Swiss residential real estate investment: Stability and resilience in the face of economic challenges

2023 was a year of significant developments for Swiss real estate investment. Various factors, such as inflation, rising interest rates, reduced institutional investment, growing rental demand, a drop in construction and rising rents, are shaping the current dynamics of residential real estate investment. Through these challenges, the Swiss residential real estate market has once again demonstrated its exceptional stability and resilience, reinforcing its attractiveness for Swiss real estate investment.

Inflation and interest rates: A difficult balance

What is the effect of rising inflation on interest rates?

After rising sharply in 2022, prompting the Swiss National Bank (SNB) to raise its key interest rate, Swiss inflation began to fall in 2023, and is now below 2%. The forecast is for an inflation rate of 1.9% in 2024, which will therefore be at the price stability level defined by the SNB. After a sharp rise in interest rates in 2022, the downward trend in inflation in 2023 led the SNB to maintain its key rate at 1.75% in September 2023.

What are the interest rate forecasts for 2024?

Wüest Partner points out that inflationary risks persist: electricity prices will rebound again in January 2024, rents are rising, and likely wage rises will increase production costs for companies. As a result, the SNB is unlikely to lower its key rate before the end of next year, and mortgage rates should remain around their current level.¹

UBS, on the other hand, notes a fall in mortgage interest rates and Swiss government bond yields in November and December 2023, as the capital market prepares for SNB rate cuts in 2024, and expects the SNB to cut interest rates in three stages from June 2024 onwards.2

However, monetary conditions are less favorable for Swiss real estate investment than they were two years ago, with financing costs remaining high and a wider range of alternatives available to investors.

Decline in demand: What is the role of institutional investors?

In its real estate market study for the fourth quarter of 2023, Bank Raiffeisen explains that the reversal in interest rates has led to corrections in the value of equities and bonds, while directly held real estate is showing almost unchanged valuations. This depreciation of other asset classes pushed the weighting of real estate above the strategic allocation target of institutional investors. As a result, they have significantly reduced their investments in the real estate market. Given that in recent years pension funds alone invested CHF 10 billion of new capital per year in real estate, it is hard to imagine that this drying-up of demand from major players will have no impact on prices and valuations.³

Rental demand boosted by immigration

High net migration, driven by the attractiveness of the Swiss economy and the inflow of Ukrainian refugees, should result in record population growth of 1.6% in 2023. High net migration, driven by the attractiveness of the Swiss economy and the inflow of Ukrainian refugees, should result in record population growth of 1.6% in 2023. This high level of immigration has boosted demand in an already tight housing market, reducing the vacancy rate by over 50% in two years. At the national level, the vacancy rate reached 1.15% of housing stock in June 2023, well below the 1.27% threshold considered optimal by Wüest Partner. This shortage situation is becoming more widespread, and is no longer confined to urban areas; Wüest Partner notes that 21 cantons have a vacancy rate below this optimum level.⁴

Low construction levels

New housing construction is not keeping pace with this growing demand, as evidenced by the extremely low number of building permit applications. New housing construction is not keeping pace with this growing demand, as evidenced by the extremely low number of building permit applications. In the rental housing segment, the figure for the second quarter of 2023 is 10% below the ten-year average.⁵ According to Bank Raiffeisen, one of the main reasons for the shortage is the lack of internal densification, which it blames on the new Swiss Land Planning Act, which makes it much more difficult, if not impossible, to create new building zones, and now also on rising construction and financing costs.⁶

Rents: An upward spiral

Bank Raiffeisen reports that in the third quarter of 2023, the offered rents rose by 2.75% across Switzerland, representing the strongest quarterly rise since 1991, an increase of almost 4% on the previous year and an annual growth rate not seen for almost 15 years. Existing rents have also risen as a result of higher benchmark rates and inflation.⁷

But this is only the beginning, as the shortage is set to intensify and existing rents will continue to rise, despite the SNB’s pause. Since December 1, 2023, the benchmark mortgage rate has risen from 1.50% to 1.75%, so rents on the affected leases could be raised as of April 1. In view of the tight housing market, Wüest Partner expects the offered rents to rise by more than 3.8% throughout Switzerland in 2024. The real estate experts are also forecasting a 3.7% rise in rents for current leases on average across the country, due to the rise in the mortgage benchmark rate and the possible impact of inflation.⁸

In addition to a sharp rise in rents, the housing shortage is causing many inconveniences for tenants, especially those who are moving out. New tenants are now faced with time-consuming searches, rent overruns and compromises that have become necessary in terms of space requirements, location quality and occupancy density. This situation is putting the brakes on the downward trend in household size observed until 2021.

Resilience of Swiss real estate in the face of economic challenges

Rising transaction prices

In an October 2023 press release, IAZI CIFI reports that transaction prices for yield buildings rose by 0.6% in the third quarter of 2023, representing a year-on-year increase of 4.3%. Capital gains are still recorded, despite rising financing costs and announcements of suspended transactions or reduced prices. This is explained by the fact that buyers are waiting for lower prices, while sellers are patient in concluding transactions at higher prices. Although the number of acquisitions is currently low, those that do take place are done so at high prices, helping to boost price indices, whereas transactions not finalized pending a price adjustment are not accounted for. ¹⁰

Swiss real estate investment remains attractive

Bank Raiffeisen explains that no major price collapse is to be expected, as the relative performance of real estate investments remains attractive. Real estate offers returns in excess of corporate bonds, and although these yields are below the average returns of ultra-low rates of the last decade, this recent decline in the attractiveness of real estate should be put into perspective in view of past performances. Moreover, with the housing shortage expected to persist, the effects of higher rates over time should be much milder than under normal circumstances. ¹¹

Rents will offset additional costs

IAZI CIFI explains that the additional costs associated with the reversal in interest rates for real estate investments financed with debt will be offset by increases in rents, for both new and existing leases. Thus, the increase in the reference rate from December 2023 to 1.75% will, depending on circumstances, result in a further rent increase of around 3%. In addition, part of the inflation and overall cost increase can be passed on to rents, thereby adding to income and supporting the attractiveness of real estate investments. ¹²

SWX IAZI investment real estate performance index

Despite the economic challenges of 2023, Swiss residential real estate investment has demonstrated exceptional stability and resilience. Faced with factors such as inflation, rising interest rates, declining institutional investment, growing rental demand, falling construction activity and rising rents, the sector has maintained its structural robustness. Strong population growth, supported by record immigration, is keeping up the pressure on the housing market. With reduced construction activity, the upward spiral in rents will maintain the appeal of investment properties, which are recording price gains despite economic uncertainties. This consistency reflects investors’ continuing confidence in the stability of the Swiss residential real estate market, which continues to position itself as a solid and reliable safe haven in a fluctuating economic environment.

 


 ¹ Le Journal de l’Immobilier, December 20th, 2023, Corinne Dubois & Marc Clapasson – Marché Immobilier, Analysis of Wüest Partner for JIM, Pas de baisse des taux prévisible en 2024 (https://jim.media/articles-jim/articles-de-une/pas-de-baisse-des-taux-previsible-en-2024/)
² UBS, Prévisions de taux: Trois baisses de taux d’intérêt de la BNS attendues à partir de juin 2024 (https://www.ubs.com/ch/en/private/mortgages/information/brochures-and-publications/interest-forecast.html)
³ Raiffeisen Economic Research, Immobilier Suisse – 4T 2023: Le prix comme densificateur
⁴ Wüest Partner, 14 novembre 2023, Marchés immobiliers: dernières évolutions et cap sur 2024
⁵ Wüest Partner, 14 novembre 2023, Marchés immobiliers: dernières évolutions et cap sur 2024
⁶ Raiffeisen Economic Research, Immobilier Suisse – 4T 2023: Le prix comme densificateur
⁷ Raiffeisen Economic Research, Immobilier Suisse – 4T 2023: Le prix comme densificateur
₈ Le Journal de l’Immobilier, 20 décembre 2023, Marché Immobilier – Analyse de Wüest Partner pour le JIM, Pas de baisse des taux prévisible en 2024 (https://jim.media/articles-jim/articles-de-une/pas-de-baisse-des-taux-previsible-en-2024/)
⁹ Raiffeisen Economic Research, Immobilier Suisse – 4T 2023: Le prix comme densificateur
¹⁰ IAZI CIFI, 11.10.2023, Le marché immobilier suisse résiste (https://www.iazicifi.ch/fr/une-dynamique-toujours-positive-sur-le-marche-immobilier-suisse/)
¹¹ Raiffeisen Economic Research, Immobilier Suisse – 4T 2023: Le prix comme densificateur
¹² IAZI CIFI, 11.10.2023, Le marché immobilier suisse résiste (https://www.iazicifi.ch/fr/une-dynamique-toujours-positive-sur-le-marche-immobilier-suisse/)
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