas.

Acknowledgement

This research was supported by the Swiss national foundation for scientific research (grant no. 101412-104102/1).

Notes

This does not mean that funds cannot be highly active within real investment channels—for example, being involved in many building projects.

The SWX Immofonds index covers all quoted Swiss investment funds. As for the SWX Real Estate Index, it contains property companies listed on the Swiss stock market (Crédit Suisse, 2005).

In order to standardize accounting standards at the national level and to make them compatible with international standards, an accounting concept inspired by practices used in the English-speaking world has been developed to cover both large and small businesses (the Swiss GAAP RPC26). The use of new accounting standards in property has led to changes in the methods and frequency of valuations. Since 1 January 2005, pension funds must use the new accounting standards (Meyer & Teitler, 2004).

According to the DCF method, the monetary value calculation incorporates factors such as refurbishment costs which will be attributed over several years or future rent increases. In this method, the determining factor is the net return from future cash flows discounted at a risk-adjusted rate (Swisscanto, 2005, p. 14).

There are nineteen major investment foundations in Switzerland which belong to the CAFP (Conférence des Administrateurs de Fondations de Placement or Investment Foundation Directors' Conference). Among the investment foundations are those affiliated to banks and insurance companies and those which run a direct property investment policy, plus independent foundations known as property foundations.

In 2003, institutional property investment (by property funds, insurance companies, investment foundations and pension funds) mainly involved purchases, with involvement in new buildings and projects being of secondary importance. Of the SFr7.6bn invested in property in 2003, around SFr6.9bn was directly invested (65% in purchases and 35% in new development projects). The remainder (around SFr1.3bn) was invested indirectly (Altaprima & Ernst & Young, 2004, p. 17).

The aim of these institutions is to make capital gains from property transactions.

Following a public sector reorganization in 1998, the funds for public sector enterprises such as the postal service, CFF (the Swiss rail service) and Swisscom are governed by private law.

Property funds are generally affiliated to banks.

An investment foundation's investors are limited to the so-called second and third pillar institutions: pension funds, vested pension institutions, bodies known as institutions supplétives (state-regulated bodies for employers who do not meet the requirements for having a registered pension fund), security funds, investment foundations, benefit funds, finance foundations and banking foundations which come under what is known as the third pillar A—see the Office Féderal de Assurances Sociales/Federal Social Insurance Office (OFAS, 1999).

As with pension funds, various institutions can have their own property management set-up in the areas where the properties are located for carrying out administrative and management tasks (renting, refurbishment, tenant relations, etc.). Alternatively, they can rely on outside management or partners.

Property companies have not been considered given that pension funds have made little use of these institutions.

These companies arose as a result of a contracting-out process by industrial and/or commercial firms and banks and insurance companies, the aim being to get them listed on the stock market. For example, Allreal is a spin-off from Oerlikon Bührle, PSP Swiss Property a spin-off from Zurich Assurance and Swiss Prime Site a spin-off from Crédit Suisse.

The map refers to all property (residential, mixed or commercial) owned via the two main indirect investment channels in which funds can hold an interest together with property owned by quoted and unquoted investment vehicles (the former being investment funds with 1250 properties worth SFr12.5bn and the latter being investment foundations with 388 properties worth SFr4.2bn) and property foundations (366 properties valued at SFr3.4bn).

The stock market value of property securities only represented less than 1.5% of shares in the Swiss Performance Index (SFr1257bn at the end of 2000). The same proportion only accounts for around 1% of the total Swiss property market (Bender et al., 2001).

Firstly, the investor can sell their holdings by finding a buyer. It goes without saying that conditions of sale and the directly-negotiated market price depends on economic conditions. Secondly, shares held by the investor can be bought back by the investment foundation. This purchase is made at book value and the process is fairly long as it depends on giving several months' notice before the end of the current year. The delay can be even longer if the amounts being bought back are significant. Furthermore, there is a sales commission for the transaction (Crédit Suisse, 2003).

For Pensimo's Turidomus Foundation (large shares) the pension funds of Nestlé, Swissair and the Swiss postal service (La Poste) can be given as examples. For the Pensimo Foundation (medium shares) the pension funds for the Lucerne canton and the city of Zurich can be mentioned, while the pension funds of Grisons and Zoug cantons can be cited in the case of Imoka Foundation (small shares).

Additional information

Notes on contributors

Jose Corpataux

†Present address: INRS Urbanisation, Culture and Society, University of Quebec, Montreal, QC, Canada.