The lasting decline in yields
For around thirty years, Swiss real estate yields have been falling. This movement is part of a global and secular trend linked to the knowledge economy, an increasingly intangible economy where investment opportunities are more dependent on particular know-how than on the provision of capital. The transition to the knowledge economy partly explains the fall in long-term interest rates in Switzerland and at the same time the fall in real estate yields in all property categories. This situation reduces the attractiveness of real estate investment because rental collections cover less and less maintenance costs. The latter are also growing due to the adoption of multiple standards and the imperatives of the energy transition.
Increasingly heavy taxation
Taxation also plays a major role in the loss of attractiveness of real estate. The drop in capital returns mechanically increases the wealth tax, calculated with a fixed rate over time. But that’s not all. To the extent that a building is by definition not movable, it constitutes a favorite tax target. By examining Swiss taxation, we see that there is a whole range of taxes specific to real estate which do not apply to securities. Let us start by mentioning property taxes which are added to the wealth tax, but do not take into account possible debt. Transfer taxes considerably increase the cost of transactions compared to that of securities. Tax on real estate capital gains is levied while movable capital gains are tax-exempt in Switzerland. Finally, the risk of being qualified as a “real estate professional” for any real estate investor is much greater than for an investor in securities.
A hostile political climate
Every year, Switzerland attracts talented people who find attractive professional prospects there, as well as wealthy people. The resulting population growth leads to rising property prices and explains the chronic housing shortage because, at the same time, the Swiss themselves are resisting the concreting of their country. This situation puts pressure on the more modest classes, and creates a hostile political climate towards the “real estate sectors” widely exploited by left-wing parties. The State is called upon to intervene and its action is deployed on three axes: legislation governing rents, nationalization of the real estate stock, and an increase in real estate taxes. For investors, the situation is therefore paradoxical: on the one hand Swiss real estate is fundamentally very interesting, on the other the action of the State complicates the situation.
The opportunity offered by real estate funds
Faced with these numerous difficulties mentioned so far, more and more families owning investment properties are finding real estate funds a valuable alternative. The advantages of real estate funds are multiple. First of all, the investment is flexible, it is done on the stock market as with any stock, which allows you to invest any amount, increase it or reduce it at any time. This advantage is found during inheritances, which are facilitated with shares in real estate funds, while the direct ownership of buildings often complicates discussions. In addition, the management of a real estate fund is carried out on a large scale by professionals who are better equipped to take care of the real estate portfolio, whether from a technical, legal or commercial point of view. Finally, the investor is relieved of any owner concerns, he receives profit distributions from the fund, which are relatively regular due to the diversification effect obtained by the large number of buildings, those under restoration being financed by the rest of the portfolio.
More and more families owning investment properties are finding real estate funds a valuable alternative.
An attractive and little-known tax system
Real estate funds offer a tax treatment that is little known in Switzerland. By federal law, when the real estate fund owns its properties directly, the fund pays both income and wealth taxes on behalf of the investor. For the latter, this has two consequences: firstly, the amount invested in the fund is not added to his taxable wealth; second, distributions from the fund are not taxable. It should be noted that the tax scale applied to the fund is hybrid: the fund pays income taxes equivalent to those of a limited company – that is to say much lower than for a natural person –, and a wealth tax at a level comparable to that of an individual. In practice, however, buildings often benefit from modest old valuations compared to their current market values.
A transition in progress
For all these reasons, we are seeing more and more families selling their investment properties or exchanging them for shares in real estate funds. These offer, as we have said, the essential advantages of real estate investment without the disadvantages that today’s world has brought. This is why Dominicé & Co is part of this development and advises many families who own real estate.
About Dominicé
Dominicé is an independent asset management company founded in 2003. The company manages investment strategies in real estate, stocks and volatility, and offers wealth management services.
www.dominice.com
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