Interpretation of the FPRE real estate meta-analysis for August 2023

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

18 August 2023

Although the most recent policy rate increases have noticeably reduced inflationary pressure, inflation forecasts for the coming months suggest further rate rises. For the first time, the altered general conditions are having a clear impact on the returns from real estate investments. A sharp drop in returns from changes in value has not been compensated for by increases in net income. However, rent rises resulting from the first-time increase in the reference interest rate will not be reflected in the data until the autumn. In the long term, further interest rate increases, persistently slack construction activity and a continued high level of net immigration point to a noticeable rise in rents. In the owner-occupied property market, on the other hand, the rise in financing costs has not (yet) been reflected in reduced prices. Prices for single-family units and owner-occupied apartments did not fall again in the last quarter, but instead gained some further, slightly upward momentum

Reduced, yet persistent inflationary pressure after policy rate increases

Although the Swiss National Bank (SNB) raised its policy rate by another 0.25 percentage points to 1.75% as at 23 June 2023, inflationary pressures remain, albeit to a reduced extent. The SNB expects an average inflation rate of 2.2% for 2023 and 2024 and 2.1% for 2025 [11].[1] The fact that these forecasts fall just outside the 0.0%–2.0% target range makes it unlikely that the round of policy rate increases that began in June 2022 will be brought to an end. Market participants and various central government agencies see inflation at 2.3% in 2023 and a low 1.6% for 2024 [8]. The SNB points in particular to stubborn second-round effects, higher electricity prices and the sharp growth in residential rents (more on this below) in explaining its medium-term inflation forecast. It also adds that inflationary pressure from abroad remains high.[2]

Growth in the Western economic blocs continues to stagnate. In Switzerland, the experts predict growth (in real terms) of 0.8% for 2023. The forecast for 2024 is 1.6% [11]. In the euro area, the various experts predict growth (in real terms) of between 0.4% and 1.1% for 2023 and between 0.8% and 1.6% for 2024. The US economy is projected to grow by between 1.4% and 1.6% in 2023 and by between just 0.1% and 1.0% in 2024 [73].

General conditions favour rise in residential rents

The index for residential rents has risen over the last 12 months, at 1.3%. However, the change in residential rents compared with the previous quarter shows a rising trend at 1.6% [25]. New-build apartments (2.1%) have recorded larger rent increases than apartments in existing buildings (1.3%).[1]  This means that rent trends are continuing with previous patterns, following a stagnation in rent growth in the last two quarters.

This time, however, the upward trend is likely to continue or accelerate in both the short term and the medium term. Not only are the direct effects of the first-time increase in the reference interest rate by the central government’s housing office as at 1 June 2023 not yet visible in the data, but this reference rate is also actually likely to be raised again by the end of the year.[2] As a result, existing rents will tend to increase until spring 2024. In line with this assessment, the price expectations of market participants also point to a sharp rise in rents in the coming 12 months [30].

An analysis by Credit Suisse suggests that the pressure on the rental housing market will increase both in the short term and in the medium term, and both on the supply side and the demand side. On the supply side, Swiss tenants face declining construction activity. The number of housing units with planning permission has been falling since mid-2018, and this will be reflected in a reduced supply of housing in the years to come. Likewise in the past 12 months, 1,700 fewer rental units were approved than in the previous 12 months.[3] Forecasts for construction activity in the next two years point to stagnation or a very small expansion in construction activity compared with 2023 [16]. A possible upswing could be favoured by the rapid normalisation in construction costs after the Covid-19 shock. Both the construction and production cost indices have settled at pre-pandemic levels [17], [18].

On the demand side, there is increasing pressure on the rental housing market, primarily due to the sharp rise in net immigration over the past two years. While the net immigration figure in 2021 was still around 60,000, in 2022 around 80,000 people moved into the country in net terms. In the first quarter of 2023 a further increase of 24% was recorded compared with same period in 2022, with a figure of 26,900.[4]

As there are few signs of an easing of the situation on the rental housing market in the medium term, either on the supply or the demand side, the housing shortage currently prevailing particularly in the major centres is likely to spread to regional real estate markets that are less problematic today. For example, the length of time properties are advertised in some parts of the Zurich urban area, such as Limmattal, Glatttal and the Zimmerberg and Pfannenstiel regions, has halved in the last four quarters compared with the long-term average. An apartment in these districts is now advertised for an average of 14–16 days, the same length of time as in the city of Zurich.[5]

The regional indices in western and German-speaking Switzerland all recorded quarter-on-quarter growth in residential rents ranging between 1.2% and 2.2%. Only in southern Switzerland did rental growth increase to a slightly lesser extent, by 0.8%. Compared with the previous year, most regions showed similar trends. The exceptions are the Lake Geneva region with a decline in residential rents of –0.3% and the Alpine region with sharp growth of 4.2% [25].



Construction costs on the rise again despite the prospect of increased building activity

Regional variation in the market for office space 

In line with the two previous quarters, a slight increase in office rents of 0.8% was observed across Switzerland as a whole in the second quarter of 2023. In a year-on-year comparison, however, the index is still –2.1% below its level in the second quarter of 2022 [37]. Regionally, varying trends can be seen in the larger economic centres. In the Zurich region, with changes of 0.4% and –2.9% quarter on quarter and year on year respectively, a pattern similar to that in Switzerland as a whole was observed, while in the Geneva economic centre in western Switzerland, with figures of 0.7% and 1.8%, a year-on-year upswing was also evident.[1] In the Basel region, the marked year-on-year reduction in the level of market rents was somewhat mitigated by an increase of 2.1% in the last quarter, but was still –3.4%.[2] In Zurich and Geneva, in contrast to the other regions, market participants expect increasing future cash flows [45].

Forecasts for Switzerland as a whole continue to show cautious expectations with regard to changes in office rents. A majority of respondents expect office rents to fall, although a less negative sentiment than in the prior-year periods is already discernible. It may be noted that over the past ten years attitudes regarding trends in office rents have been consistently negative and. in retrospect, overly pessimistic. As with residential property, the office market is at a ten-year low in planning permission for new buildings, while the number of planning applications has overcome last year’s low and recovered somewhat [48].

For an assessment of future movements in the market for office space, it is worth taking a look at the labour market. The Employment Indicator produced by the KOF Swiss Economic Institute at ETH shows recruitment trends at companies and in the past has often proven to be an early indicator of movements in the labour market. After peaking in July 2022, the share of firms intending to create new jobs has been on a steady downward trend. However, employment dynamics remain clearly in positive territory.[3] In line with this, the unemployment rate fell from 2.0% to 1.9% quarter on quarter.[4]

The view from the labour market appears to provide a positive future basis for the market for office rentals in terms of demand. On the supply side, planning permission for new buildings continued to show declining figures as at the end of March 2023. For the first time since 2005, the moving average volume of approved projects over the last 12 months fell significantly below CHF 1.5 billion. In contrast, the number of planning applications rose slightly in the last quarter, lifting away from its historic low for the time being.[5] This could indicate slight optimism on the part of investors. However, as both the number of building permits and the number of planning applications remain at a low level in absolute terms, the development of the office market will be decisively driven by demand-side changes in the medium term.

Negative total returns because of returns from changes in value

After a trend reversal in yield expectations in the second quarter of 2022 due to the interest rate turnaround, the minimum discount rates increased steadily over the period of one year from a low of 1.71% to 1.99% in the spring of this year. Currently, the minimum discount rate for multi-family units as at mid-July 2023 as calculated by leading valuers is an average of 2.03% (in net, real terms) [34, 35].

Largely on account of the change in minimum discount rates, market values decreased by a considerable –12.0% year on year [27], although net income rose by 1.4%. Compared with the previous quarter, the rate of change in market values of multi-family units is negative at –1.5%, while net income is positive at 0.8%. The total return for multi-family units in 2023 (YTD) is –7.4%. This looks like a sizeable correction year on year (total return in 2022: 5.5%); furthermore, a negative total return for multi-family units is expected to be recorded for the first time ever in the observation period from 2001 to 2023.

The sharp drop in returns is exclusively due to the return from changes in value, which is –10.3% in 2023 (YTD) (2022: 2.6%). The cash flow return in 2023 (YTD) is stable at 2.8% (2022: 2.9%) and continues to pursue the slightly declining trend that has been seen consistently for years. Given the circumstances explained in section 2, the trend of declining cash flow returns is likely to be reversed and move in the opposite direction in the short to medium term. Regionally, the picture is almost the same everywhere with regard to returns. All the regions of western and German-speaking Switzerland as well as the south of Switzerland lost ground with reductions of –7.0% and –8.0% respectively. This is also true of the Alpine region to a lesser extent, with a drop of –5.5%. The cash flow return made a consistently positive contribution to total returns in all regions, with rises of between 2.5% and 3.9%.[1]

It is expected that 2023 will see negative total returns in the multifamily segment for the first time in over 20 years.

In the office market, the same trends can be seen in 2023 (YTD) as in the residential market. The return from changes in value is negative at –8.8%, while the cash flow return of 3.2% continues the relatively stable trend of recent years. The total return is thus –5.5% in 2023 (YTD). In the previous year, it was 12.1%, with a positive return from changes in value of 8.5%. Similar trends are also evident at regional level, but to varying degrees. In the economic centres of Zurich, Geneva and Basel, the total returns in 2023 (YTD) are –5.1%, –2.9% and –4.5% respectively (previous year: 12.8%, 17.1%, 4.0%). It is interesting to note some variation in trends for cash flow. While net income in Zurich fell by –4.0% compared with the previous year, it rose by 2.4% in Geneva. In Basel, meanwhile, investors had to be content with a reduction in net rental income of –8.5%. In Geneva and Basel, the quarter-on-quarter comparisons show similar patterns, while in Zurich the increase in net income compared with the previous quarter points to a trend reversal.[2] In addition, the availability rate in the city of Zurich has remained stable at around 3.8% over the last 12 months, while in Geneva the availability rate has risen from 2.8% to 3.5%. In Basel, the availability rate in 2022 was 5.9%. Data for 2023 were not yet available.[3]


Increase in office rents in Basel and Zurich

Prices for residential property continue to rise in all segments

The mortgage volume in Switzerland continues to follow a stable trajectory. As of May 2023 the total volume of mortgage loans amounted to CHF 1,160.4 billion, which was around 3.8% above last year’s figure [24]. The highly volatile trend of rising mortgage rates triggered by the SNB’s policy rate increases last year seems to have settled down somewhat. The interest rate on a three-year fixed-rate mortgage rose from 2.70% to 2.77%. For five-year and ten-year fixed-rate mortgages, a reduction from 2.84% to 2.77% and from 2.96% to 2.84% respectively were recorded [23]. The variable SARON interest rate was also subject to a sharp increase, rising from 1.42% to 1.70% [21]. The SARON interest rate is expected to rise slightly to as much as 2.00% in the coming 12 months. Subsequently, interest rates are expected to fall again moderately.[1] This forecast is also reflected in the lower mortgage rates for a ten-year fixed-rate mortgage referred to above.

Prices in the residential property market are showing a sharper increase than in previous quarters since spring 2022. While there was a year-on-year increase in prices for single-family units of 3.4%, in the quarter-on-quarter comparison the index is already up by 1.3%. Prices in the low-price segment are rising fastest, at 4.4%. This is followed by the mid-range and premium segments, with figures of 3.4% and 3.0% respectively [58].

In the owner-occupied apartment market, a similar dynamic to that in the market for single-family units can be seen. Compared with the previous year, the index rose by 4.5%. However, the premium segment saw the sharpest growth at 6.1%. This was followed by the low-price and mid-range segments at 3.7% and 2.7% respectively. In a quarter-on-quarter comparison, the increase in prices across all segments stands at 1.4%. The premium segment shows the biggest increase at 2.4%, followed by the mid-range segment at 0.8%. The low-price segment, in contrast to all other owner-occupied property segments, actually slipped by –0.3% [64].

Regionally, rising prices for single-family units were observed in most regions with rates of change of between 1.6% and 2.5%. The trend in the Basel region was stagnant at 0.1%. Surprisingly, the exception is the Zurich region, which saw prices fall by –1.2% in the last quarter. The premium segment played a key role in this at –2.3%. The mid-range and low-price segments recorded rates of change of –0.4% and 0.7% respectively. In the owner-occupied apartment market, prices in most regions increased by between 1.0% and 2.9% compared with the previous quarter. The exceptions were the Jura region and southern Switzerland, with decreases of –1.4% and –0.2% respectively.[2]


Momentum and willingness to invest decline in the home ownership market

1 SNB, Monetary policy assessment (June 22nd, 2023)

2 SNB, Monetary policy assessment (June 22nd, 2023)

3 FPRE, Market indices for investment properties (Data as of June 30th, 2023)

4 Cantonal bank of Zurich, SNB rate hike cycle probably not over yet, June 22nd, 2023 (In German)

5 Credit Suisse, Real Estate Monitor / June 2023

6 Credit Suisse, Real Estate Monitor / June 2023

7 Credit Suisse, Real Estate Monitor / June 2023

8 FPRE, Market indices for investment properties (Data as of June 30th, 2023)

9 FPRE, Market indices for investment properties (Data as of June 30th, 2023)

10 KOF, Employment Indicator / July 2023

11 SECO, Unemployment figures, The situation on the labor market 2023 (In German)

12 Credit Suisse, Real Estate Monitor / Juin 2023

13 FPRE, Market indices for investment properties (Data as of June 30th, 2023)

14 FPRE, Market indices for investment properties (Data as of June 30th, 2023)

15 JLL, Switzerland office market (Q2 2023)

16 UBS, Interest rate forecast (Data as of July 31st, 2023)

17 FPRE, Market indices for privately-owned properties (Data as of June 30th, 2023

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Sebastian Zollinger

Sebastian Zollinger

Director, Head Real Estate Advisory, PwC Switzerland

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