Swiss real estate on solid foundations

Swiss real estate on solid foundations
Swiss real estate on solid foundations

Demand for Swiss real estate remains strong and investments in Swiss real estate companies continue to be attractive.

© Keystone

Listed Swiss real estate companies underperformed broader market indices such as the Swiss Performance Index. On a rolling year basis, the SXI Real Estate Shares (all listed Swiss real estate companies) underperformed the Swiss Performance Index Total Return by 7.8 percentage points, as more cyclical sectors attracted more investor interest. However, positive macroeconomic data, favourable exogenous and structural factors (positive demographics, solid labour market, stagnant construction activity) should continue to boost demand for Swiss real estate and make investments in Swiss real estate companies attractive.

Swiss inflationary environment bodes well for the sector

The sector offers an estimated dividend yield of 4.0% for FY25E, which is above the market average (3.2%). The Swiss inflationary environment also seems to us to bode well for the sector. The key message on inflation is that the numbers in Switzerland have been coming down much faster and are much lower than in other markets. This has allowed the Swiss National Bank to cut the base rate from 1.75% to 1.25% in the first half of 2024. According to Bloomberg, the expected inflation for 2024 is currently 1.4% in Switzerland, compared to 3.1% in the US and 2.4% in the European Union.

Rising inflation rates have translated into higher interest rates and mortgage rates over the past two years. This abruptly ended the period of scarcity of investment opportunities that was one of the main drivers of the massive inflow of capital into the Swiss real estate sector. However, inflation has been successfully managed by the Swiss National Bank and is rapidly decreasing. We therefore see a relatively attractive spread between the dividend yield offered by listed Swiss real estate companies and the 10-year Swiss government bond. With real interest rates (interest minus inflation) also remaining in negative territory, this provides additional support to the sector.

Demand for Swiss real estate is reassuring, with annual growth expected to be around 0.6% according to the Federal Statistical Office.

Net migration, a key driver of real estate demand

Net migration to Switzerland is an important driver of real estate demand. According to the Federal Statistical Office, net migration increased significantly in 2022, and provisional growth is even higher in 2023. The increase is partly due to the fact that Ukrainian citizens have been included in the permanent resident population since 2023.

Overall, the Swiss population is expected to have increased by 1.6% in 2023 (without Ukrainians, the population would have increased by 1.0%). The demand for Swiss real estate is therefore reassuring in our eyes, with an expected annual growth of around 0.6% according to the Federal Statistical Office. The metropolitan areas of Zurich and Geneva will remain the main drivers of demand, with expected annual growth rates of around 0.9%.

Construction activity in Switzerland

Housing construction activity in Switzerland is declining. According to Wüest Partner, there will be a shortage of more than 50,000 apartments by the end of 2026. It is therefore not surprising that the demand for condominiums and single-family homes is higher than the supply. Since the middle of last year, the number of people looking for residential apartments has increased by 7%, according to the same real estate consultant. Actual transactions on the market show an increase in prices. Transaction prices for condominiums increased by 3.6% between the first quarter of 2023 and the first quarter of 2024, while the value of single-family homes increased by 1.6%. There are no signs of a trend reversal for the current year, and the upward trend is expected to continue. This situation remains favorable for the Swiss real estate market.

In 2023, new building permits for office space reached their lowest level since 2000. According to Wüest Partner, the investment volume amounted to CHF 875 million, 48 percent below the average of the last ten years. This is due to the increase in financing and construction costs, as well as the rising vacancy rate. Buildings that require significant investments to modernize in terms of sustainability are more affected than office buildings that are up to date in terms of sustainability. The increase in vacant office space is expected to continue to put pressure on office rents. Wüest Partner also reports that the median asking rent in the first quarter of 2024 was 2.8 percent lower than in the same quarter of the previous year. Despite this, the situation in the retail space sector remains broadly stable, although retail is growing at a slower rate than the population. The increased interest in commercial space in prime locations is striking, leading to rising rents in these locations, while average rents in Switzerland are falling.

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