Introduction: Inflation is back
After more than 30 years of low inflation, it rose sharply at the end of 2021. Fiscal support measures to mitigate the consequences of the pandemic have provided a strong boost to global consumption. At the same time, containment measures, notably in China with the zero-COVID policy, led to disruptions in supply chains. The war in Ukraine has further aggravated these disruptions by causing a rise in the price of energy and many raw materials . To counter this rise in prices, central banks have taken a radical turn by adopting a restrictive monetary policy. The Swiss National Bank (SNB) has already raised its key interest rate twice this year, first in June from -0.75% to -0.25% and then in September to 0.25%. Further increases are expected in 2023. This return of rates to positive territory marks a paradigm shift for the Swiss property market.
Inflation protection mechanisms
In its June 2022 Talking Points publication, UBS Asset Management points out that, in addition to its tangible nature, real estate offers protection against inflation over the long term through two mechanisms:
a. The evolution of land and property prices
Over the last fifty years, nominal property prices have increased almost fivefold, while the general price level of consumer goods has tripled. Stone has therefore been a good defence against the erosion of purchasing power .
b. Income from the sector that offers protection through the adjustment of rental income
However, this adjustment of rental income is often imperfect in its timing and scope. Nevertheless, it contributes to the resilience of this asset class in times of inflation. In concrete terms, up to 40% of the change in the consumer price index can be passed on to residential tenants and rents can be adjusted to the market level in case of a change of tenant . However, the purchasing power of households must not be eroded at the same time and the vacancy rate must not be high, as in this case the tenant may change flat in response to the increase .
However, property prices do not necessarily increase with every spike in inflation. Changes in interest rates often have a greater influence on prices, and periods of high inflation are usually accompanied by an increase in interest rates, which in turn has an impact on property prices .
Solidity of the Swiss real estate market
In an analysis  published in September, CBRE underlines the greater resilience of the Swiss real estate market compared to that of the main foreign markets by highlighting five factors:
- Inflation is much lower in Switzerland (3.5% in August over twelve months) than in Europe (9.1%) or the United States (8.3%), which should make it easier for real estate to play its protective role, at least partially.
- The increase in ten-year bond yields in the Swiss Confederation (around 1.5% over one year) is lower than those recorded in France, Germany or the United States (around 2.20% to 2.50%). The risk premium for real estate in Switzerland would therefore be less affected by the rise in bond rates.
- Debt levels in the Swiss real estate market are generally low, which makes it less vulnerable to the upward shock of policy rates.
- The Swiss real estate market’s exposure to foreign capital (approx. 10-15%) is significantly lower than in Europe (approx. 40%) and is limited to commercial real estate under the LFAIE, thus limiting fluctuations in times of crisis.
- The fundamentals of the Swiss real estate market are more favourable than in Europe. The residential sector has the lowest vacancy rate in Europe and the highest rate of tenants, which, combined with sustained demand, reinforces its role as a safe haven. UBS even expects a further decline in the vacancy rate and further rental growth in 2022 due to the robust absorption potential supported by immigration, the slowdown in the planning of new residential properties and rising construction and financing costs .
After an exceptional period of euphoria, which was largely based on a negative interest rate environment that favoured massive capital inflows into real estate, the Swiss real estate market should enter a phase of normalisation. The imbalance between buyers and sellers (in favour of the latter) that has prevailed in the market for years is now being readjusted , and the market will thus offer many opportunities to real estate investors in the years to come.