PwC Immospektive May 2024

Sebastian Zollinger

Director, Head Real Estate Advisory, PwC Switzerland

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The cycle of interest rate cuts was heralded surprisingly early with the reduction of the key interest rate in March 2024, ahead of the major currency areas of the US and EU. Despite being predicted last year, a further increase in the reference interest rate during the current year is therefore off the table for the time being. This will further widen the growing gap between existing and quoted rents. The persistently high level of net immigration is acting as a price driver on the rental housing market, especially in urban areas. There are still no signs of an increase in construction activity in the residential sector, which remains well below the five-year average. On the office market, demand for high-quality space in good locations increases slowly but steadily. This is causing the achievable prime rents to rise. The price trend on the owner-occupied housing market continues to point upwards. As supply will continue to be lower than demand and the fall in interest rates will make buying a home more attractive again, this trend will continue.

The information on market developments, on which Immospektive is based, can be found in FPRE’s real estate meta-analysis. References to FPRE graphics in our text are marked with [1] etc.

Surprise reduction in the key interest rate by the SNB

On 21 March 2024, the Swiss National Bank (SNB) announced its decision to lower the key interest rate from 1.75% to 1.5%. This step was taken against the backdrop of a stable inflation situation, but nevertheless surprised the majority of market observers and participants. The monetary authorities assume that inflation, which stood at 1.2% in February 2024, will reach an annual average of 1.4% in 2024. Forecasts for the years 2025 and 2026 are 1.2% and 1.1% respectively, assuming the key interest rate remains unchanged [9].¹

In its assessment, the SNB also states that it expects GDP in Switzerland to grow by 1% in 2024. While the service sector recorded moderate growth, industry stagnated. Unemployment is likely to continue to rise gradually. According to the SNB, the main risk for the domestic economy lies in weakening demand from abroad.² The State Secretariat for Economic Affairs (SECO) and the KOF Swiss Economic Institute forecast growth of 1.5% and 1.6% respectively for 2024, and 1.3% and 1.4% respectively for 2025 [6], while Swiss Life anticipates growth of 1.2% for 2024 and 1% for 2025.³

Although the global economy grew slightly stronger than expected in 2023, the SNB continues to see greater risks in its assessment of future growth, as it did in February of this year. Inflation rates in some countries haven’t yet reached the target ranges foreseen by the respective national banks, which means that a restrictive monetary policy continues to dominate. In addition, geopolitical tensions still pose an increased risk.⁴ Swiss Life estimates 0.3% real growth in the eurozone for 2024, while the OECD forecasts it at 0.9% and the EU Commission at 1.2%. They expect growth of 1%, 1.5% and 1.6% respectively for 2025. The inflation rates for 2024 are forecast by the aforementioned institutes at 2.4%, 2.9% and 3.2% respectively, while 2%, 2.3% and 2.2% are anticipated for 2025 [71].⁵ In view of the inflation forecasts, it’s difficult to predict when the ECB will turn the key interest rate screw.

^{1 SNB, Geldpolitische Lagebeurteilung vom 21. März 2024

2 SNB, Geldpolitische Lagebeurteilung vom 21. März 2024.

3 Swiss Life, Perspektiven Konjunktur, Mai 2024.

4 SNB, Geldpolitische Lagebeurteilung vom 21. März 2024.

5 Swiss Life, Perspektiven Konjunktur, Mai 2024.}

Rental flat prices pursue an upward trend

The upward trend for quoted rents on the rental housing market continued in the first quarter of 2024 with growth of +1.5% for new-build housing. Compared to the previous year, growth reached a high of 7.5%. The rates of change for older housing are slightly lower at 1.2% and 4.6% respectively [27].⁶A look at net immigration and the construction activity forecasts suggests that last year’s record-breaking rent growth will continue unabated in the new year. Further increases in the level of rent, particularly in urban centres and their agglomerations, are unavoidable in the short to medium term due to the discrepancy between supply and demand.

Immigration has risen continuously every year since 2017 to date. Net immigration in 2024 is still very high, but with positive net immigration of 21,500 people in the first quarter it was lower than the figure of 26,900 people recorded in the first quarter of the record year 2023 [13]. Nevertheless, it can be assumed that net immigration and the associated demand for housing will remain high for the foreseeable future. On the supply side, there are still no signs of increasing momentum in residential construction activity. The economic research institute BAK expects construction activity to decline by -2.6% in 2024, remain stable at -0.1% in 2025 and not pick up again until 2026 when construction activity is anticipated to rise by +2.6% compared to 2024 [14]. The current structural deficit between required and planned residential space is unlikely to be corrected in the short to medium term. Real estate investors will be able to benefit from the discrepancy between supply and demand on the rental housing market in the form of rent increases for new lettings and re-lettings. From the tenants’ point of view, hopes that rising rents will soon level off are likely to be buried.

With regard to rental growth, the FPRE data confirm a forecast by Swiss Life in February of this year, which predicted rental growth of +1–5%. Even greater growth is expected in the cities.⁷ In the Zurich region, residential rents grew by +1.2% in the first quarter of 2024 compared to the previous quarter. Over the last 12 months, the rate of change was even +6.6%. The effects of the housing shortage are particularly evident in the annual rate of change of +7.9% in quoted rents for new-build housing. In the Lake Geneva region, residential rents rose by +0.4% in the last quarter, increasing by +5.5% in the year-on-year comparison (new-build: +6.8%). In the Basel region, quarter-on-quarter and year-on-year growth rates of +1.7% and +5.8% respectively (new-build: +7.6%) were observed. The central Switzerland region recorded above-average rates of change with 1.6% and 6.5% respectively (new-build: +8%). In a quarter-on-quarter and year-on-year comparison, the regions of eastern Switzerland (+1.4%, +5.2%), southern Switzerland (+4.5%, +7.4%), the Alpine region (+0.4%, +5%) and Jura (+1.1%, +5.2%) also all recorded positive rental growth rates.⁸

^{6 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien, Mai 2024.

7 Swiss Life, Real Estate House View Schweiz, Februar 2024.

8 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien, Mai 2024.}

Development of rental flat prices in Zurich becomes a boomerang for investors

Real estate investors should be concerned about the developments on the rental flat market in Zurich. The ever widening gap between existing and quoted rents resulting from the housing shortage is increasingly weakening the incentives to move. Supported by the limited possibilities for rent increases for existing tenants provided for under local tenancy law, this means that tenants are staying longer in housing that doesn’t meet their needs. A lack of suitable alternatives is leading to a decline in rental turnover. This means that real estate investors no longer have the opportunity to increase income on existing buildings. In addition, this effect is leading to a significant misallocation of resources on the rental housing market and is undermining the functioning of the market, particularly in urban centres.⁹

When analysing the lack of supply in recent years, there has often been talk of increased construction and financing costs. These are due to the supply chain problems triggered by the coronavirus pandemic and geopolitical upheavals as well as the interest rate hikes to combat inflation, and they had largely returned to normal by the start of this year. The production cost index for stone and concrete construction for multi-family units fell by -0.7% over the last 12 months [16]. The construction price index reflecting the actual construction costs increased by +1.4% in the same period, after consistently being up 4–10% in the years 2021 to 2023 [17]. The interest rate situation has also largely returned to normal of late, since the SNB cut its key interest rate in March of this year. A ten-year fixed-rate mortgage currently has an interest rate of 2.3% following the interim rate of 3% in the years 2022 to 2023. The SARON interest rate stood at 1.45% as at April 2024. The KOF and SECO predict that it will fall to 1% and 1.1% respectively by 2025 [18]

Another factor inhibiting investment is increasingly coming to the fore: state regulation. Requirements of all kinds for building permits and the length of the approval process are increasingly being cited as obstacles hindering the provision of residential space. As an extreme case, the canton of Basel-Stadt currently serves as an example of a level of regulation that will bring investments by institutional investors to a virtual standstill for the foreseeable future.¹⁰ This includes expenditure that would have contributed to the decarbonisation of the real estate portfolio as part of renovations to improve energy efficiency. In Zurich especially, which is plagued by a housing shortage, medium-term regulatory changes now represent a risk that must not be ignored when purchasing residential properties in need of renovation. After the cantonal ‘Housing Protection Initiative’ (which aims to link building permits in connection with renovations and replacement buildings to rent caps) was submitted last autumn, the cantonal ‘Housing Initiative’ reached the required number of signatures and was submitted in February 2024. The aim of the latter is to oblige the canton and the municipalities to create more non-profit residential space, such as by setting up a cantonal housing cooperative with a starting capital of CHF 500 million, which the initiators want to turn into a strong player on the real estate market.¹¹The property sector must counter the political pressure more strongly in order to prevent the adoption of these initiatives. The economic and political factors that have led to the current shortage situation, as well as the drastic consequences of strong regulation, must be addressed much more strongly in public discourse.

^{9 Raiffeisen Economic Research, Immobilien Schweiz, 1. Quartal 2024.

10 Bajour, Investor*innen investieren nicht mehr, März 2024.

11 NZZ, Was in Zürich droht, hat Basel seit einem Jahr, Februar 2024.}

Differentiating developments on the office space market by region

On the office space market, investors appear to be increasingly able to respond to the changes in working models triggered by the coronavirus pandemic. According to UBS, the attractiveness of buildings with high-quality workspaces in well-developed locations is increasing, while new lettings of older properties in less well-developed locations remain a challenge.¹²

Across Switzerland, office rents rose by +1.8% compared to the previous quarter, while an increase of +5.8% was observed compared to the previous year [34]. The estimated proportion of vacant office space increased slightly at the end of 2023 compared to the third quarter of 2023, but is still well below the multi-year average since 2018 [41]. In the Zurich region, rents for office space developed very positively from an investor’s perspective, with quarter-on-quarter and year-on-year rates of change of +3.1% and 9% respectively. This was even more pronounced in the second-largest economic centre in German-speaking Switzerland, the Basel region, with +3.8% and +9.4% respectively. The central Switzerland region recorded the highest annualised growth rate, at 11.8%. In the Lake Geneva economic region, on the other hand, negative rates of change of -2.3% and -5.9% respectively were recorded [36]. At -5% and -2.1% respectively, the southern Switzerland region also performed negatively for investors. The eastern Switzerland region recorded stable growth of +2.4% and -0.1% respectively. No data were available for the Jura and Alpine regions.¹³

On the demand side in the office property market, the KOF Employment Indicator can be used as a leading indicator for trends in the labour market. After reaching a record high in the second quarter of 2022, the proportion of employers intending to increase their headcount in the reference quarter fell from quarter to quarter. However, there are still far more employers willing to recruit than there are wishing to reduce their workforce. The employment indicator is approaching the long-term average. The deteriorating outlook in the manufacturing and banking sectors had a particularly negative impact on results.¹⁴

The unemployment rate in Switzerland has risen slightly over the last 12 months, but is stable in the long term. The highest level in the last ten years was reached during the coronavirus pandemic at around 3.4%. For a short time in 2023, the rate even dropped slightly below 2% [7]. The unemployment rate was 2.3% in April 2024.¹⁵The KOF and SECO forecasts assume an average unemployment rate of 2.3% for 2024, and 2.4% and 2.5% respectively for 2025 [6]. However, the number of vacancies fell further by -9% compared to the previous quarter. This trend has been ongoing for several quarters and can be seen as a sign of a flattening economic cycle on the horizon [10].

^{12 UBS, Schweizer Immobilien Outlook 1H24, April 2024.

13 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien, Mai 2024.

14 KOF, Beschäftigungsindikator, Mai 2024.

15 SECO, Die Lage auf dem Arbeitsmarkt, Mai 2024.}

Focus on increasing income with investment properties

After negative total returns (-7.7%) were recorded for multi-family units in Switzerland for the first time in 20 years in 2023, a positive result of +5.6% was achieved again in the first quarter of 2024. The cash flow return increased from +2.9% to +3.3%, while the return from changes in value stabilised from -10.6% to +2.2%. The minimum discount rate for multi-family units has been moving sideways for around a year and was quoted at 2.06% in mid-April (previous quarter: 2.08%) [32]. There was also a trend reversal in the more volatile office segment. While a negative total return of -4.8% had to be absorbed in the previous year, a positive interim result of +6.7% was achieved again in the first quarter of this year. The cash flow return contributed to the total return with +3.7% and the return on changes in value contributed with +2.9%.¹⁶

The market values of multi-family units have increased slightly in line with the development of minimum discount rates [25]. Between the high in the first quarter of 2022 and the low in the third quarter of 2023, market values depreciated by around -14%. Since then, there has been an upward trend in the market values of multi-family units. The rate of change in market values was +1.8% in the last quarter and +1.1% over the last 12 months. In contrast to the period prior to 2022, the increase in net income is making a greater contribution to the positive development of market values in the current phase. Net income changed by +1.3% in the last quarter, and even increased by +5.2% year on year.¹⁷

In the regions, different but consistently positive developments were observed on the market for residential investment properties. In the economic centres of Zurich, Lake Geneva and Basel, market values increased by +2%, +1.2% and +2.1% on a quarterly basis (year-on-year comparison: +0.3%, +0.9%, +0.7%). In the central Switzerland, eastern Switzerland and southern Switzerland regions, the rates of change in the first quarter of 2024 were +1.6%, +1.7% and +2.7% (year-on-year comparison: +1.8%, +2%, +2.7%). The peripheral Jura and Alpine regions recorded quarter-on-quarter increases of +1.5% and +1% (year-on-year comparison: +1.8%, +3.5%).¹⁸

In the office segment, the differences between the regions were more noticeable. The economic centres of Basel and Zurich grew by +4.6% and +5.7% respectively compared to the previous quarter (year-on-year comparison: +6.7%, +8%), almost making up for last year’s negative rates of change. However, the Lake Geneva region is still faced with negative rates of change of -2.7% for the previous quarter and -10.4% for the previous year. At +2.6% and +10.7% compared to the previous quarter and previous year respectively, the central Switzerland region was able to keep pace with the development of the Zurich and Basel regions. In eastern Switzerland, a quarter-on-quarter increase of +2.8% heralded a trend reversal from the previous year’s negative rate of change of ‑4.7%. At -5.5% and -5.4%, southern Switzerland continues to show a negative trend compared to both the previous quarter and the previous year. No data were available for the office segment in the peripheral Jura and Alpine regions.¹⁹

^{16 FPRE, Marktindizes für Renditeimmobilien, Mai 2024.

17 FPRE, Marktindizes für Renditeimmobilien, Mai 2024.

18 FPRE, Marktindizes für Renditeimmobilien, Mai 2024.

19 FPRE, Marktindizes für Renditeimmobilien, Mai 2024.}

No breather on the owner-occupied housing market

The trend of rising transaction prices is continuing on the market for single-family units and condominiums. Compared to the same quarter of the previous year, prices for single-family homes rose by +5.5% and those for condominiums by +3.9%. Compared to the previous quarter, prices rose by +1.8% and +0.8% respectively.²⁰ Due to the downward trend in interest rates and the continuing high demand, the momentum on the owner-occupier housing market is likely to increase further. However, Raiffeisen estimates that the annual price increases of up to 9% in recent years will not be achieved for the time being.²¹

As was already the case towards the end of 2023, the growth in mortgage volume also lost momentum in the first quarter of 2024. The annualised growth rate fell from +3.1% to +2.8%. The total volume amounted to CHF 1,179.1 billion as at February 2024 [22]. The SARON interest rate fell from 1.7% to 1.45% compared to December 2023 [19]. Stable trends were observed for fixed-rate mortgages following strong fluctuations in 2023. The interest rate on a three-year fixed-rate mortgage remained at 2.14% compared to the previous quarter. Five-year and ten-year fixed-rate mortgages showed a decrease from 2.17% to 2.15% and from 2.32% to 2.30% respectively [21]. SECO expects the SARON interest rate to increase slightly to 1.6% in 2024. The KOF anticipates a SARON interest rate of 1.4% in 2024. Both institutes expect a reduction to a range of 1% to 1.1% for the year 2025 [18].

While property prices have risen across Switzerland as a whole, there are regional differences compared to the previous quarter. Compared to the previous year, all regions have increased. The Alpine and central Switzerland regions recorded the highest growth compared to the previous quarter at +3.0% and +2.9% (same quarter of the previous year: +6.9% and +6.4%). This was followed by the regions of Zurich with +1.0% (+3.1%), eastern Switzerland with +0.8% (+5.2%), southern Switzerland with +0.8% (+2.5%) and the Jura region with +0.8 % (+5.5%). Growth in the Lake Geneva region was also moderate at +0.7% (+4.7%). The Basel region recorded a slight decline of -0.3% (+4.4%) compared to the previous quarter. In a five-year comparison, all regions except southern Switzerland (+14.7%) recorded growth in transaction prices for residential housing (single-family units and owner-occupied housing) of over +20%. The Zurich region came out on top with +35%. This was followed by eastern Switzerland with +30.2% and the Lake Geneva region with +28.6%. The other regions reported growth rates of between +25% and 27.1%.²²

^{20 FPRE, Transaktions- und Baulandindizes für Wohneigentum, Mai 2024.

21 Raiffeisen, Economic Research, Immobilien Schweiz, 1. Quartal 2024.

22 FPRE, Transaktions- und Baulandindizes für Wohneigentum, Mai 2024.}

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