Investors' capital allocation into office and residential markets in ...

Chapter 1
Introduction
1.1 Background
Property has become one of the main investment assets beside shares and bonds.
However, having low liquidity compared to other assets, property represents an important
asset class in the portfolio. Government, companies and individuals are typical owners of
real estate.
Typically, the main property investors in any market are such institutions as insurance
companies and pension funds. The investors choose among different investment media on
international level. Therefore, the characteristics of each asset and linkages among them
are of great importance for the institutions. Investors’ behaviour is not only driven by
expected performance but also by the institutional framework, traditions, rules and
regulations in the market.
Having stable economies and sophisticated technologies Sweden and Switzerland attract
important flows of funds to their markets. The active growth of venture capital and
private equity in Sweden is ranked second in Europe while at the same time Switzerland
takes the last place as for the promotion of these capital investments. A country’s
legislation system, tax policies and company management are factors that prevent or
contribute to the growth of the capital investments, flows of funds (Hoesli M. and
Macgregor B., 2000).
The structure of real estate markets in Sweden and Switzerland is rather different. Offices
represent the major property type in the Swedish Real Estate market (60 per cent)
whereas the Swiss market comprises more than 50 per cent residential properties (IPD,
April, 2006).
There has been done some research about the situation in international markets and the
properties allocation in international portfolios. Property is traded more often today due
to the new technique in property valuation (time-weighted returns). Nowadays, real estate
has been placed on the same level with shares and bonds in the context of capital markets
and the wider economy. Being more liquid, property as an asset could have lower risk
premium which influences the cap rate (which takes into account the risk of investing
into the asset, with good liquidity the risk is lower, so is the cap rate) as well as capital
value. This particular research provides specific description of Swedish and Swiss office
and residential markets. Pension funds, insurance companies and large international
investors can benefit from the research project as it would give clear and rather new
information about the two specific markets as well as will save their time and resources.
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