Swiss real estate – how long will the boom last?

Investors tend to view real estate as a safe asset class. It thus comes as no surprise that they are pouring more money into Swiss real estate in this turbulent market environment. UBS
Research Switzerland sees this as a dangerous trend

The fundamentals of the Swiss residential real estate market remain strong, and (potential) homeowners can secure lower interest rates than ever before. Since 2007, annual
population growth has been well over double its long-term average. Household incomes are still rising briskly, albeit more slowly than before. The widespread confidence in the Swiss real estate market nevertheless seems to be showing signs of increasing strain. For example, condominium prices have risen around 35 percent throughout Switzerland in only five years (Zurich region: 40 percent; Lake Geneva region: 70 percent), leading more and more observers to describe the property market as overheated.

The housing market does not seem poised at the brink of a downward spiral in 2012. However, it seems equally unlikely to calm down, even though it has become even more dramatically imbalanced in recent years owing to a dangerous concoction of distorted interest rates, overly optimistic investor expectations, a grim outlook in the Eurozone and a dearth of investment alternatives. UBS Research Switzerland expects prices to rise by around another 4.0 percent for condominiums and 3.5 percent for single-family homes over the next 12 months, despite the deteriorating economy.

Slumping demand for office space
The global economic slowdown will also affect Switzerland. Nonetheless, office jobs have been fairly crisis-resistant in the recent past: The number of employees stayed virtually unchanged during the 2008/2009 financial crisis, the biggest economic slump since the 1975 oil crisis. Office rents have largely reflected this remarkable stability. Such robust growth is unlikely to recur: Since the financial sector is facing more regulation as a result of the current crisis, employment growth in Switzerland's finance and business services sector should be weaker in the next several years than it has been since the financial crisis. Consequently, demand for office space is expected to drop throughout Switzerland. In 2012, UBS
Research expects asking rents to rise by a mere 0.5 percent across Switzerland.

Asking rents for retail space, on the other hand, are actually expected to drop around 2.0 percent this year. Two factors are driving this decline: First, the current total supply of retail space has increased by around 20 percent, largely due to new shopping centers. Second, the strong franc has driven up shopping tourism in border regions.


High valuations for indirect real estate investments
Swiss real estate equities did well in 2011. They closed the year with a total return of 6.1 percent compared to the prior year, while the Swiss Performance Index (SPI) traded 7.7 percent lower. Their outperformance was based on several factors. First, real estate companies exceeded profit expectations, which can be attributed to low interest rates and the strong Swiss property market. Second, not only did real estate valuations rise slightly, the Swiss government also provided tax relief on dividend payments.

Real estate funds performed even better in 2011, closing the year up 6.8 percent. Overall, investors tended to prefer exchange-traded real estate investments despite their relatively high valuations – mainly because the current economic environment indicates that interest rates will likely remain low for the near future. If the economy enters a major downturn, however, the current high valuations of real estate equities in particular harbor a risk of profit-taking in the short term.

The UBS study «UBS real estate focus 2012» can be accessed via the following link:
www.ubs.com/realestatefocus