NEWS

Offices will make a comeback, CIO Diego Liechti says

By Muskan Arora

Moving against the tide, Diego Liechti, the CIO and executive board member of Nest Sammelstiftung continues to invest in office spaces, both in Europe and globally as he expects a recovery soon.

While home offices work for employees, the CIO indicates it as “not such a good idea” for employers as it reduces innovation and productivity of the people.

“I think home office will remain, but a larger part of work should be spent in the office,” said the CIO, backing the trend of employers forcing employees to come back into offices.

The Swiss multi-employer pension fund allocates 70% of its Swiss real estate sleeve to residential and 30% to office spaces.

Further, the system also has a 3% allocation to global real estate, dominated by office spaces.


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“We had really a hard time the last two years there, but we stick to the allocation, we might diversify a little bit more, but the office will remain a main part of the portfolio,” Liechti told Markets Group.

While vetting opportunities within office spaces in both Switzerland and globally, the CIO prefers spaces “closer to public transportation stations or in the center of the city”.

“If you only invest in New York, London, and Frankfurt, you might be badly diversified due to the exposure to the financial sector. As a consequence, you should have other cities such as L.A. or Munich,” he added.

In Switzerland, the investment is directly towards cost efficient spaces along with a “specific sustainable approach”.

Bad returns might sway away most allocators, however Liechti follows a disciplined rebalancing mechanism which is “a little bit contrarian” to get, on average, the best results.

“If you look at global real estate, then the returns of the last two years are really bad. However, with a disciplined rebalancing approach you have to increase the allocation again,” added the CIO.

According to a latest Savill's European office research study, European office investment transactions totalled to 14.1bn euros up to June, down 21% year-to-year basis. 

However, the UK has witnessed a strong growth with a 29% share of European office investment volumes, 25% above the average of the last five years. Ireland and the Netherlands are also showing momentum, as per Savill's research.

Noticeable economic growth and higher occupancy rates in Spain, Italy and Portugal also signs of strength. 

With changing winds towards good returns, investors are now coming back to insurance-linked securities without considering the type of risk and the extent of risk they want to take. Further, they should also choose between a multi-manager approach and a single manager approach.

[Returns of the firm in CFH (swiss currency), compared with the UBS pension fund index, the broadest index for Swiss Pension funds]

The CIO favors insurance-linked securities as it is “the only alternative asset class that has an added value, meaning that you can't replicate it with other asset classes”.

However, he believes private equity returns can be replicated with small-cap value equities and a moderate leverage. Similarly, private debt can be replicated with corporate bonds, some interest rate hedging and some liquidity risk form another illiquid asset class.

“Although I like the asset class per se, I'm always critical about private equity because the fees are way too high and governance in LP structures are quite poor. Especially, the performance fees are usually set up in a bad way,” said Liechti.

“Other aspect I do not like is the catch-up where GPs are paid in the end for absolute performance and not for a good relative performance,” added the Swiss CIO.