Is there a viable alternative?
All facts considered, it seems the only way of generating a passive income that beats inflation is by raising the risk parameter. Let’s consider investment-grade bonds issued by leading Swiss companies. Of course, they are not guaranteed, not to mention that the credit standing of even the biggest issuers is below the triple-A accorded to the Swiss government. Therefore, investing in individual corporate bond issues requires thorough research into the available options and their respective ratings. In light of this, opting for an exchange-traded fund (ETF) may certainly prove to be easier and more convenient.
BlackRock, the world’s largest investment manager, offers a wide range of iShares ETFs, including a Swiss corporate bond vehicle that holds a diversified range of investment-grade bonds, offering a yield of 1.73% as of the end of February 2024.
While this is certainly greater than the rate of inflation, the ETF has also given investors a much bumpier ride than they experienced with Swiss government bonds, while delivering a total return (capital appreciation plus interest paid) of just CHF 500, or 5%, on an initial CHF 10’000 invested over 10 years. Conversely, sums passively held in a bank savings account, despite offering much lower interest, would have, however, suffered no capital volatility at all.
Growth of hypothetical CHF 10’000 invested in the iShares Core CHF Corporate Bond ETF index 10 years ago (in CHF)
Source: iShares by BlackRock
Yet, more risk is needed if one is to earn a reasonably attractive level of passive income. This implies considering leading Swiss equities that consistently pay dividends, which are likely to be maintained or even increased over the long term.
As is the case with corporate bonds, research will be required to identify equities offering the best yields commensurate with an acceptable level of risk. Alternatively, as with an approach for bonds introduced earlier, it may be better to outsource research to a reputable fund manager by investing in a suitable ETF. BlackRock, for instance, offers the iShares Swiss Dividend ETF which tracks the index of 20 companies with the highest dividend yield in the Swiss equity market and yields a modest 4.33%.
For those willing to risk everything on a single stock, however, Swiss Re AG might be the option to opt for. As the largest reinsurance group in Switzerland and the world’s second-largest, Swiss Re AG is a blue-chip component of the Swiss Market Index, yielding almost 6% per year. Yet, blue-chip or not, Swiss Re has experienced relatively high volatility in its share price, implying a certain level of risk.
Swiss Re AG stock price since 2014 (in CHF)
Source: Yahoo Finance
Real estate as the ultimate income source
We have explored various avenues, including cash deposits, bonds, and equities, in our quest for Swiss sources of passive income with an acceptable risk level, yet, so far, none have been a perfect fit. What about real estate, the asset class that Le Bijou has persistently advanced as an essential component of long-term savings and investments? Could it be the solution?
Currently, there are four options for passive income through real estate. The first is direct ownership. However, unless limited to just one or two rental properties, and fairly small ones at that, it requires a capital commitment far above what is available to the great majority of Swiss private investors. This challenge can potentially be resolved with mortgage financing, but the interest paid would nearly wipe out all of the rental yield.
Moreover, direct ownership requires significant expenses, time, and effort in property management, contradicting the whole notion of ‘passive’ income.
A more realistic option seems to be fractional ownership, wherein investors acquire a small portion of a property's share and benefit from income and capital growth pro rata. This is a relatively new approach that has become more popular with the advent of tokenization, enabling those with only a few thousand francs to invest in and receive income from Swiss real estate.
In 2021, Switzerland became one of only a handful of countries to enact legislation for the tokenization of real assets, passing the so-called DLT Bill, a.k.a., the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology. This law grants tokenized real estate the same standing as established investment assets such as shares and bonds.
A wide range of platforms – and sometimes even companies such as Le Bijou – offer Swiss investors fractional real estate opportunities. Many are also crowdfunding facilities, providing a third source of passive real estate income; with, in some cases, a minimum investment of only CHF 100, yields of up to 10% can be realized.
However, the drawback of crowdfunding is that it offers relatively poor-quality real estate that, very likely, has previously been refused finance by banks and other more established funding sources. Moreover, the sector is notoriously prone to invasion by scammers and hackers. Additionally, there's uncertainty regarding whether the property management will uphold the expected standards of excellence, potentially impacting the overall return on investment. Not to say a consistent stream of tenants for these properties is not guaranteed.
Le Bijou, however, is not a crowdfunding platform, in the traditional sense. Rather, we act as a developer, general contractor, operator, and technology provider, which opens up a new path for real estate investors to benefit from our exacting due diligence on, and scrupulous management of, our prime properties with a projected return of up to 14.93% p.a.
Not only this, but at Le Bijou we also offer access to the fourth source of passive income from Swiss real estate, which is debt. In contrast to the listed loans issued by Swiss real estate companies, which yield around 4-5%, the Le Bijou Development Bond pays an impressive interest rate of 7.125%. Interest is paid monthly, unlike the biannual payments typical of corporate bonds, and the minimum investment is only CHF 25’000.
