HSC Fund Update

We look back on a historic year

Last year was characterized by the war in Europe, the end of the zero-interest rate policy and rising inflation. All these events were also reflected in the Swiss real estate market in a historic 2022.

The SXI Real Estate Funds Broad, the index of listed Swiss real estate funds, suffered a historic 15% setback in 2022. Not even during the financial crisis of 2008 did the index of listed Swiss real estate funds suffer a similarly large loss. This is all the more astonishing as the SXI Real Estate Shares Broad Index, the index for listed real estate shares, lost only 9% and the KGAST Index, the real estate index of investment foundations, even gained 4.4%. By contrast, the SPI lost as much as 16.5% last year.

The discrepancy between listed and unlisted products is also reflected in the returns of Helvetica Funds. Although the HSC Fund once again outperformed the SXI Real Estate Funds Broad Index in 2022 with minus 10.81%, the unlisted HSO Fund ended the year with only minus 2.68% and the HSL Fund even with positive 0.73%. Thus, as the chart below shows, all Helvetica Funds outperformed the relevant SXI Real Estate Fund Index.

The times of increased market volatility of listed real estate funds, in which the HSC Fund could also be bought partly below the net asset value of the fund, seems to be over in our view. Real estate funds have regained their typical stability and are, in our view, a good entry opportunity for long-term investors. Buying real estate fund shares below the net asset value was generally a good decision in the long term.

How robust is the Swiss real estate market?

The real estate market remains in good health and is robust. This is also reflected in strong market data, such as:

• Solid growth in overall economy
• Record low unemployment rate
• High migration rate
• Declining construction activity
• Rising construction costs and high inflation
• Historically low rental costst

The real estate market will not be exempt from volatility in 2023, but the outlook is still exceptionally good. With the unemployment rate at a 20-year record low and inflation rising to 3%, a scenario is developing that will continue to buoy the real estate market, this despite potentially rising interest rates.

Where was the focus of the HSC Fund?

However, it is not only the general conditions that have improved, but also the HSC Fund itself. Demand for rental space has increased substantially and the end of 15 years of deflationary rent trends has now been reflected in higher rents. The HSC Fund is thus well positioned to provide solid protection against rising inflation, thanks to a high lease indexation rate of 92%.

Thanks to the attractive locations of the Fund's rental properties, vacancies in Schindellegi, Münchwilen and Bischoffszell, for example, were further reduced on fund level and new leases were signed. In addition, follow-up leases were concluded at a significantly higher rate than in the valuation. In conclusion, we expect the positive development of the HSC Fund to continue.

What will be important in 2023?

We continue to see sustained demand for commercial rental space. This is also evidenced by the 50,000 new companies established in Switzerland last year, which is clearly above the average of the past ten years. Companies continue to expand and although home office will remain an option for many companies, employees are often happy to be able to return to work, at least partially.

This is where the HSC Fund is best positioned. For the HSC Fund, we see continued stable growth in 2023 with a focus on:

• Increasing rental income due to inflation-adjusted leases
• Further vacancy reduction due to high demand for rental space
• Lease extensions and increase in lease duration by around 20%
• Medium-term reduction of the debt ratio to below 28%

For the past financial year, a very attractive distribution at least in the order of magnitude of the previous years can again be expected. The detailed annual report will be published on March 1, 2023.

Where do we see the greatest opportunities?

The prices of listed Swiss real estate funds have fallen disproportionately, which in our view represents an attractive buying opportunity. The price losses of listed real estate funds mean that fund units can currently be purchased even below their net asset value, which also applies to the HSC Fund.

Particularly important at present: real estate funds offer excellent inflation protection, which is especially important in the current economic environment. The HSC Fund, where investments can be made in a diversified real estate portfolio with around 100 Swiss francs per fund unit, is particularly well suited for this purpose.

We remain convinced that the general conditions for an investment in a real estate fund have rarely been as attractive as they are today. This is also shown by a look at the average distribution yields of listed real estate funds in Switzerland, which are currently just under 3%. This compares to a 10-year Swiss federal bond, with a current yield of about 1.4%. The HSC Fund is an outperformer, with a convincing 2021 distribution yield that is almost four times higher, at 5.4% as of 31.12.2022. Our CEO Hans R. Holdener also commented on this in detail in his blog of November 10, 2022.

Invest - now more than ever!

The HSC Fund with ISIN CH0335507932 is listed on the SIX Swiss Exchange and invests in high-quality commercial properties in Swiss growth regions and is geared towards long-term value preservation. Fund units can be purchased and sold through your bank.

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