PwC Immospektive

Interpretation of the FPRE real estate meta-analysis for August 2022

References to FPRE graphics in our text are marked with ‘[1]’ etc.

19 August 2022

Despite the strained economic situation on the global markets, Switzerland remains in good shape. Employment is at a high and many sectors are complaining of staff shortages. Rising prices are being felt in Switzerland as elsewhere, though the rates of inflation are currently still low in comparison with those in the EU and the USA. Central bank interest rate policy has also driven up mortgage rates. However, this has not dented the high demand for residential property, which continues to generate rising prices. At the same time, though, rental properties are in short supply, owing to the low level of building activity caused by increased construction costs. This means that rents are also rising to a marginal extent. The office market is returning to the old normal: rents are at pre-crisis levels, with market values rising. The logistics sector has gained in popularity over recent years. The future economic situation will give greater momentum to demand for logistics space.

Despite global tensions, Switzerland’s economy remains in good shape

The war in Ukraine has now been going on for about six months. The restrictions connected with the coronavirus pandemic are still not completely lifted and there is an ongoing shortage of raw materials. The positive forecasts for the economy issued at the start of the year have been overshadowed by various global events. As a result of international inflation, caused by supply bottlenecks and raw material shortages, a turnaround in interest rates has been ushered in[1]. Financing terms have been tightened, fuelling fears of recession. Nonetheless, Switzerland, as an independent player in the market, is in good shape. The currency gains recorded recently, solid demand for services and the high level of employment are acting to counter the downside factors. Thus, the forecast for GDP growth for 2022 has slipped only a little, from 2.7% to 2.6%. SECO has revised its growth forecast for 2023 to 1.9%[2]. Consensus forecasts for the global economy show a similar picture. A weakening in the economy is expected for the second half of 2022, with some further flattening in 2023 [73].

Strong position on the labour market – staff shortages in many sectors

The labour market seems finally to have recovered from the pandemic in the second quarter of 2022. As at June 2022 the unemployment rate was 2.0%. SECO expects an average unemployment rate for the year of 2.1%, possibly falling further in 2023 to 2.0%[2] [8,9]. In June 2022 the Swiss Federal Statistical Office recorded a small gap between vacancies (71,742) and jobseekers (168,944)[3] . At the same time, there is an acute shortage of staff in many sectors. The industries most affected are IT, construction, healthcare and catering. The lack of staff is explained by the after-effects of the pandemic, during which many workers changed their career plans. The economy furthermore received a sudden boost from the lifting of restrictions, as a result of which many firms were advertising for new staff at the same time. The slightly positive net migration rate (May 2022, 6,200) [13] is also unable to fill the gap at present; a much higher level of inward migration would be needed for that[4].

Inflation fuelling fears of recession – prices rising globally

The inflation rates on the global markets are rising at historic levels. The consensus forecast for the USA in 2022 is for an average inflation rate of 7.7%. Within the euro area, the estimates point to an inflation rate of 7.2%. However, according to the experts, in 2023 inflation should decline to 3.6% in the USA and 3.2% in the euro area[1]. Inflation in Switzerland, meanwhile, is much lower. By the end of the year an average inflation rate of 2.5% is anticipated. In 2023 it should return to within the target range of 0–2%, with the SNB forecasting a rate of inflation of 1.9% [8, 11]. The assumptions are predicated not least on restrictive central bank monetary policy. Since the start of 2022 the US central bank, the Fed, has hiked its policy rate by 2.25 percentage points to 2.5% in response to rapidly rising inflation rates[5]. The SNB has raised its policy rate by 0.5 percentage point, which means that it currently stands at –0.25%. The ECB has upped its rate by 0.5 percentage point to 0.0%, thus leaving behind the negative interest rate environment. With the increase in policy rates, there is a renewed threat of a debt crisis in the EU. Therefore, with energy prices continuing to climb, a shortage of basic foodstuffs and rising animal feed prices, a further intervention on the part of the ECB is foreseeable[6]. In a negative scenario for the EU, a possible recession cannot be ruled out at present[7]. Switzerland, which is linked with the ECB, is likewise expected to see the end of the negative interest rate environment. UBS forecasts an increase in the policy rate by mid-2023 to 0.75%[8].

Financing of home purchases made more difficult by interest rate rises – price correction taking time to manifest itself

The volume of mortgages on the Swiss market has grown continuously in the last ten years. The reason for this was favourable interest rates for property finance. As at May 2022 the total volume of mortgage loans amounted to CHF 1,125 billion, which was around 4% above last year’s figure [24]. Recently, mortgage rates have risen rapidly owing to rising inflation and the uncertainties on the financial market. As at August 2022 the rates for three, five and ten-year fixed-rate mortgages were 1.82%, 1.99% and 2.40% respectively. A further rise in mortgage rates against the previous quarter (1.43%, 1.67% and 2.08%) has been recorded. The variable Saron rate remains in negative territory at –0.20% [21]. However, the incipient doom and gloom about rising interest rates has abated [23]. Only a slight further rise is expected over the next 12 months. The increased interest rates and the costs of ownership mean that renting is currently cheaper than buying. There is nonetheless still excess demand for owner-occupied properties, which is why no price correction is yet to be seen on the real estate market[9].

The Swiss construction price index climbs further – standing at 152 points in the second quarter of 2022

The construction industry has recorded another rise in turnover. In the second quarter of 2022 the construction index rose by 2.7% compared with the previous quarter. At 152 points, the index is at its highest since 2000. The main driver of the increase in turnover is rising production costs[10]. In the first half of 2022 the construction price index rose in total to 111.8 points. That is a change of 4.9% over the first half of last year and 7.7% over last year as a whole [19]. Thus the production cost index has also risen to a historically high level. In stone and concrete construction the index has climbed by 11.2% (multi-family units) and 11.5% (single-family homes) against the previous year. Meanwhile in building construction and industrial construction the index has gone up by 18.9% [18].

Building construction index driven up by conversion projects

The building construction index recorded an increase of 10.4% over the same quarter last year [17]. This rise is largely attributable to planning applications for existing stock. According to Credit Suisse, planning applications amounting to CHF 13.7 billion were submitted for conversions, extensions and renovation work. That is the highest level since data were first collected in 1995. Conversion work is being boosted not least by energy-efficient refurbishments in response to rising energy costs and the switch to renewable sources of energy[10].

Non-financial incentives sustain desire for ownership

The advantage of owning over renting has been eaten away by increased financing costs. However, despite the recent increases in mortgage rates, owning a home can still be financed cheaply. Non-financial incentives continue to sustain the desire for ownership. Having your own four walls, an investment for the future and supposed protection against inflation are factors that bolster the demand for owner-occupied property[11]. The demand situation is accentuated by the low level of construction activity in new owner-occupied apartments and single-family homes[12].

Rise in price of owner-occupied property continues unabated – index at 227.3 points

Compared to the previous quarter, an increase in prices of 2.4% was registered for Switzerland as a whole (owner-occupied apartments 2.7%, single-family homes 2.2%). Year on year prices were up 6% (owner-occupied apartments 6.7%, single-family homes 5.5%). The index rose again, going up 5.4 points to 227.3 (1985: 100) [3, 4, 7]. Further price increases are forecast for 2022/2023, though a delayed effect could occur because of the rising interest rates [67]. For owner-occupied apartments, the largest jump in prices was to be observed in the high-end segment, at 3.4% against the previous quarter and 7.0% against the previous year [64]. For single-family homes, the lower end of the market recorded the largest increase at 2.8% compared with the previous quarter. Meanwhile, compared with the previous year the low-price segment registered a rise of 7.1% [58]. In regional terms, all regions showed a positive price change in comparison with the previous quarter. Prices remained the most stable in southern Switzerland (1.1%) and in the Geneva region (1.5%). The largest appreciation in value was generated in Zurich (3.4%) and in the Alpine region (3.1%)[13].

Slight shift in expected returns – 1.78% (net, in real terms)

Following a long period of steadily falling expectations as to returns, the second quarter of 2022 brought a slight shift in the trend. The minimum discount rates for multi-family units, as assessed by respected valuation firms, are 1.78% on average (first quarter of 2022: 1.71%) [34, 35]. For 2023, stable to rising expected returns are predicted; the existing housing stock in the main could produce considerable increases in returns. The total return was corrected to 7.6% in the second quarter of 2022 (first quarter of 2022: 8.5%), although it is still possible to achieve attractive cash flow returns with rising mortgage rates. This means that the total return in 2022 (YTD) is made up of 2.9% cash flow return and 4.7% return from appreciation[11]. Nonetheless, institutional investors are planning to cut back the proportion of loan financing because of rising mortgage rates. The increase in expected returns is also reflected in market values. In all regions, multi-family units declined in value against the previous quarter. Market values fell most in southern Switzerland (–4.0%) and in the Alpine region (–3.3%). The smallest losses in value were registered in the regions of Geneva (–0.8%) and Zurich (–1.1%). In Switzerland as a whole, market values fell by –1.6% compared to the previous quarter. Year on year, a positive appreciation in value of 5.6% was recorded[14].

Stable rental market thanks to high demand – market rental index rises to 112.1 points

Switzerland is a country of renters, which means that the demand for rental properties is consistently high. The vacancy rate has remained at a very low level for years: according to the Federal Statistical Office it is 1.54% nationally (data as at 13 September 2021). Sluggish building activity because of high construction costs and the ownership premium add further strength to the rental market [12, 13]. Therefore, residential rents are on a slightly rising trajectory. Compared with the previous quarter, current rents rose by 0.6% [25, 26]. Year on year, market rents recorded growth of 1.5%. The sharpest rent increases against the previous quarter were measured in the cantons of Geneva (1.7%), Schwyz (1.4%) and Vaud (1.3%). In the cantons of Basel-Land (–1.0%), Basel-Stadt (–1.0%) and Ticino (–0.5%), rents had once again to be reduced quarter on quarter[15]. The expectations for residential rents in the coming 12 months are on a rising trend [30]. In the near future the issue of passing on inflation through the reference interest rate for index-linked residential rents will be a major topic and this will, it is assumed, lead to further nominal rent increases[11].

Flexibility is the key to success in renting out office space

The market for office space finally returned to the new ‘normal’ in the second quarter of 2022. The lifting of all recommendations to work from home in April heralded the great return to the office. The economic recovery and the record-high level of employment are bolstering demand for traditional work spaces[11]. Nonetheless, post-Covid a ratio of 20–40% of working hours spent at home has proven a realistic amount. No great movement on the office market is to be seen yet, as so far demand and supply are in balance. However, firms thinking in terms of economic efficiency will take account of the reduced need for space and switch to new working models. This means there is a need for shorter contract terms with early break options and incentives/extension contributions from landlords[16]. Looking forward, stable to slightly falling rents are expected for the second half of 2022 [2, 6].

Rents for office properties return to pre-Covid level

The return to the office is also reflected in rents for office space. In Switzerland as a whole, market rents rose by 3.0% compared to the previous quarter. Year on year, rents were up by 6.1%. An increase quarter on quarter occurred in all regions. The highest rates of increase were registered in the regions of southern Switzerland (5.0%) and Basel (3.4%). Year on year, rents rose the most in the regions of Geneva (9.3%) and Zurich (7.8%). Only in Basel were falling rents recorded year on year, at –1.0%[15] [36, 37, 38]. In Switzerland as a whole, with net income rising by 1.2%, market values rose by 3.0% quarter on quarter. Year on year, an appreciation in market value of 13.0% was generated, with net income rising by 4.2%. The largest gains in value were recorded in the cantons of Zug (5.5%) and Vaud (4.7%). The cantons of Neuchâtel (–4.2%) and Schaffhausen (–2.8%) suffered the biggest losses in market value[14]. Returns on office properties are also on a rising trend. For 2022 a total return of 13.3% is expected, with the largest part (9.7%) attributable to returns from appreciation in value. For the forecast period 2022/2023 both stable initial returns and stable market values are anticipated [44, 45].

Logistics facilities in great demand – real estate trend of 2022

Globalisation, advances in technology, rising demand for goods deliveries and returns, and the growing role of e-commerce, bolstered by the Covid-19 pandemic, are leading to increased demand for centrally located logistics sites. For investors, logistics premises represent a good way of diversifying their portfolio, as the drivers differ from those for traditional real estate demand. Most logistics facilities are operated by their users, with sale-and-lease-back contracts increasingly popular[17].

Risk/return profile for logistics properties exciting for Swiss investors

According to the latest logistics study by JLL, prime returns of 3.5–4,0% can be achieved. The rents for logistics space are between CHF 50 and CHF 70 per square metre for standard premises. For cooled and digitalised storage spaces, more than CHF 200 per square metre might be demanded. With a vacancy rate of 6.0–7.7% this asset class remains a risky investment. Economic development and import/export volumes for goods will give momentum to the future of the logistics market[1].

Swiss Life Asset Managers, Perspektiven Konjunktur / Juli 2022
Staatssekretariat für Wirtschaft (SECO), Konjunkturprognose: Die Erholung setzt sich abgeschwächt fort/ Juni 2022
Staatssekretariat für Wirtschaft (SECO), Die Lage auf dem Arbeitsmarkt / Juni 2022
NZZ, Mitarbeiter verzweifelt gesucht / Juni 2022
NZZ, Entwarnung? Von wegen – die US-Inflation ist im Juni auf satte 9,1 Prozent gestiegen / Juli 2022
Staatssekretariat für Wirtschaft (SECO), Konjunkturprognose, Prognose Schweiz / Sommer 2022
Staatssekretariat für Wirtschaft (SECO), Konjunkturtendenzen Wirtschaftslage Schweiz / Sommer 2022
UBS, Zinsprognose für Hypotheken, Juli 2022
Credit Suisse, Immobilienmarkt vor veränderten Vorzeichen / Juni 2022
Credit Suisse, Bauindex Schweiz / 2. Quartal 2022
Raiffeisen, Immobilien Schweiz / 2Q 2022
Wüest Partner AG, Immobilienmarkt Schweiz 2022 / 2
FPRE, Transaktionspreis- und Baulandindizes für Wohneigentum (Datenstand 30.06.2022)
FPRE, Marktindizes für Renditeimmobilien (Datenstand: 30.06.2022)
FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien Schweiz (Datenstand: 30.06.2022)
CSL Immobilien, Immobilienmarkt Bericht 2022
JLL, Logistics Report, An Overview of the Swiss Logistics Real Estate / Juni 2022

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Sebastian Zollinger

Director, Head Real Estate Advisory, PwC Switzerland

Tel: +41 58 792 28 87