Real Estate Funds: high return spreads increase alpha opportunities

The return spreads of listed Swiss real estate funds were exceptionally high in 2023. This puts active fund managers in a good position to achieve alpha for investors.

Flurin Joller

The turnaround in interest rates generated large return spreads for Swiss real estate funds listed in Switzerland (Source:

The turnaround in interest rates in Switzerland had far-reaching consequences for listed real estate funds here. While the SXI Real Estate® Funds Broad Index ("SWIIT Index") rose by a good 5 per cent last year, the relative performance of the individual funds to the index ranged between 11 and -30 per cent. This range of around 41 per cent is well above the average of the past 16 years. This is 24 per cent and was only exceeded in the pandemic year 2020 (see chart 1).

Chart 1: Range and standard deviation of listed funds compared to SWIIT Index


Source: Zürcher Kantonalbank, Bloomberg

This immense range was not only due to statistical outliers. A look at the development of the standard deviation clearly shows that the average deviation of the individual performances from their mean value is significantly higher than in the past, with the exception of 2020.

The distribution of relative performances can be illustrated even better using the normal distribution (see chart 2). In the years analysed, the relative performances of the individual funds were close to the respective mean value. In 2020 and 2023, however, the proportion of funds with large positive or negative deviations from the mean was significantly higher. The distribution of relative performances was therefore much broader than in the other years.

Figure 2: Normal distribution of the relative performances of listed funds

Source: Zürcher Kantonalbank, Bloomberg

The exceptionally broad diversification in 2020 can be explained by the outbreak of the pandemic. While residential real estate funds recovered relatively quickly from the sharp correction in March 2020, funds focused on commercial real estate were under pressure throughout the year.

Reasons for the high return dispersion in 2023

There were many reasons for the high dispersion in 2023. Here are the most important ones:

  • More funds in the index: whereas the universe comprised 15 funds in 2008, by 2023 this had risen to 40, naturally increasing the likelihood of several funds deviating more strongly from the index performance.
  • Leverage: Rising interest rates led to price losses, particularly for funds with high leverage and short term financing (see chart 3).

Figure 3: Negative correlation between leverage ratio and total return

Source: Zürcher Kantonalbank, Annual reports of the real estate funds, Bloomberg
  • Valuations: Certain funds whose properties were highly valued based on our fundamental analysis also came under pressure and had to record the greatest devaluations as a result of rising discount rates. Typically, these tend to be younger, smaller funds that have grown strongly in the past and had built up their real estate portfolio at high prices. In addition, individual funds were traded massively below their net asset value, i.e. at a high discount of over 30 per cent. This increases redemption risks. In the worst case, redemptions can lead to the liquidation of a fund.

Good starting position for alpha

As expected, the challenging market environment last year led to greater differentiation in the selection of listed real estate funds. The individual funds have performed very differently and it can therefore be assumed that the wheat has been separated from the chaff.

We expect the average range of returns to remain above average in the future. The continued broad spread of returns is good news for active fund managers, as it offers the opportunity to generate alpha for investors with the right positioning. However, this requires a thorough, fundamental assessment of the funds and their inherent risks based on the market environment.


Real estate