Property ownership – risk of poverty?

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Assets and especially real estate ownership reduce the risk of poverty in old age. However, in practice, the owner-occupied home often becomes a burden factor, as it accounts for the majority of the assets on the one hand, and does not increase the current income on the other hand. That is the conclusion of a recent study conducted by the Empirica analysis institute on behalf of the German Institute for Retirement Provision (DIA). Unlike typical poverty measurement studies, this evaluation also considered assets. Typically, according to Empirica study author Dr. Reiner Braun does not lead to distortions, since it is rightly assumed that poor people do not own assets. However, this does not apply to the issue of old-age poverty, he emphasizes. This age group has accumulated a disproportionately large amount of wealth over the course of their lives. According to Braun, this age group is therefore also considered to be in income poverty if they have assets but their current income, such as pension payments, is insufficient. In many cases, according to Braun, the assets are owner-occupied residential property.

Risk of old-age poverty lower for real estate owners

According to the study, the risk of poverty for all individuals in Germany falls by one percentage point to 15.6 percent when existing assets are converted into current income over the rest of their lives. The risk of poverty drops to 14.8 percent if real estate assets are also converted accordingly, reports the DIA. In terms of old-age poverty, the risk decreases more significantly when assets are taken into account: It is reduced by four percentage points to 14.9 percent if financial assets are included in the calculation. The risk of poverty in old age is reduced by a further percentage point if real estate assets are also taken into account. According to this calculation, this means that fewer people are affected by poverty in old age, according to the DIA.

Property can become a burden in old age

However, this view does not necessarily benefit many seniors with real estate property, but low pensions: "The annuitization of the property – as assumed in these calculations – usually does not take place at all," explains DIA spokesman Klaus Morgenstern. The consequence: On the one hand, seniors have lower expenses, since they do not have to pay rent. On the other hand, you also have to keep money for modernization and repairs in reserve. The problem is also shown by a survey conducted by the Institute of Insurance Science at the University of Cologne on behalf of Deutsche Leibrenten AG among seniors aged 69 and older: According to the survey, one in four respondents said that the money was "just enough to live on". And around a third of the survey participants have no other assets apart from the property.

Life annuity and reverse mortgage as a solution?

The DIA therefore calls for greater efforts to be made to find solutions for generating additional income in old age by annuitizing residential property. This is possible on the one hand via a so-called reverse mortgage, which is widespread in the Anglo-Saxon countries. In this model, the property owner takes out a loan, which is paid out by the bank in monthly installments. The property does not change hands. The situation is different with a life annuity – another way of turning the property into cash and continuing to live in it: Here, the property passes to a new owner, who grants the annuitant a lifelong right to live there, which is also recorded in the land register. The purchase price is settled with an annuity, although a one-time payment or a mix of annuity and one-time payment can also be agreed upon.

Reduce debt at an early stage, build up additional provision

One thing property owners should generally keep in mind as they age, given their tighter budgets: They should deleverage their property as early as possible before they retire. So there is still time until retirement to build up a reserve for modernization and repairs. Depending on your budget, you should also not neglect private pension plans. Those who missed out on this at a younger age can still make provisions in their 50s. However, due to the relatively short period of time until retirement, higher monthly savings rates are required to build up a significant additional pension.

Gas is Vladimir Putin's economic weapon. (Shutterstock.com/OlegDoroshin)

War in Ukraine brings misery and geopolitical uncertainty to Europe. Economically, however, the impact of sanctions on the eurozone is small, as exports to Russia are not very significant. The biggest economic risk for Europe, in Swiss Life Asset Managers' view, would be a halt to Russian gas supplies.

No sooner has the economic uncertainty of the pandemic given way than the next wave of uncertainty rolls into Europe with the war in Ukraine. The sanctions against Russian banks, which also affects their access to the SWIFT payment communication network, will make exports to Russia more difficult. The latter, however, have become much less important for the eurozone, and in 2020 made 0.5% of GDP, a halving since the peak in 2012, Swiss Life Asset Managers notes.

Russia, for its part, has foreign exchange reserves of about 640 billion. USD accumulated, which may partially cushion the impact of potential financial sanctions (cf. Figure). However, the West's recent sanctions against Russia's central bank could cut off access to much of these reserves. In a risk scenario, this harsh measure could, according to the experts at Swiss Life AM, make Vladimir Putin all the more willing to impose countermeasures and stop gas deliveries to the West. But it could also be that in this weakened position, it will have to rely all the more on its main source of income – energy exports.

Russia's Foreign Exchange Reserves

If Russia uses gas supplies as leverage, Europe would be more vulnerable, concludes Swiss Life AM. According to data from the think tank Bruegel, pipeline supplies from Russia are currently about a third lower than last year. Imports of liquefied petroleum gas from other countries would have doubled year-on-year, but probably could not compensate for a significant curtailment from Russia. In the event of a supply freeze, energy rationing and stagflation are possible consequences. Even without such an escalation, energy prices are likely to remain high, although they have so far left surprisingly little mark on private consumption. "The reason is the labor market, which is in great shape in the euro zone. Employment has already exceeded pre-crisis levels, and the unemployment rate in December 2021 reached a new low of 7.0% reached.", according to the economists at Swiss Life AM.

Sanctions against Russia could hit Germany slightly harder than other countries; exports to Russia accounted for around 0.7% of GDP in 2020. However, there are signs of a turnaround in fiscal policy, as the government has allocated generous funds for rearmament and wants to significantly increase efforts to move away from dependence on Russian gas, for example by building liquefied gas terminals.

Inflation forecasts in the euro zone adjusted

Annual inflation in Germany probably fell in January from 5.3% to 4.9%, but this decrease was much less pronounced than expected by Swiss Life AM. Inflation continues to be driven heavily by energy prices.

Contrary to expectations, inflation in the euro zone did not fall in January, but rose from 5.0% to 5.1% continued to rise. A good half of inflation is due to higher energy prices, while core inflation has fallen slightly, from 2.6% at 2.3%. Wage pressure is still low, but is likely to increase in 2022. Sustained high energy prices and efforts to quickly wean off dependence on Russian gas argue for a higher inflation regime in the short to medium term and have resulted in corresponding adjustments to Swiss Life AM's forecasts for 2022 and 2023.

Inflation in the USA goes up

U.S. inflation surprised on the upside again in January 2022, rising from 7.0% to 7.5%. Inflation has been on the rise, as the experts at Swiss Life AM explain. While the energy (27% year-on-year price increase) and food (+7%) categories continued to be strong drivers, core inflation (+6%) also picked up. Particularly noticeable were rising prices in the index heavyweight medical services, which was not yet a driver of inflation in 2021. Combined with surprisingly strong wage increases in the January labor market report, this has laid the groundwork for the Federal Reserve's first interest rate move in March 2022, it said.

Economically, the U.S. is affected by the Ukraine war mainly via higher energy prices. Inflation has already left its mark on economic data: Consumer sentiment has fallen to its lowest level since 2011, according to a University of Michigan survey, with respondents mainly complaining about high prices on durable goods. Consumption has not collapsed as a result; in fact, nominal retail sales increased at an above-average rate in January. But beware, Swiss Life AM economists warn: "Inflation is at work here too, with price-adjusted sales volumes moving sideways at high levels since March 2021."

The tighter monetary policy will also have a braking effect: The average interest rate on a 30-year fixed-rate mortgage, with which a house is usually mortgaged in the USA, has risen since the beginning of the year from 3.3% to 4.2% increase. The housing market, which is currently still doing very well, is likely to lose some momentum in 2022, as is the investment cycle, which has benefited from buoyant lending activity.

In terms of GDP growth, Swiss Life AM experts expect an acceleration in the second quarter after a weak start to the year due to the pandemic, driven by consumption of services, which should also benefit from the steady improvement in the labor market.

Forecast comparison

Delayed rise in inflation in Switzerland?

With 1.7% annual inflation as of January was at a high since October 2008. Nevertheless, inflation in Switzerland remains low by international standards and still in line with the Swiss National Bank's target band of 0% to 2%. One striking feature of inflation measurement in Switzerland, according to Swiss Life AM, is the high proportion of government-fixed prices for goods and services in the basket of the national consumer price index. So far, this circumstance has had a price-dampening effect, especially on electricity prices. Higher costs, however, could be passed on to the end users after all, even with a delay in administered prices, say economists.

The first official estimate for Switzerland's gross domestic product for the fourth quarter of 2021 shows quarterly growth of 0.3%, exactly in line with Swiss Life AM's expectations. Combined with slight revisions to previous quarters' data, real GDP growth for 2021 as a whole is 3.7%. Swiss Life AM remains comparatively cautious in its GDP growth forecast for this year and next year.

Inflation is not an issue in China and Japan

In China, the rigorous zero-covid approach is weighing on the domestic economy, experts note. During the New Year's holiday, various provinces asked the population not to leave their cities. High-frequency data show that travel activity increased only slightly compared to the previous year and was about 50% below pre-crisis levels. In addition, regional production shutdowns in the run-up to the Winter Olympics weighed on manufacturing activity, causing the Caixin industrial PMI to fall to 49 in January.1 fell.

Another risk to China's growth prospects is the Ukraine war. If the conflict escalates drastically and slows down Europe's economy significantly, China could also feel the impact. After all, exports from China to the EU account for nearly 3% of China's GDP.

Inflation is not an issue in China. In January it was 0.9%, well below the 3% target, giving the authorities room to cut monetary policy rates further, according to Swiss Life AM. Producer prices also fell to 9.1% from previously 10.3%. This reduces the pressure on manufacturers to pass on costs to customers.

Inflation in Japan is even lower than in China. In January, it was only 0.5% and is currently an issue for energy and food in particular. In contrast, Japan's version of core inflation, which excludes perishable food and energy, slipped further into deflation (-1.1%). Because wage growth has also slipped slightly into negative territory, there are no reasons for the Bank of Japan to change its monetary policy, according to Swiss Life AM.

The international real estate market offers a variety of opportunities worldwide. (Image: iStock)

Central banks around the world are putting the brakes on monetary policy because of rising inflation rates. The result is rising interest rates, which can weigh on the real estate market. Peter Bezak of Zurich Invest explores the question of why investors should now invest in foreign real estate, of all things, at a time when interest rates are expected to rise.

After the temporary slump caused by the Corona crisis, prices on the international real estate markets have recovered strongly in the past year. "Low interest rates have been crucial to the real estate boom of recent years and the associated price increases. Last year, investors benefited from further favorable conditions: In addition to the recovering economy and loose monetary policy conditions, expansionary fiscal policy has also had a positive impact,", says Peter Bezak, economist and investment expert at Zurich Invest.

This year, however, conditions will change. The U.S. Federal Reserve, unlike the eurozone's monetary watchdogs, is backing a tighter monetary policy. Therefore, according to the economist, after the prospect of a first interest rate hike in March, two or three more hikes are to be expected in the course of the year. Rising interest rates could reverse the trend and cause real estate prices to fall again, he further explains. However, as interest rate increases are expected to be moderate, the impact on real estate prices is also likely to remain within tolerable bounds. In addition, price reactions are usually not observed immediately, but only after a certain delay. "Regardless of these factors, real estate is a real alternative to domestic real estate for a variety of reasons", Bezak emphasizes.

Attractive risk-adjusted returns over the long term

The steady professionalization of real estate as an asset class has made it an attractive, risk-adjusted alternative internationally. A key factor, he said, is the consistent rental income achieved to date. The income yield, in addition to the change in value yield, is a further contribution to the total return and an important component for stable investment success, the investment expert explains. The Investors-Non-Listed-Real-Estate-Vehicles (INREV) index is a good example of the development of this type of investment.

The INREV index tracks the performance of European unlisted real estate funds. Subsequently, yields do not fluctuate to the same extent as the change in value yield, which provides information on the change in value of real estate in relation to the market (see figure). But inflation could become a problem for real estate investors, according to Bezak, if price increases cannot be passed on in the same amount on the income side. But interest rates, which remain low in Europe, made real estate an attractive investment for many investors in 2022, despite inflation.

The global real estate market: a very different order of magnitude

"Swiss pension funds have a lot of experience as investors in the domestic real estate market. However, the international market offers far more investment opportunities. Here are ideal complements to investments at the national level", says Bezak. Swiss pension funds investing abroad could already cover about two-thirds of the global market with the fastest-growing real estate markets in Europe, which include Germany and France, and the world's largest real estate market, the U.S. (see chart). Moreover, the individual countries not only had different economic cycles, but also a relatively low correlation of returns between the different markets. It is precisely this heterogeneity that provides the necessary diversification in an international real estate portfolio.

Investment opportunities in Switzerland are severely limited simply because of the limited size of the market, Bezak said. However, the investment potential in foreign real estate is not yet fully exploited by Swiss pension funds. Who invests abroad, diversifies its risks and receives so the chance on long-term higher net yields.

Transparent real estate markets abroad

As the expert goes on to explain, the USA, Great Britain, Australia and France are regarded as role models for real estate markets around the globe in terms of transparency. The high level of transparency is achieved through a legal framework that prescribes high standards for data availability and quality, as well as frequent performance measurements with high requirements. A good example of this is the centralized Multiple Listing Service (MLS) established in the U.S., which contributes to an open exchange of information, he said. "This real estate information system clearly lists the available supply of properties, including the asking sales price. Suitable properties can easily be found and compared with each other. In addition, the MLS simplifies price negotiations because sellers and buyers all have the same information", explains Bezak.

Invest globally with experienced real estate professionals

Institutional investors had the best access to investment opportunities in global markets due to their large investment volumes. The key to success, they say, is always choosing the right real estate investments. Specific real estate knowledge, a lot of experience and, above all, a good local network are indispensable, says Bezak, adding: "Just as important is conscientious management in order to manage real estate efficiently. This expert knowledge is also required if transactions are to be correctly analyzed, structured and, in the end, successfully implemented. Whether in Austin, Paris or London, the international real estate market offers a wide range of opportunities worldwide for institutional investors such as pension funds."

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