Investing in the long term is always better

Various real estate experts and media recommend their readers to make quick money by buying and redeeming real estate fund units - prominently described as a "risk-free arbitrage opportunity". Fact is that listed real estate funds have lost historical value since the beginning of the year. This means that fund units can currently be purchased below the fund's net asset value (NAV). In the following interview, Hans R. Holdener explains why, on the contrary, this is pure speculation. He agrees with the comments on one point: Now is the right time to buy real estate fund shares and then hold them for the long term.   

Interview: Theodor Härtsch

Theodor Härtsch: Hans R. Holdener, what does long-term mean to you?
Long-term means everything to me and has been practically ingrained in me. It’s part of my DNA, because everything my father did was long-term and sustainable, I don’t know anything else. I told about this formative time in my Founder Story. That’s why we as a company have also defined Building Enduring Value as our value proposition. We think in generations, not years.

What role does the CILO bicycle play in this founder story, which can also be seen on the homepage?
It all started with this CILO bike. In 1984, as an 18-year-old, I set off on a long journey alone with my bicycle from Switzerland to Oslo, my then home. This trip changed my whole life. This original CILO bicycle form 1984 is in our offices today and has become a symbol for sustainability, value retention and long-term thinking.

Experts say that it’s possible to make quick money by buying and redeeming real estate fund units. What is your opinion on that?
No, that is not true. Let me briefly explain how the cancellation of real estate fund units actually works in practice. If you buy fund units today for less than their value, you can terminate the units with a notice period of 12 months by the end of the following year. This means that you will not receive today's value, but the value that will be determined in the future. Until you get the money paid out it takes another three to four months, which means that you have the money in your account about 15 months later, before deduction costs. A ridiculous proposal.

Why is it possible to buy a fund unit below the net asset value at all?
That's a very good question. Various factors play a role here. The net asset value and the market price of real estate fund units are only related to a limited extent. Few transactions in shares can distort the market price up or down. This has to do with short-term speculation and nothing to do with a long-term investment horizon. The real estate values and thus the net asset value of a real estate fund are determined by many factors such as rent development, construction activity, migration, interest rates, inflation and economic growth.

What is arbitrage anyway?
According to Wikipedia, arbitrage is the exploitation, without risk, of price differences at the same time for the purpose of profit taking. Since in the case of cancellation of real estate fund units, the net value of the fund unit is calculated in the future, this is pure speculation and not a risk-free arbitrage. I consider the statement accordingly as nonsense and even misleading. Avoiding fast money is always associated with high risks. As Claudio Saputelli, Head Global Real Estate at UBS recently said: "There is no free lunch". I can only confirm that.

So there is no profit without risk, you say?
Correct. The statement that investors can make a quick buck by buying and redeeming listed real estate fund units has nothing to do with exploiting a risk-free arbitrage opportunity. As explained, it is only clear in the future what the value of the share is. Real estate or real estate funds were and are not trading instruments, but a long-term investment. Period.

Then this is effectively a risky strategy?
Correct. It involves one big unknown too many, because as mentioned, the net value of the fund unit is not known for at least 12 months. We have not yet mentioned another major factor. Redeeming fund units is a very costly, administrative process for the fund and results in applicable fees. Once the fund units have been terminated, there is also no return for the investor, regardless of how the market price of the fund units develops. If the market is willing to pay more for the units again during this waiting period, the investor even makes high losses. It is like a bet in the casino.

So why is this idea presented so prominently?
Once again, it is an idea that has not been thought through to the end. It is simply an abuse of an instrument that is supposed to serve investor protection and has always proven its efficiency in the past.

How well does the trading of fund units work?
Normal trading is beneficial to investors because it is predictable, and it usually works smoothly. However, in the case of smaller real estate funds with low trading volumes, shortages can occur. That means selling fund units, especially in a declining market, can take some time. This is the nature of real estate investing. However, one must always keep in mind that real estate funds were made for long-term investors who do not need liquidity today or tomorrow.

You talk about creating long-term value, so when is a good time to enter?
For long-term investments, the best time is always now. You couldn't go far wrong with real estate in Switzerland in recent years. The overall index of listed real estate funds (SWIIT) has averaged a return of 7.25 percent per year over the past five years. After this year's historic decline in the SXI Real Estate Funds Broad TR (SWIIT) index of listed Swiss real estate funds, you can actually buy listed real estate funds at very attractive rates right now. To be sure, it has nothing to do with real estate per se or the future prospects of real estate. It is simply a short-term distortion of the market. As an entrepreneur and investment professional with more than 25 years of real estate experience, I am convinced that this historical setback is absolutely disproportionate and, accordingly, even offers a historically good buying opportunity. For long-term investors, I recommend getting now in the game. So, buy real estate fund units now, but hold them for the long term.

Why has the real estate index actually fallen so much?
It's difficult to say. The whole thing is incomprehensible to me. Not even during the last major financial crisis did the SWIIT index of listed Swiss real estate funds suffer a similarly large setback. On the contrary, during the 2008 financial crisis, the index outperformed all other asset classes and ended the year with a net return of +0.53%. By comparison, the SMI lost around 35% of its value in 2008. All in all, the outlook for the real estate market in 2008 did not look very promising, in contrast to the situation in 2022, when all indicators are in favor of the real estate market - the outlook is great. Because higher interest rates equal higher rent levels.

What do you recommend and why?
I recommend buying now! It's the buying opportunity of the century. With more than 25 years of real estate Investment experience, I am convinced that this historic setback is absolutely disproportionate and, accordingly, offers a historic buying opportunity, but only in those listed real estate funds that have corrected sharply.

What does that mean in concrete terms?
Since I remain convinced of a strong economy in Switzerland, I would look at the Helvetica Swiss Commercial Fund. The fund invests in Swiss commercial buildings and commercial properties and is listed on the SIX Swiss Exchange and can be traded regularly. The fund is perfectly positioned for the economic upturn. A very good buying opportunity for long-term investors.

I know about your great passion, does it also have something to do with your long-term thinking?
Yes, exactly. Ever since I was a little boy, I’ve dreamt of owning a gray Porsche 911 Targa. In addition to the CILO bicycle, the Porsche also plays an important role for our company and is also well described in my Founder Story. Almost 20 years ago, I fulfilled my childhood dream. The timeless shape of the classic 911 is a symbol of long-term thinking and has almost a philosophical significance for me. The photo with my daughter and the Porsche on the Zurich Gemüsebrücke bridge also has great significance for me. It is my intention to take exactly this photo again in 30 years (laughs). The Porsche and the silhouette of Zurich will still be the same, only my daughter and I will be a bit older.