Listen to the podcast
To hear the full episode of Wealth Insights, now part of the Beyond Markets podcast series, please follow the links below to Apple Podcasts or Spotify.

Could you please begin by explaining your role at Julius Baer?
Markus Waeber: My role covers the indirect real estate sector, i.e. real estate shares and funds. I identify investment opportunities for Julius Baer’s clients in cooperation with the fund advisory and equity research teams. I also produce a quarterly property market report – the next issue will be published in July.

What does property investment – as opposed to home ownership – actually mean?
Broadly speaking, real estate investment vehicles can be split into two main categories: direct and indirect. As its name suggests, direct real estate investing sees investors directly purchase physical real estate – such as office buildings, residential homes, logistics centres or hotels – with the aim of generating income and capital appreciation. If you buy a multi-family house, you’re looking for a stable distribution out of the rental income. And as the land appreciates, you should also benefit from capital growth. When we look back at the last 22 years on a total return basis for global property investments, you could earn a decent total return of 7% on average. Of that 7%, 5% would have come from the income return, and the other 2% from capital growth.

The indirect approach, on the other hand, involves investing in real estate through instruments such as real estate investment trusts (REITs) or exchange-traded funds (ETFs), rather than owning the bricks and mortar itself.

Could you outline how the considerations might differ between, for example, buying a house and investing in real estate? What are the things that investors need to assess or need to be particularly aware of?
Usually if you talk about real estate, you come up with the famous three criteria: location, location, location. If you buy a house for yourself, your personal situation and preferences are important for your decision. A house makes up a great share of your wealth, and you’ll also likely have a mortgage.

If you plan to invest in a real estate as an asset class, diversification, liquidity and risk-return parameters are important parameters to consider. Institutional investors or high-net-worth individuals are investors with larger portfolios and larger amounts of money to spend. They can afford to build their portfolio by themselves, by buying houses directly on the market or buying commercial real estate. Another interesting method we’re seeing is club deals, where private investors team up to buy a development or a value-add property. These types of investment typically have a higher return than just an income return, but also obviously a higher risk requirement. If you’d like to dive deeper into this subject, I recommend to read our article ’Direct vs. indirect: the different doors open to real estate investors’.

Given the marked focus on how we use our homes, our offices and our urban environments in the last few years – and the way that our interactions with them are changing – what are the general prominent trends that you see at the moment in real estate?
One of the conclusions from the pandemic was that the personal living situation of each and every one of us has become more important. Also, it is possible to work remotely, from home or from elsewhere in the world. Having said that, I think global companies will still need headquarters in central business district locations, but they may not need offices all around the world – in every city, in each country. And these companies can now choose from a variety of options. They can have flexible solutions, meaning that they can rent spaces for their employees with office providers. We’re definitely seeing different models than just having your normal rental contract with an office location.

The housing market is a topic that’s front of mind for a lot of people. We all need somewhere to call home. For owners and renters alike, what is going on in the housing market itself, currently – particularly with regards to things like demographic shifts or affordability trends?
In the current environment of rising interest rates, the cost of buying and financing a home with a mortgage has increased significantly. The dream of becoming a homeowner cannot be realised for everyone. Inflation has also increased, meaning construction costs for new buildings have gone up. The number of available flats and new buildings has decreased, and rents are rising. In the UK, for example, we have seen a 9% rise in rents year on year. In Zurich, there’s been a 10% increase year on year, which is quite a lot from an investors’ point of view. We think investing in a multi-family house could be an interesting option now, to cover the shortages in the market and also to benefit from rising rents. In general, we’re seeing that everyone is having to reduce space requirements. The sorts of spacious rooms that people may want following the pandemic are now costing a lot more. You can read more about current trends in my article ’Real estate - six global trends to watch’.

If we consider the environmental impact of building large amounts of new buildings – what are the developments or innovations that could come in the sector in the future that will help us regarding efficiency, sustainability and even cost?
I think the construction industry itself has not been the most innovative sector in the past, but this is changing. We already see drones and robots used on construction sites, and 3D printing can be used to construct buildings at a lower cost base. In terms of sustainability, there is a lot of activity. Institutional investors aim to bring their global greenhouse gas footprint down, and we’re seeing a range of techniques used to tackle embodied carbon. Concepts like the ‘circular economy’ can be implemented on existing buildings, i.e. recycling existing materials in the renovation process. Digitalisation is also on the rise.

How has the new normal of hybrid working and online retail affected the real estate market? Are all sectors having to make big adjustments here?
Companies have to rethink their office requirements in terms of quality and size. The office has to become more attractive and needs to be designed to stimulate collaboration and to support meeting requirements. Therefore, an upgrade in quality is needed. In the retail sector, we see a growing share of e-commerce sales. In response to that, companies like Inditex, for example, have concentrated their stores in central locations and upgraded them to ensure the physical shopping experience remains attractive. So high street locations will stay important, but omnichannel strategies also require warehouses – this is likely to offer opportunities for logistics real estate investors. Money being spent online requires places to store your goods. So logistics centres look attractive, and the interest in this area is growing.

On office space and the role it has to play in a central business district – offices are so integral to a lot of town and city centres. While the debate about hybrid working still rages, what effect is the use or lack of use of offices and commercial buildings having on cities and towns?
Working from home, I think, is here to stay. In the future, we’ll probably see outdated office buildings being repurposed as hotels or student housing. Conversions of traditional office space into residential apartments would also be possible, but this is trickier because you have to adhere to different laws and regulations. But it would be an interesting option, and such conversions could help with shortages in supply. Office buildings with a flexible design can be converted if they are in a good location. You also can benefit from rising rents, which makes the investment attractive.

A notable trend at the moment is people going out much more to restaurants, bars – travel is rebounding. Does this mean that hospitality is an area of opportunity for investors? What might be some other opportunities they need to look out for?
Working from home or working remotely creates opportunities for travel, and staying in hotels longer than just for a vacation is now an option. We will see if companies like that or not. The hospitality industry is certainly enjoying the demand, as are airports, which are booming. So I think this is certainly a sector to look at.

Much is being said about the world becoming increasingly deglobalized. This is still up for debate, particularly regarding supply chains and manufacturing. How is this playing out in the real estate sector?
Demand for additional space is driven by interest in onshoring or near-shoring, especially in the life sciences and tech industries. Intel, for example, is spending €17 billion for a new chip production facility in Germany. It’s a change from everything being built in Asia or sourced from Asia. In life sciences, there are models like ‘lab as a service’, which is an interesting way to offer fully equipped laboratories for start-ups. These companies usually don’t want to spend money on the fit-out for their laboratory; they would rather spend it on research and development. And compared to traditional offices, you can’t really do research from your computer at home – you have to be in the lab. They could prove to be quite defensive investments, and I think there are good opportunities for real estate investors in these sectors.