A net return between 2% and 4% of an insurer’s real estate portfolio is necessary to meet its obligations, according to Jean-Pierre Valenghi of Baloise.
Baloise is one of the largest institutional real estate owners in Switzerland. Around 80% of its real estate portfolio is made up of housing (more than 13,000 apartments), the yield of which cannot exceed 3.75%. Its role is sometimes criticized in matters of rent by various organizations, including Asloca (Swiss Tenants Association). The only way to contain rents and satisfy the strong demand for housing is to strengthen supply, and not to paralyze it, according to Jean-Pierre Valenghi, director of the real estate sector at Baloise Group.
How do you assess the situation of the Swiss real estate market after more than 20 years of growth, although it is necessary to differentiate by segment?
The stabilization of interest rates after their rise led to a stabilization of the real estate market. This means that we found, from an investment point of view, a “spread” or difference in yield between 1.5% and 2.0% compared to the risk-free rates of Confederation bonds at 10 years. While it was greater when rates were negative.
Of course, we must distinguish between regions. In the periphery, the risk appears higher than in large urban centers, notably Zurich and Geneva, both with regard to homes and offices. In other words, lower risk justifies a more modest return, as long as the recurring cash flow, which we need, is more stable.
It is important to remember that around 80% of Baloise’s real estate portfolio consists of residential properties and we are legally obliged to a maximum return which corresponds to the reference interest rate for rentals (currently 1.75%) plus two percentage points.
How is net return determined?
The net return is to be judged, on the one hand, on the basis of the means invested by the owner in the building and, on the other, on that of the net income resulting from this invested capital, according to the case law of the Federal Court.
“The growing demand is estimated at 50,000 housing units per year in the coming years.”
The net yield within the meaning of Article 269 of the Code of Obligations (rental and farm lease) is permitted according to the case law of the Federal Court and is therefore not abusive, as long as the “supplement” that can be added to the reference mortgage rate does not exceed two percentage points, and to the extent that the reference rate is equal to or less than 2%. This is why the maximum permitted yield currently stands at 3.75%, i.e. the reference rate of 1.75% plus two percentage points.
The rise in rents is becoming worrying for part of the population, especially in big cities…
Supply and demand must be rebalanced by building more housing instead of tightening tenancy law; tightening it amplifies the housing shortage and makes rents more expensive. Effective measures are urgently needed to meet the growing demand, estimated at 50,000 housing units per year in the coming years by the “Swiss Housing Alliance”, by creating the necessary supply. The situation is particularly crucial in Basel-Stadt.
What exactly is the situation in the canton of Basel-Stadt?
It is the first German-speaking Swiss canton to have introduced rent control. For the moment, we are no longer undertaking any renovations concerning ourselves. Because the resulting return for us is too low, well below the net return located within a margin of 2% to 4%, which we are aiming for and which we must achieve to satisfy our obligations at all times towards our policyholders. We must generate sustainable cash flow that allows us to meet our obligations.
Is the strengthening of tenant protection in Basel-City not also the consequence of premature renovations?
We renovate when technically necessary and adhere to long-term planning in this regard. Baloise does not act as a speculator, but in the long term, depending on the service life of the properties in its portfolio.
Baloise strives to reduce the energy consumption of its real estate portfolio, mainly by renovating older buildings or replacing them with new construction projects, for energy optimization purposes. This allows us to lower the operating costs paid by our tenants.
We must also show imagination by repurposing former industrial sites, to create attractive, open, diverse and innovative urban districts, like the Klybeck district project in the north of Basel. Which is open to varied forms of cohabitation and to different generations, income categories, nationalities and cultures. In Rhystadt-Areal alone, in which we are involved, more than 3,000 new homes for various needs in Basel are to be made available.
“It is in Geneva that we find the highest rents and the worst condition of housing.”
What is the situation in the canton of Geneva?
The vacancy rate was less than 1% on June 1, 2023, according to the Federal Statistical Office. We consider the market balanced when it displays a vacancy rate of 1.5%. However, it is in the canton of Geneva that we find the highest rents and the worst condition of housing, despite measures to protect tenants.
Is it better than in the canton of Zurich where the vacancy rate has been less than 1% since the 2000s?
It is no better than the canton of Zurich where demand remains very strong, especially if we take 3 and 4 room apartments. An initiative for affordable rents is also underway in this canton.
What is the policy of the canton of Geneva?
The housing policy carried out there is mainly implemented in development zones, that is to say in new housing districts. This does not prevent a tense situation in this canton, with a vacant housing rate of less than 0.5%. State control does not really help to improve the housing situation.
Is there high inflation in construction costs?
Construction costs have increased by 14% over the period from 2020 to 2023. This increase affects all regions in Switzerland. Not to mention stricter standards for construction and renovations.
