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Economic Research Swiss Issues Real Estate March 2015 Real Estate Market 2015 Structures and Prospects
Credit Suisse Economic Research
Publishing Details
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Giles Keating
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giles.keating@credit-suisse.com
Fredy Hasenmaile
Head Real Estate & Regional Research
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fredy.hasenmaile@credit-suisse.com
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+41 44 333 33 99
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Authors
Denise Fries
Fredy Hasenmaile
Philippe Kaufmann
Dr. Christian Kraft
Sarah Leissner
Thomas Rieder
Daniel Steffen
Dr. Fabian Waltert
Contribution
Andreas Bröhl
Thomas Schatzmann
Swiss Issues Real Estate – Real Estate Market 2015
Credit Suisse Economic Research
Table of Contents
Management Summary 4
FX Shock: Impact on Swiss Real Estate Market 6
Owner-Occupied Housing 8
Demand 8
Supply 11
Market Outcome 14
Residential Property as an Investment 18
Outlook for Owner-Occupied Housing in 2015 21
Residential Property in Regulators' Sights Across
the Globe 22
Rental Apartments 26
Demand 26
Supply 29
Market Outcome 31
Outlook for Rental Apartments in 2015 34
Driverless Cars: The Next Stage of Mobility 35
Office Property 37
Demand 37
Supply 39
Market Outcome 41
The 15 Largest Office Property Markets at a Glance 43
The Five Largest Office Property Markets in Detail 43
Zurich 44
Geneva 46
Berne 48
Basel 50
Lausanne 52
Outlook for Office Property in 2015 54
Retail Property 55
Demand 55
Supply 58
Market Outcome 59
Outlook for Retail Property in 2015 62
Student Housing: Yields Despite Low Willingness to
Pay? 63
Real Estate as an Investment 67
Direct Real Estate Investments 67
Indirect Real Estate Investments 72
Outlook for Real Estate as an Investment in 2015 77
Factsheets: Regional Real Estate Markets at a
Glance 78
Swiss Issues Real Estate – Real Estate Market 2015 3
Credit Suisse Economic Research
Management Summary
Consequences of the Return of the cycle
Swiss Franc Shock The Swiss franc shock accelerates a development that has long been in evidence on the Swiss
Page 6 real estate market, which is that the lengthy period of stability is drawing to a close. The tradi-
tional real estate cycle, in which excess supply replaces the long phase of rising prices, is re-
turning. This process is likely to accelerate, firstly because the domestic economy is also being
dragged down by the Swiss franc shock, thus reducing the demand for floor space, and sec-
ondly because even more capital is now flowing into the real estate markets. This is because
negative interest rates are driving investors into the real estate market, increasing the invest-
ment in new developments and therefore further expanding the supply of space.
Owner-occupied housing Braking and accelerating forces in equilibrium
Page 8 Were it not for regulatory measures and the dampening effect of repeated warnings about a
price bubble, the residential property market would be overheating due to ultra-low mortgage
interest rates. Based on data for two cantons, it is possible to show how high prices and an un-
equal distribution of assets, in combination with regulation, are limiting demand. Thus the mar-
ket – figuratively speaking – has one foot on the scorching hot plate and the other in the freez-
er. This "cohabitation" between hot and cold is by and large working. But whereas the high-
price segment continues to suffer, the home ownership boom in the lower-priced segments is
continuing apace. Developers have become cautious, however. Demand for owner-occupied
property is showing saturation tendencies; on the other hand, home ownership presents an in-
creasingly important investment opportunity at a time of low interest rates.
Special focus: Switzerland is not the only country seeking to calm its housing market
Residential property in Some countries are currently showing a tendency toward overheating. The range of regulatory
regulators' sights across measures deployed around the world is as wide as it is uncharted. Switzerland has already im-
the globe plemented a comparatively large number of measures. This is not entirely without some initial
Page 22 success, which may have something to do with the typically Swiss sport of self-regulation.
However, regulation is not without its costs and requires considerable judgment as well as good
timing.
Rental apartments Gradual transition from landlord's to tenant's market
Page 26 Complaints about a lack of housing are widespread, despite the fact that vacancies for rental
apartments are at their highest level since 2001. With demand having peaked, this easing of
the situation is likely to be the subject of increasing awareness in future. Though down by more
than 10%, immigration is once again more or less likely to ensure the sale of newly built apart-
ments this year. That is unlikely to be the case going forward, however; we therefore examine in
greater detail which regions would be most affected by a continued decline in immigration. The
current easing of the situation is primarily due to the high level of apartment construction. Be-
cause developments are continuing at a very rapid pace, the greater number of days on the
market and weaker growth in rents offered – both of which we are seeing at the moment – are
unlikely to be a flash in the pan. They are early signs of decreasing pressure on rents. A broad-
based fall in rents is not yet expected over the coming quarters. The market is only slowly turn-
ing. But provided there is no tightening of supply, that is indeed likely to become a reality.
Special focus: Driverless vehicles take mobility to the next level
Driverless vehicles – the Driverless cars are on everyone's lips, but as yet very little is known about how this new tech-
next game-changer nology will alter people's behavior and their needs. The new technology is already being tested
Page 35 in the real world and will determine our everyday lives in the not-too-distant future. We therefore
give some thought to what this could mean for the real estate market.
Office property No light at the end of the tunnel
Page 37 Despite solid five-year economic growth in the 1–2% range, an oversupply of office space has
built up in Zurich and Geneva in particular. The primary reason is the fact that the development
of the economy was dominated by domestic growth in the period after 2009. Momentum
Swiss Issues Real Estate – Real Estate Market 2015 4
Credit Suisse Economic Research
among traditional users, such as banks, insurance companies and consultancy firms, has
slowed considerably and even gone into reverse in places. An increased requirement for office
space has developed among real estate and construction service providers, public administra-
tion, educational institutions, healthcare and providers of services to the high-tech industry, on
the other hand, though with a lower willingness to pay and/or different floor space require-
ments. Because the absorption of new properties was effortless for a long period of time, the
market failed to respond quickly enough to changing demand requirements. The result is excess
supply, although this varies considerably from one location to another. Prime sites such as rail-
way locations in the major centers should continue to do well. There is a major risk of an in-
crease in excess supply, however. The fact is that even if production has peaked, construction
activity will remain at too high a level due to the dearth of investment opportunities – a situation
that is likely to be amplified further by the introduction of negative interest rates.
The five largest office prop- Oversupply more clearly in evidence
erty markets in detail In-depth analysis of the major office property markets centers on the question of where adver-
Page 43 tised floor space is concentrated in location terms. Extensive supply currently exists in the cen-
tral business districts (CBDs) of Geneva and Zurich in particular, mostly comprising small-scale
properties. Bern and Basel are comparatively unaffected; here it is above all individual projects
in the outer business districts that are looking for new tenants. Lausanne is positioned some-
where between the two extremes.
Retail property No end to the challenges
Page 55 The retail property market has demonstrated an astonishingly high degree of stability in recent
years. Supply and demand have never been far apart. However, there are now growing signs
that the spate of development that occurred in the period up to 2011 is set to take its toll on the
market. Although a few projects are still awaiting completion, it seems there are virtually no new
projects in the planning phase. This speaks volumes: the uncertainty on the part of investors
and tenants alike as to how the market can cope with the imminent challenges due to the
growth of online sales is tangible. Bricks and mortar retailing has still to find its new role in a
digitized omni-channel world. What's more, this is in a business environment that is now even
more challenging following the Swiss franc's appreciation.
Special focus: A niche with growth potential
Student housing Affordable housing for students is a scarce resource at many university locations. First, low in-
Page 63 comes mean many students have minimal willingness to pay; this severely restricts the choice of
potential accommodation. Second, reurbanization and immigration have made housing increas-
ingly scarce in the urban centers, where educational institutions are located, and driven rents
sharply higher. Supply is particularly scarce in the major university cities. Consequently, there is
major demand for additional housing for students. At the same time, in an environment of con-
tinuously falling yields the question of alternative investment opportunities is becoming an in-
creasingly pressing one for real estate investors. Niche markets such as student housing are
one of these alternatives and are also perfectly suited to diversification.
Real estate as an No way real estate investments can be avoided at the moment
investment Swiss real estate investments benefited from extraordinary circumstances on the capital mar-
Page 67 kets last year. This trend is likely to continue in the current year, though presumably not with the
same dazzling results. We anticipate that short and long-term interest rates will remain at low
levels this year. The gap between dividend yields on real estate investments and safer bond
yields is therefore set to remain huge, meaning there is virtually no way real estate investments
can be avoided. We also show that funds are less heavily exposed to the growing absorption
risk. It will not be possible to prevent initial yields on direct Swiss real estate investments from
falling again, however, since the development of prices and rents on residential and mixed-use
investment properties is continuing to diverge.
Regional analysis Regional real estate markets at a glance
Page 78 We explore the influence of regional factors and characteristics on the structure and develop-
ment of real estate markets in even greater detail in the form of informative electronic fact
sheets for all 110 of Switzerland's economic regions. These regional fact sheets serve as an
online reference tool, enabling private and professional real estate investors to compare regional
sub-markets and discover the key features of the local real estate markets.
Swiss Issues Real Estate – Real Estate Market 2015 5
Credit Suisse Economic Research
FX Shock: Impact on Swiss Real Estate Market
The Swiss National Bank's abandonment of the euro exchange rate floor caught many market
participants totally unprepared. Although this thunderbolt has not fundamentally altered the
Swiss economy's starting position, the scale and urgency of the new challenge should not be
underestimated. Following an initial stock-taking, we have halved our growth forecast for gross
domestic product this year to 0.8% and expect a sharp fall in employment growth. The main
victims of the SNB's decision are the export sectors. They include not only the export-
dependent industrial segments but also key elements of the Swiss financial center as well as
tourism and retailing. As the real estate and construction sectors with few exceptions have a
distinctly domestic bias, the direct consequences are more or less negligible. Since the Swiss
franc shock nevertheless has a negative effect on the domestic economy, Swiss real estate
markets will very probably feel the consequences of the decision via second-round effects.
Need for structural adjust- The abandonment of the euro exchange rate floor is an economic shock that will cause a slump
ment and cost pressures in demand for Swiss products. However, it also means a need for structural adjustment has built
will reduce demand for up – literally overnight. The pressure for adjustment will require a rapid response that – after a
floor space slight time lag – will ultimately spread to the furthest reaches of the economy through various
transmission channels. Companies will have to rethink their strategic business areas and be
forced to adapt to the new situation. This will lead to the relocation of production processes,
abandonment of entire business areas and concentration on new, high-value areas of activity.
However, all cost factors will be scrutinized. These include the cost of premises, with the result
that many of the companies affected are looking for ways to increase floor space efficiency and
negotiate more favorable rents per square meter. Real estate players therefore have to expect
reductions in demand.
Negative interest rates in- Although the fundamentals were negatively affected by the Swiss franc shock, interest in real
creasing the attractiveness estate investments is likely to increase further still. There are four reasons for this: first, yield
of real estate yields … spreads between real estate investments and alternative investments are at a record level fol-
lowing the renewed reduction in interest rates by the National Bank. Second, the fear of nega-
tive interest rates and shortage of alternatives are driving investors into real estate. Third, there
are no signs of a rapid change in the situation. There is no threat of a sharp rise in interest rates
or excessive slump in demand. Fourth, a greater home bias can be expected given that domes-
tic investors are once again attaching greater weight to exchange-rate risk. Following a brief dip
on the day of SNB's decision, price gains on listed Swiss real estate investments confirm the
heightened interest among investors.
… and driving investors into The yield gap in favor of real estate is likely to cause prices of the latter to go on rising, regard-
real estate less of the trend to excess supply and declining yields. Both rising prices and growing vacancies
are putting yields under pressure. Falling yields therefore continue to characterize the real estate
market, where prices and fundamentals are becoming increasingly decoupled.
Impact on individual segments of the real estate market
Commercial property The expected softening of economic activity comes at an inopportune moment for the office
market worst affected property market. Floor space expansion continues to put a strain on the market and is causing a
rise in vacancies. The existing oversupply is now likely to accentuate even further. Having al-
ready been slack to date, demand this year is likely to suffer from companies' response to the
exchange-rate shock. In a single stroke, production costs in Switzerland also became substan-
tially more expensive for foreign companies. The recent exceptionally low success rate in at-
tracting foreign businesses (see page 37) is unlikely to recover quickly following the SNB's de-
cision. On the contrary, consultants and locational development chiefs state that interest in
Switzerland among foreign firms is dwindling; hence the further fall in the number of new busi-
nesses attracted in recent months. Growing uncertainty about the political framework in light of
the many anti-business proposals is now accompanied by a jump in costs. We expect additional
demand of less than 200'000 m² for 2015, which is only around one-eighth of the record de-
Swiss Issues Real Estate – Real Estate Market 2015 6
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mand seen in 2007. More efficient use of floor space is one option for firms wanting to cut
costs and maintain margins. This creates opportunities for new or refurbished properties, pro-
vided they can offer companies efficient use of space. In overall terms, however, the market
trend means an acceleration in vacancies and even more pressure on rents. In the major centers
of Zurich and Geneva in particular, we expect an unbroken rise in vacancies. That said, the situ-
ation may vary considerably at local level. Prime sites such as railway locations in the major cen-
ters should continue to do very well, including in the case of new properties. Smaller office mar-
kets are also likely to be less significantly affected by the supply overhang.
Retail property: sites near The abandonment of the euro exchange rate floor has a serious effect on the retail property
border at risk market, especially in border areas. The business environment in retailing – not that it had im-
proved in any case – will continue to become more depressed as a result of the currency appre-
ciation shock. Shopping tourism will get another boost and consumer enthusiasm will remain
subdued, while retail prices fall more sharply again. We consequently expect a noticeable, nom-
inal decrease in sales in 2015. Investors and tenants had already been unsettled by online com-
petition prior to the Swiss franc shock. Thus any boost to the demand for space is only likely to
come from population growth and foreign retail chains, whose interest in Switzerland as a busi-
ness location has increased due to the sharp jump in the Swiss franc's purchasing power. A
rapid rise in surplus capacity is unlikely in future, however, given that expected construction out-
put has also slumped. Vacancies will nevertheless continue to rise, while the supply of property
will remain at a high level at least.
Rental apartments market: The super-cycle in the domestic economy is beginning to lose steam. This development is being
return of the cycle accelerated by the abandonment of the euro exchange rate floor. Unlike the owner-occupied
market, which is being curbed by regulatory intervention, the rental apartments market is only
seeing a minimal loss of momentum whether on the demand or the supply side. For 2015,
however, we expect slightly weaker immigration from abroad of around 70'000 persons as well
as more cautious demand given that tenants are among the main victims of the expected job-
shedding. The regulatory induced reduction in demand for owner-occupied housing will never-
theless continue to have a supportive effect. Significantly lower employment growth and a con-
sequent decrease in the flow of immigrants will have a greater impact on demand in the medium
term. On the supply side, production of rental apartments meanwhile continues unabated or is
actually being stimulated further by the increasingly pressing dearth of investment opportunities.
We therefore expect another marked increase in vacancies of around 4000 apartments in
2015. As a result, the rental apartments market is gradually moving toward a situation of excess
supply and is likely to evolve into a tenant's market. It will be a slow process, however. This will
temporarily result in a slight easing in the urban centers, which are characterized by a shortage
of housing. Long-term, the decline in demand is likely to be observed above all outside the ma-
jor cities.
Owner-occupied housing: The more subdued economy, which is likely to become more noticeable to households during
High-price segment worst the summer months, will ensure a continuation of the weakening trend for owner-occupied
affected housing and keep the market on track for the hoped-for soft landing. Meanwhile, segment-
specific differences are likely to become more accentuated. The high-price segment is exposed
to persistently weak demand, which will become more acute due to the exchange-rate shock.
Switzerland's price/performance ratio is simply no longer acceptable to foreign buyers, and this
will also hit sales of second homes. The number of vacant owner-occupied properties is there-
fore likely to increase again this year. We do not expect higher vacancies medium-term, howev-
er, as output of owner-occupied housing has already been declining for years and is therefore
adjusting to waning demand. This year, for instance, construction of owner-occupied properties
will reach its lowest level since 2001. This is likely to have a stabilizing influence on the market
should the second-round effects of the exchange rate shock weaken demand somewhat more
strongly in 2016.
Swiss Issues Real Estate – Real Estate Market 2015 7
Credit Suisse Economic Research
Owner-Occupied Housing
Without regulatory measures and the dampening effect of repeated warnings of a price bubble,
the residential property market would overheat due to the extremely low interest rates. Meta-
phorically speaking, the market therefore has one leg on the glowing hotplate and the other in
the freezer. All in all this therefore results in a pleasant feeling. But will this "cohabitation" be-
tween hot and cold continue to keep the market on course? In order to answer this question it is
helpful to know where the market is currently standing and how it can be expected to develop in
the next few quarters.
Demand: Marked Effects of (Self-) Regulation
Low mortgage interest Mortgage interest rates and consequently the financing of residential property were more favor-
rates only exerting a limited able than at any time within living memory at the start of 2015. Mortgage interest rates are at
effect due to regulation their lowest technically feasible level well into the medium-term duration segment; in other
words, the mortgage holder is only paying the margins of the lending institutions that the latter
require to cover the handling and risk costs. Interest rates should remain at an extremely low
level on a historical comparison over the rest of the year. In principle this represents ideal breed-
ing ground for strong demand for owner-occupied housing. However, demand can only benefit
from the low mortgage interest rates to a limited extent: On the one hand the constant rise in
property prices means that the number of households that can afford residential property is de-
creasing. At the same time, the regulatory measures introduced so far, the impact of which we
will address below, have additionally increased the obstacles. Although the desire for owner-
occupied housing remains high due to very low mortgage interest rates, it is something that
fewer and fewer households are able to realize.
What is an average house- A comparison between the maximum price that according to conservative affordability guidelines
hold still able to afford? an average household is able to afford and the market price of a newly constructed condomini-
um illustrates vividly how the price level achieved and the regulatory measures are curbing de-
mand (see Figure 1). A property of this kind cost CHF 450'000 back in 2000. An average
household would even have been able to afford a property for CHF 664'000 back then, i.e. it
was not merely able to buy property but could even afford some extra space or a property in a
better location. The maximum affordable purchase price at the end of 2014 was CHF 734'000.
The small increase in purchasing power is partly attributable to the fact that the higher payback
requirements serve to neutralize some of the growth in income. Over the same period the price
for an average property rose to almost CHF 800'000, which is no longer affordable for an aver-
age household. Figure 1 illustrates this disproportionate development of market prices and the
purchasing power of the broad population.
Figure 1 Figure 2
Gulf between price and maximum affordability Imputed affordability (average household)
Comparison in CHF for average household and medium-sized condominium Imputed costs for residential property as % of income
800'000 45% Maintenance 1% of property value
5% mortgage interest for 80% loan capital
700'000 40% Repayment costs from 80% to 66%
Golden rule of financing
600'000 35%
30%
500'000
25%
400'000
20%
300'000
15%
200'000
10%
100'000 Market price of condominiums
5%
Maximum affordable price of condominiums
0 0%
2000 2002 2004 2006 2008 2010 2012 2014 2001 2003 2005 2007 2009 2011 2013
Source: Credit Suisse, Wüest & Partner Source: Credit Suisse
Swiss Issues Real Estate – Real Estate Market 2015 8
Credit Suisse Economic Research
Imputed affordability no If affordability is calculated at an imputed interest rate of 5%, an average household no longer
longer guaranteed for fulfilled the imputed affordability criteria1 for the purchase of a new standard condominium at the
average households end of 2014. 36% of household income would have to be spent on interest and repayments as
well as maintenance, which is above the generally recognized affordability threshold of 33.3%
(see Figure 2). Affordability is not only becoming a growing financing hurdle in the high-price
regions surrounding Lake Geneva, Zurich and Zug, but is now also affecting comparatively in-
expensive regions such as St. Gallen/Rorschach and La Gruyère. The recent significant in-
crease in prices in these regions alongside comparatively moderate simultaneous growth in in-
come has pushed up the imputed living costs to 35% and 37% respectively (see Figure 5).
Significant effects of Alongside the continuous price increases, the regulatory measures gradually introduced by the
self-regulation supervisory authorities in the past few years and the self-regulation of Swiss banks were the
main reason for the growing difficulties of households in meeting the affordability requirements.
The maximum repayment period for mortgage loans (up to 66.6% of the lending value) was re-
duced to 20 years in July 2012 and a further reduction to 15 years followed in September
2014. The shorter repayment periods resulted in an abrupt rise in annual repayments (see Fig-
ure 2). Because the latter are included in affordability calculations, the imputed living costs of
the average household are increased. Without the two regulatory measures the living costs
would today lie at 33.8% instead of 36.0%.
Capital requirements the Even stronger than via the affordability channel regulatory measures unfolded their effect by
greatest obstacle affecting capital requirements. Owing to the hefty property prices the capital requirements today
pose the greatest obstacle on the path to home ownership for broad sections of the population.
According to our Housing Affordability Index (HAI), at the end of 2014 an average Swiss
household had to spend 6.1 times its annual income on a new medium-sized condominium (see
Figure 3). The cost of a single-family dwelling amounts to 7.7 annual incomes. In the UK,
where real estate is not exactly cheap, only 5.0 annual incomes are required for the purchase of
residential property. Thanks to the option of an advance withdrawal of retirement assets, the
growing capital requirements for a long time did not pose any major obstacle. However, the
tightened equity requirements introduced in the summer of 2012 according to which a home
buyer has to contribute 10% of the lending value in the form of common equity that is not taken
from pension fund assets were then deliberately radical. Because many households are either
not able or not prepared to accumulate savings outside mandatory occupational retirement ben-
efits, this clear provision has increased the entry obstacles. According to our estimates, the reg-
ulatory measures introduced so far have curbed the growth of mortgage volumes over the past
few quarters by 1.0 to 1.5 percentage points.
Distribution of wealth To determine how drastic these equity requirements are, we have carried out a detailed analysis
increasingly determining of wealth data from the cantons of Aargau and Zurich. According to the most recently available
the potential demand figures from 2011, only 38.9% of taxpayers in the canton of Zurich are able to supply the 10%
of common equity required for the purchase of an average newly built condominium in the can-
ton from their own assets (see Figure 4). At 42.0%, somewhat more taxpayers fulfil this criteri-
on in the canton of Aargau, where a new condominium costs almost a third less. Assets in the
canton of Aargau are generally lower so that as a rule fewer households and taxpayers are able
to supply the capital for an equally expensive home. However, because house prices in the can-
ton of Aargau are significantly lower, altogether more households are able to overcome the eq-
uity obstacle.
What would be the effect The assessment of wealth distribution also shows what effect could be expected from a further
on demand of a further increase of the obstacle concerning common equity. A tightening of this requirement from 10%
tightening of to 15% or 20% would reduce the share of taxpayers in the canton of Zurich with sufficient
equity provisions? capital for a newly built condominium from 34.2% to 29.8%. In the canton of Aargau, 37.2% or
33.6% of taxpayers would remain as potential buyers of residential property.2 In some cases the
requisite funds can also be procured via family or friends. However, this has a negative effect on
1 Loan to value ratio: 80%; imputed mortgage interest rate: 5%; maintenance: 1%; reduction of debt from 80% to 66.6% of lending value within 15 years.
2 Because funds from the third pillar are not included in the wealth data but can be allocated to common equity, the actual shares will in fact be somewhat higher. On the
other hand, the continued rise in prices for residential property of 10.5% since 2011 that the wealth data is based on has reduced these shares again.
Swiss Issues Real Estate – Real Estate Market 2015 9
Credit Suisse Economic Research
affordability unless the money is lent without interest. Our results show that for each tightening
of the common equity requirements by five percentage points a fall in demand of over 10%
compared with the existing potential demand can be expected.
Figure 3 Figure 4
Housing affordability index: condominiums Taxpayers with sufficient assets
Required annual income for the purchase of average residential property X axis: share of taxpayers with sufficient assets; Y axis: required equity; data
(shown as minimum required equity and loan capital) from 2011
7 Common equity 200'000
ZH 20% Share of required
Other equity Canton Zurich
175'000 common equity
6 Loan capital Canton Aargau
150'000
5 ZH 15%
AG 20%
125'000
4
100'000
AG 15% ZH 10%
3
75'000
AG 10%
2
50'000
1 25'000
0 0
2001 2003 2005 2007 2009 2011 2013 20% 25% 30% 35% 40% 45%
Source: Credit Suisse Source: Cantonal statistical offices, Credit Suisse
Major regional differences Regionally there are very different ratios in terms of the households still capable of fulfilling the
in terms of capital require- dream of home ownership within the scope of their financial resources. The Housing Affordabil-
ments and affordability ity Index drawn up for the first time on a regional basis clearly illustrates these differences re-
garding the capital requirement obstacle (see Figure 6). To purchase a condominium costs 9.0
annual incomes and more along virtually the entire shore of Lake Geneva. The front runners are
Geneva at 14.6 and Lausanne at 11.1. The situation around Lake Zurich is similar, although not
quite so extreme. The front runner here is the city of Zurich with 11.1 required annual incomes,
followed by the Pfannenstiel region with 9.7. The situation in many parts of the Swiss Plateau is
very different: For instance, 5.1 annual incomes are sufficient in both the Thurtal region and
Aarau.
Demand switching to less A very similar regional picture emerges for imputed affordability that has long since ceased only
expensive regions or small- to be difficult to uphold in the high-price regions (see Figure 5). For this reason a shift in de-
er properties mand can currently be observed to regions with lower land and property prices. Those who nev-
ertheless do not wish to give up the dream of their own four walls at central localities are today
being obliged to switch to smaller-sized properties and if necessary also to make concessions in
terms of features.
Further downturn of The additional self-regulation measures for banks introduced in September 2014 (tightened
growth in demand in 2015 repayment guidelines, lowest value principle) that ultimately serve to increase both the afforda-
due to regulatory reasons bility and the equity obstacle had only partially taken effect in the second half of 2014. We
therefore expect the demand for owner-occupied housing to continue to fall in the current year
despite negative interest. Because many potential buyers already own residential property, the
positive momentum arising from the extraordinarily low mortgage interest rates will not only be
neutralized but overcompensated by the reduction in potential demand due to regulatory rea-
sons.
Swiss Issues Real Estate – Real Estate Market 2015 10Credit Suisse Economic Research
Figure 5 Figure 6
Imputed affordability (average household) Capital requirements (housing affordability index)
5% interest, 1% maintenance, 80% loan to value ratio, repayment on 67% in Required annual incomes for the purchase of average residential property.
15 years
51 – 88% 10 – 15
41 – 50% 8 – 10
34 – 40% 7–8
31 – 33% 6–7
26 – 30% 5–6
21 – 25% 4–5
15 – 20% 2–4
Source: Credit Suisse, Geostat Source: Credit Suisse, Geostat
Supply: Falling Number of Planned Owner-Occupied Properties
Continued shift of Housing production is so far barely showing any signs of fatigue and remains at a high level. We
construction activity expect the completion of 47'000 residential units in 2015 (see Figure 7) which is only marginal-
from residential property ly below the level of the past two years. Structurally, however, the mix of housing has been
to rental apartments changing for years in favor of rental apartments. The construction of single-family dwellings has
been declining for over ten years. For the first time less than 10'000 new single-family dwell-
ings were approved in 2013. By contrast, the number of approved condominiums remained at a
level of over 20'000 units until mid-2011. However, constructions in this segment have since
then also entered a downward trend that was only temporarily halted by a wave of second home
approvals following the acceptance of the second home initiative. We expect around 15'000
condominiums and 8000 single-family dwellings to be built in the current year – a decline of
12% on the previous year. Altogether the construction of residential property has decreased by
a quarter since 2011. Residential property construction is at its lowest level since 2001.
Production of new residen- It is expected that this development will continue in 2016. There are currently no signs of a
tial property will also fall in trend reversal in terms of either building permits or planning applications. The decline in produc-
2016 tion can at best be expected to slow down for condominiums. In view of the situation outlined
above with an ongoing downturn in demand for owner-occupied housing, the anticipated fall in
supply is to be welcomed. This should reduce the risk of a growing oversupply.
Noticeable decline in The interesting question now is where less residential property is being planned. Is construction
owner-occupied projects activity also shifting in line with demand from the high-price regions to the surrounding areas
in high-price regions … where purchasing one's own four walls is more affordable? In order to analyze this, we base our
assessment of building permits on regional aggregates that reflect the differing price momentum
(see Figure 8). It can be seen that approvals in the high-price regions on Lakes Geneva, Zurich
and Zug already dropped significantly at the start of 2012 and since then have more or less
managed to maintain the current annual level of 4300 approved units. This corresponds to a
decline of 25% since mid-2011 when the local maximum of the past six years was recorded.
The decline in the urban centers outside the high-price regions and in the growth regions close
to the urban centers is less marked (–22% since mid-2011). However, the downward trend
there has not yet come to a halt. Although the price level in these regions is not as high as in
the high-price regions, the continuous price rises are also posing a burden there for more and
more households. Meanwhile, the Alpine regions have sustained the sharpest fall with a virtual
halving of owner-occupied projects (–46% since mid-2011) because following acceptance of
the second home initiative condominiums not used as a first home may only be built to a very
limited extent.
Swiss Issues Real Estate – Real Estate Market 2015 11Credit Suisse Economic Research
Figure 7 Figure 8
Net addition by Segment Owner-occupied housing building permits
In residential units, 2014/2015: Credit Suisse estimate/forecast Geographical aggregates, number of residential units, total over 12 months
60'000 High-price regions (hotspots)
Urban centers outside the hotspots and growth regions close to the urban centers
Single-family dwellings Condominiums Rental apartments Other parts of Swiss Plateau and Jura
50'000 Alpine regions
14'000
40'000 12'000
10'000
30'000
8'000
20'000 6'000
4'000
10'000
2'000
0 0
2001 2003 2005 2007 2009 2011 2013 2015 2002 2004 2006 2008 2010 2012 2014
The residential units approved in 2012 can no longer be constructed due to
objections upheld by the Federal Supreme Court.
Source: Credit Suisse, Baublatt, Swiss Federal Statistical Office Source: Baublatt, Credit Suisse
… but less loss of momen- The least loss of momentum was recorded for the construction of residential property in other
tum in other parts of the parts of the Swiss Plateau and the Jura (see Figure 8). With 9800 approved condominiums and
Swiss Plateau and the Jura single-family dwellings in the last 12 months, permits are 17% down compared with mid-2011.
The less marked decline will be attributable primarily to movements on the demand side from
the high-price regions to regions still offering affordable housing. No change to this geograph-
ical shift is to be expected in the immediate future.
Figure 9
Planned expansion of residential property
As % of stock of residential property (condominiums and single-family dwellings)
> 2.5%
2.0 – 2.5%
1.5 – 2.0%
1.0 – 1.5%
0.75 – 1.0%
0.5 – 0.75%
< 0.5%
Versus five-year average
Sharp increase
Moderate increase
Sideways movement
Slight decrease
Sharp decrease
Source: Credit Suisse, Baublatt, Geostat
Swiss Issues Real Estate – Real Estate Market 2015 12Credit Suisse Economic Research
Major regional differences Major regional differences can arise within the geographical aggregates. Our overview map
shows how much the stock of residential property in the individual regions is expected to expand
in 2015 (see Figure 9). It confirms the impression that the focus of construction activity is in-
creasingly coming to lie outside the high-price regions. The highest growth in 2015 can be ex-
pected in the regions of La Gruyère, Glâne/Veveyse, Erlach/Seeland, Sursee/Seetal and the
Limmattal and Knonaueramt. However, what is astonishing is that the momentum east of Zurich
is only well above the national average in the Thurgau regions of Thurtal and Untersee/Rhein.
Fewer major projects Not only is less residential property being built but the projects are generally also smaller (see
Figure 10). Projects with 25 homes or fewer now account for 68% of all approved condomini-
ums. This primarily comes at the expense of projects with 26 to 50 homes. However, projects
with over 100 homes are also rare and can today be counted on the fingers of one hand. The
decrease in project size will at least partially be attributable to the fact that a greater share of
residential property is being constructed outside the densely populated high-price regions where
the volume of demand is limited. However, the decrease in project size also shows that suppli-
ers have become more cautious and are avoiding cluster risks. In times of falling demand,
smaller properties are more likely to achieve sufficiently high advance sales figures and hence
greater chances of realization.
Increasingly cautious Real estate investors also appear to be deciding increasingly later whether to construct rental
behavior of real estate apartments or condominiums. The number of multi-family dwelling projects without specification
investors of use has therefore risen sharply. It is now the case for 34% of all planned homes in multi-
family dwelling projects that no information is at hand as to whether rental apartments or con-
dominiums are under construction (see Figure 11). There are two reasons for the lack of usage
specification – diversification and scope for manoeuver. On the one hand major projects are in-
creasingly serving both demand segments, which is among other things also down to the
changed structure of immigration and increased demand for rental apartments. Any changes to
the market situation in one segment can be absorbed better with this kind of diversification. On
the other hand, usage is deliberately kept open for as long as possible in order to retain scope
for manoeuver. If the homes cannot be sold to private owners due to the ongoing fall in de-
mand, many investors will be tempted to let them out. However, this entails the risk that poten-
tial future sales problems for residential property spread to the rental accommodation market, to
say nothing of the fact that a conversion of condominiums to rental apartments is not all that
easy – especially since the two market segments are increasingly drifting apart. At least the re-
turns will be brought under pressure by such a change of housing type.
Figure 10 Figure 11
Residential property projects by project size Planned use of MFD projects
Share of MFD building permits by project size (owner-occupied only) Percentage of building permits
1 – 10 11 – 25 26 – 50 51 – 100 101 – 200 > 200 Condominiums Rental apartments MFD, usage unknown
100%
100%
90%
90%
80%
80%
70%
70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2002 2004 2006 2008 2010 2012 2014 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Baublatt, Credit Suisse Source: Baublatt, Credit Suisse
Swiss Issues Real Estate – Real Estate Market 2015 13Credit Suisse Economic Research
Market Outcome: Continued Slowdown – No All-Clear
The "soft landing" path is Until now it has been possible to keep the Swiss residential property market on course despite
narrow excessive growth momentum from time to time. There remains a good chance that the current
property cycle will end with a "soft landing", which is more the exception than the rule. The
regulatory measures introduced to date have significantly weakened demand despite abnormally
low mortgage interest rates. Thanks to the likewise reduced expansion of supply, a major mar-
ket imbalance has so far been prevented. However, the challenges remain in place. It is to be
hoped that any further potential regulatory measures are implemented in a well thought out and
sensitive manner.
Vacancies of residential Owing to the long period between the planning and completion of construction projects, supply
property increasing is responding with delay to the lower demand. There was therefore an increase in residential
property vacancies of 1565 residential units in the past year. As of 1 June 2014, 5215 condo-
miniums and 4692 single-family dwellings were vacant. This is equivalent to a vacancy rate of
0.91% for condominiums and 0.34% for single-family dwellings. These levels are not yet worry-
ing but merely confirm the more challenging market environment for investors.
Vacancies in the hotspots An analysis of vacancies according to the various geographical aggregates confirms that the
almost doubled since 2010 property market is no longer running smoothly above all in the high-price regions (see Figure
12). Since 2010 vacancies in the hotspots on Lakes Geneva, Zurich and Zug have almost dou-
bled to 0.4%. This is roughly equivalent to the level in the urban centers outside the high-price
regions and in the growth regions close to the urban centers. The considerably less expensive
supply of owner-occupied housing in these regions has largely found buyers so that vacancies
here have only risen marginally in recent years. The upturn in the remaining parts of the Swiss
Plateau and Jura was also limited although the vacancy rate here is somewhat higher at 0.53%.
The significant upturn in the Alpine regions is to a considerable extent due to statistical effects
as vacancies in many tourist regions were reported too low in the past. Figure 13 illustrates the
current vacancy rates of residential property in the individual regions. The map shows that par-
ticularly in the regions of Morges and Chablais and in the canton of Appenzell Ausserrhoden too
many properties have been constructed recently that are proving difficult to sell.
Figure 12 Figure 13
Vacancies of residential property Regional vacancies of residential property in 2014
As % of stock of residential property (single-family dwellings and condos) As % of stock of residential property (single-family dwellings and condos)
2014 property vacancies
High-price regions (hotspots) 1.21 – 1.53%
Urban centers outside the hotspots and growth regions close to urban centers 1.01 – 1.2%
Other parts of Swiss Plateau and Jura 0.81 – 1%
Alpine regions 0.61 – 0.8%
0.7% 0.41 – 0.6%
0.21 – 0.4%
0.6% 0 – 0.2%
0.5%
0.4%
0.3%
0.2%
Change on 2013 – 2014
0.1% Sharp increase
Moderate increase
0.0% Sideways movement
2001 2003 2005 2007 2009 2011 2013 Slight decrease
Sharp decrease
Source: Credit Suisse, Swiss Federal Statistical Office Source: Credit Suisse, Swiss Federal Statistical Office, Geostat
Number of transactions The fall in demand for owner-occupied housing is also reflected in the development of transac-
decreasing tions (see Figure 14). These reached their peaks in the spring of 2011. Compared with these
peaks there has been a decrease in the number of transactions of 11.8% in the case of con-
dominiums and 16.8% in the case of single-family dwellings. Altogether this represents a mod-
erate downturn in changes of ownership that points towards continued attractive framework
conditions for owner-occupied housing. However, the conditions are now no longer equally at-
tractive for all market players. The renewed appreciation of the Swiss franc following the with-
Swiss Issues Real Estate – Real Estate Market 2015 14Credit Suisse Economic Research
drawal of the minimum exchange rate has made residential property for foreigners calculating in
foreign currencies much more expensive. Prices already rose by a quarter due to exchange rate
effects back in 2010/2011. In the canton of Zurich the number of property purchases by for-
eigners has been falling since 2011. Alongside the appreciation of the franc, these falling sales
figures can also be explained by the changed structure of immigration. Immigrants from South-
ern Europe have less income and capital and can be proven to purchase less expensive proper-
ties. They will therefore be much more greatly affected by the tightened financing guidelines.
Newly built homes account Newly built homes account for an extraordinarily large share of overall transactions in Switzer-
for two fifths of transac- land. In 2014, 21% of all changes of ownership were attributable to newly built homes (see
tions but old properties Figure 15). If in order also to take into account newly built homes that cannot be sold immedi-
gaining popularity ately we also count one-year-old properties, the share of newly built homes rises to almost
29%. This high share results from the growing significance of condominiums in Switzerland as
well as the typically long period of residence of owners in their own four walls which significantly
reduces the market liquidity of older properties compared with other countries. However, old
properties that we define as properties in excess of 30 years old are gaining popularity in partic-
ular in the single-family dwellings segment. They are exerting a growing influence on the selling
market for owner-occupied properties.
Figure 14 Figure 15
Transactions by segment Transactions by age of property
Index: 2009 = 100; Credit Suisse estimate Percentage of all transactions
120 Newly built 1 2–5 6 – 10 11 – 20 21 – 30
Condominiums Single-family dwellings 31 – 40 41 – 50 51 – 75 76 – 100 > 100
110 100%
90%
100 80%
70%
90
60%
80 50%
40%
70 30%
20%
60
10%
50 0%
2009 2010 2011 2012 2013 2014 2000 2002 2004 2006 2008 2010 2012 2014
Source: SRED, Credit Suisse Source: SRED, Credit Suisse
Downturn in price momen- The prevailing fall in demand is not only making itself felt in increased vacancies but also in a
tum losing strength reduction of price momentum. The upsurge in prices has been receding for a good three years.
In the medium-range segment the prices of condominiums rose by 2.5% in the fourth quarter of
2014 compared with the prior-year quarter, while those of single-family dwellings went up by
3.2% (see Figure 16). A price fall was only observed in isolated regions in 2014. We expect a
continued downturn in price momentum although at a lower speed. The lower production of res-
idential property and above all the extremely low mortgage interest rates suggest that the rise in
residential property prices in the current year is likely to remain close to the 2% threshold or
even above it.
Price falls to be expected in The upsurge in prices has by far decreased the most in the high-price regions. At present there
high-price regions in 2015 is only weak year-on-year growth of 0.3% (see Figure 17). The first price falls on an annual
basis are even emerging in the Lake Geneva area. Prices are falling most sharply in the canton
of Geneva at –2.8% on an annual basis. A certain degree of correction to the excessively high
property prices in Geneva has therefore started to set in. The times of marked price growth are
also over in the city of Zurich and along the Gold Coast. Although self-regulation is presumed to
have made the greatest contribution to this development, further reasons will also be responsi-
ble: The structural change in the financial sector, a lower number of prosperous expats due to
fewer settlements and generally lower foreign demand have particularly affected the high-price
segment. As no rapid change in these factors is to be expected and an economic slowdown will
now also be added following the withdrawal of the minimum exchange rate, price momentum in
Swiss Issues Real Estate – Real Estate Market 2015 15Credit Suisse Economic Research
the high-price regions looks set to decrease further. We expect a fall in prices on an annual ba-
sis for the first time in a long time in 2015.
Figure 16 Figure 17
Price growth in the residential property segment Growth of residential property prices – regional
Annual growth rates in % Geographical aggregates (condominiums and single-family dwellings); annual
growth rates in %
10% Condominiums High-price regions (hotspots)
Single-family dwellings Urban centers outside the hotspots and growth regions close to urban centers
Average condominiums 2000–2014 Other parts of Swiss Plateau and Jura
14%
8% Alpine regions
Average single-family dwellings 2000–2014
12%
10%
6%
8%
6%
4%
4%
2%
2% 0%
-2%
0% -4%
1.Q 2011 1.Q 2012 1.Q 2013 1.Q 2014 2001 2003 2005 2007 2009 2011 2013
Source: Wüest & Partner, Credit Suisse Source: Wüest & Partner, Credit Suisse
Continued high price The situation in the Alpine regions is difficult to interpret at present. A large number of second
growth outside the high- homes have been built due to the second home initiative. However, their sale is stalling consid-
price regions erably due to the uncertainty among buyers owing to the unclear legal situation. Statistically
there are therefore only few observations available and price performance should accordingly be
treated with caution. However, the upsurge in prices in the Alpine regions has until recently fall-
en to a credibly similar degree to that in the high-price regions of the Swiss Plateau. By con-
trast, price growth in the urban centers outside the high-price regions and in the growth regions
close to the urban centers has evened out at a level of around 4% and is only displaying a very
small further downward trend. This will be attributable to the geographical shifts in demand. As
explained above, many households are now only able to afford owner-occupied housing in less
expensive regions owing to the tightened financing guidelines.
Second homes – continued legal uncertainty
The second-homes act, or "Lex Weber", which market players hope will create legal cer-
tainty, has yet to materialize. It has now been debated in the Council of States and is in-
cluded in the agenda for the spring session of the National Council in March 2015. But
even if the National Council were to go along with the toned-down draft legislation of the
Council of States, it is questionable whether implementation would be swift. The initiators
of the second-homes initiative are threatening a referendum. This could give the Swiss
electorate the final say, which would extend the legal uncertainty. The Building and Plan-
ning Committee of the National Council therefore intends to declare the legislation urgent.
That would mean it entering into force with immediate effect. Any referendum would follow
later, and might result in the law being overturned again.
The ongoing legal uncertainty is toxic for a functioning market in the regions affected.
Potential buyers are shying away from a purchase, and in many places it is difficult to sell
property at present. This is compounded by the large number of new second homes in
some tourist regions; these were planned and constructed at the last minute after the
"yes" vote in the second-homes initiative. Following the lead verdict issued by the Swiss
Federal Court, stipulating that the rules on restricting second homes must apply from the
date of the referendum, the status of these properties has not been resolved. Will they be
treated as equal to homes built under the old legislation, or should specific restrictions
apply to their use? The decision will have a key impact on price levels for these homes. No
wonder, then, that sales are slow. In addition, the entire situation is exacerbated by the
Swiss Issues Real Estate – Real Estate Market 2015 16Credit Suisse Economic Research
overall economic situation – particularly in the euro zone. Poor economic prospects in their
home countries, plus the strong Swiss franc, are currently deterring many foreign residents
from buying a second home in Switzerland. As a result, excess supply will continue to rise
in the short term.
Unfortunately the uncertainties will not be cleared up even after the law is passed. The
draft legislation contains a number of passages interpretation of which will presumably
require final clarification by the Federal Court. Once the law is passed, a noticeable im-
provement in the market situation is likely to begin for properties not subject to restrictions
on their use (those covered by the old legislation) at least. However, the possible scale
and type of additional second homes that may be built in future as well as future prospects
for the construction sector in the regions affected will be heavily dependent on the defini-
tive form in which the second-homes act takes effect.
More – but less extreme – The decreasing price momentum has reduced the risk of a price bubble by preventing the real
imbalances estate market from slipping into a development shaped by speculative purchases. However, this
does not mean that the question of the sustainability of the current price level has been re-
solved. On the contrary, the residential property prices in various regions continued to rise more
sharply than incomes over the last year. The imbalances have therefore increased in number but
are no longer quite as extreme in some regions. We now consider the price performance in 55
out of 106 regions no longer to be sustainable (see Figure 18). Price corrections must be ex-
pected in these regions in the event of a normalization of the interest rate situation. However,
the overvaluation in some regions is only very moderate and their price levels differ greatly from
those in the high-price regions. This applies to most of the regions that are newly included in
this count. As before, we are talking only in the case of Geneva about a veritable price bubble.
However, the imbalances were slightly reduced in 2014 in both Geneva and the other high-price
regions around Lakes Geneva and Zurich. Nevertheless, there is still a long way to go before
regional property prices correspond better with local incomes again.
Figure 18 Figure 19
Regional valuation of residential property prices Criteria of a property price bubble
Price performance of condos/single-family dwellings in relation to income
1996 – 2014 ratio
> 1.6
Agree ~ Insufficiently pronounced X Disagree
1.5 – 1.6
1.4 – 1.5
1.3 – 1.4
Excess liquidity
1.2 – 1.3
1.1 – 1.2
~ Excessive appetite for risk
1.0 – 1.1
< 1.0
Long period of rising real estate prices
Real estate prices decoupled from income
~ High level of speculative real estate transactions
X High / excessive growth in mortgage volumes given margin
pressure on mortgage lenders
X Insufficient credit checks for mortgage approval (due to false
YoY change
Deterioration
incentives)
No change
Im provement
X Excessive construction activity and supply surplus
Source: Credit Suisse, Geostat Source: Credit Suisse
No property price bubble With a view to our checklist for the existence of a property price bubble, the situation is similar
despite overvaluation to that of the previous year (see Figure 19). As before, some criteria for the existence of a
property bubble are not fulfilled. There can be no talk of either excessive construction activity or
generally poor credit checks by the mortgage loan institutions. Furthermore, because the growth
of mortgage lending to private households has shrunk markedly to 3.3%, there can no longer
be any talk of excessive lending. On the other hand, we are placing more of a focus on specula-
tive real estate transactions. Although the falling overall number of transactions (see Figure 14)
is having a calming effect and does not support the conclusion that a large number of properties
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