• Date: 10/2/2013

Rising prices in the residential segment 

Ulrich Prien, Head of Real Estate at KPMG Switzerland 
What is the current situation on Switzerland's investment real estate market?

Ulrich Prien: KPMG's “Swiss Real Estate Sentiment Index” – a representative survey of over 220 investors and appraisers of investment real estate – indicates that price developments will level out somewhat. Market players will focus on residential real estate and centrally-located properties. However, they feel confronted with a scarcity of suitable investment property in these categories. Moderate drops in prices are anticipated for commercial properties such as office and retail space.


Have price developments peaked in that case?


Ulrich Prien: The answer to that question differs depending on which segment you look at. After a long phase of price increases, those surveyed are now expecting prices to decline slightly in the commercial segment. In the residential segment, on the other hand, prices can be expected to rise as a result of sustained pressure to invest. However, compared to previous years, we're also seeing certain trends there that point toward a slowdown. The yield difference to bonds still seems attractive enough though, and immigration is underpinning demand, as well.


What are the most interesting investment segments in the current market environment?


Ulrich Prien: In the current market environment, investors' preferences lie with mid-priced residential properties. Since tenant demand in this category remains high, that has a corresponding impact on pricing. Demographic trends are boosting the importance of assisted living/care facilities for the elderly, as well. In light of the market's partial opening as a result of the new hospital law, institutional investors can also imagine investing in this area.


What is making the Swiss investment real estate market attractive for institutional investors like pension funds or insurance companies?


Ulrich Prien: The continued attractiveness of real estate yields compared to those of bonds, as I already mentioned, certainly plays a role. Yields for real estate investments are currently far above the minimum interest rate of 1.5% which occupational pensions have been requiring since 2012. It's no wonder, therefore, that pension funds have increased their real estate allocation, largely at the expense of investments in fixed-income securities.


Has a point of overexposure been reached with regard to pension funds and their greatly expanded real estate portfolios? What happens when interest rates pick up?


Ulrich Prien: It would be wrong to talk of a fundamental overallocation. On the other hand, we cannot dismiss the fact that Swiss pension funds have greatly increased their real estate components over the past few years. At present, over 20% of their overall portfolio consists of Swiss real estate investments while the proportion of investments in foreign real estate is marginal.


Local pension funds would be able to cope relatively well with a gradual rise in interest rates. A sudden, sharp increase in interest rates coupled with a recessive economy, on the other hand, would have a more major impact. A historical comparison with the real estate crisis from the 90s gives us reason to believe that the balance sheet values of real estate held by pension funds is likely to react cyclically to any change in the market due to market-consistent valuations and increased investments in the commercial segment which reacts sensitively to economic change.


The Swiss real estate market has seen a recent increase in investments from abroad. Which players are behind this trend?


Ulrich Prien: One prominent example of this was last year's purchase of the Uetlihof office building from Credit Suisse by the Norwegian Government Pension Fund Global. We are seeing other investment activities involving certain “trophy” hotel properties which are catching the eye of buyers from the Middle or Far East. Then, of course, there are also family-run businesses in neighboring countries that are interested in Swiss properties, particularly since they usually already have experience on the market and also have businesses and industrial holdings here. For foreign players to enter the complex Swiss market, however, transactions must be of a certain size.


Does demand from abroad also come with risks? And are there any factors that can hamper demand?


Ulrich Prien: One of the main factors is certainly the Lex Koller procedure which still applies to residential properties as well as parliamentary discussions surrounding that legislation. Because of that restriction, foreign interest in this kind of investment real estate can be categorized as modest compared to domestic demand by wealthy private and institutional investors. As a result, it has nearly no impact on general price levels. The commercial properties in prime locations preferred by foreign investors are relatively expensive here compared to other countries, a situation further exacerbated by the strong franc. In general, increased demand from abroad does not bring any additional risks; however, depending on the willingness to pay, it can drive prices up.


What is the reverse situation like: Are Swiss investors investing abroad?


Ulrich Prien: Generally we're seeing that Swiss investors remain skeptical toward foreign real estate markets. Sustained investment pressure on the local market, however, is prompting a change in how investors think. However, many indirect types of foreign investments are extremely complex. Paired with the cross-border nature of the investment, this places great demands on investors. But not only that, they also need a sound knowledge of the local market and, in the end, investors need to define how they plan to deal with exchange rate fluctuations.


Which risk factors impact the Swiss investment real estate market, now and in the future?


Ulrich Prien: Not only interest rate movements but also increased supply due to vigorous construction activities and regulatory developments, in particular, play a role. The latter include banks' increased capital adequacy requirements which have a direct impact on real estate financing. Current negotiations regarding tax-related issues and their potential consequences with regard to corporate taxes also have an influence. Various initiatives concerning the free movement of persons or the attractiveness of business locations will also have an impact.


Interview: Sarah Hefti, Media Relations


Ulrich Prien


Head of Real Estate at KPMG Switzerland