Immospektive August 2024

Director, Head Real Estate Advisory, PwC Switzerland

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In 2024, the Swiss National Bank (SNB) has cut its policy rate twice: to 1.5% in March and to 1.25% in June. In taking this action the SNB has responded to stable inflation, moderate economic growth and a rise in unemployment. The rate cuts are intended to boost capital expenditure and demand. In the rental housing market, rents continued to rise in the second quarter of 2024, especially for new-build properties. Despite the interest rate cuts, further rent increases are to be expected in the future because of the shortage of housing. Analysis of capital expenditure in construction in 2023 shows a slight increase, with growth in civil engineering and renovation work, while construction costs in building construction continue steadily at a high level. In the market for office space, office rents were observed to fall slightly in the last quarter, though they rose year on year. This was despite the fact that vacancy rates for office space are high throughout Switzerland. In the market for investment properties, following negative returns in 2023 positive performance resumed for multi-family units in the second quarter of 2024. At the same time, market values and demand for residential properties are rising. Prices for single-family units and owner-occupied housing likewise increased year on year, but stringent requirements regarding financial sustainability and equity limit the pool of buyers. Nevertheless, the SNB’s interest rate cuts could strengthen demand again.

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 [1] etc.

Consistent pursuit by the SNB of its interest rate reduction cycle

In 2024, the SNB has made two appreciable interest rate cuts. In March 2024, it surprised the markets by lowering its policy rate by 0.25 percentage points, from 1.75% to 1.5%. This was the first interest rate cut in nine years and many analysts were not anticipating such a cut until mid-2024. The main reasons for this decision were stable inflation and the general economic situation.¹ A further reduction in the policy rate followed in June 2024, this time to 1.25%. The reduction came as inflationary pressures continued to abate. In addition, Switzerland’s gross domestic product (GDP) grew only moderately in the first quarter of 2024, driven by the services sector, while industry stagnated and unemployment rose slightly.²

Economists believe that the SNB took this action because inflation appears to be under control. The forecast inflation rate is +1.4% in 2024 and +1.0% in 2025 [6]. In addition, Switzerland’s currently moderate economic growth may have played its part in the SNB’s decision-making. The forecast for real GDP growth from a number of market participants is +1.3% in 2024 and +1.5% in 2025 [6]. Rising unemployment figures also played a role; the projected unemployment rate is 2.4% in 2024 and 2.5% in 2025 [6].

The SNB itself has adhered to its assessment whereby it expects GDP growth of around +1.0% for 2024 and +1.5% for 2025. In this environment, unemployment is likely to continue to rise slightly and utilisation of production capacity will probably fall.³ The policy rate reduction counteracts this negative trend by lowering financing costs for companies and consumers, promoting capital expenditure and strengthening demand. This will support moderate growth and enable the economy to improve gradually through livelier demand from abroad due to the depreciation in the Swiss franc.

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

2 SNB, Geldpolitische Lagebeurteilung vom 20. Juni 2024.

3 SNB, Geldpolitische Lagebeurteilung vom 20. Juni 2024.}

No end in sight for residential rents

The upward trend for new tenancies in the rental housing market continued in the second quarter of 2024 with quarter-on-quarter growth of +1.3% for new-build housing. Compared to the previous year, growth reached a high of +6.7%. The rates of change for existing housing were +2.0% and +5.3% respectively.⁴ Given the rise in the mortgage reference rate to 1.75%, many existing tenants recently faced significant rent increases. According to Raiffeisen, about half of tenancy agreements, especially those with institutional property owners, were subject to one or two rent adjustments in 2023. Approximately 12% of tenancies are still at the 1.25% level, which makes future increases possible. Thanks to the SNB’s interest rate cuts, the rent increase in December 2023 could be the last for the time being, which means that no further near-term rent rises are to be expected after the round of increases in April.⁵ However, for the reference interest rate to fall the policy rate would have to drop well below 1%. Furthermore, many fixed-rate mortgages are coming to the end of their term and will have to be renewed at a significantly higher interest rate, which makes a reduction in the near future equally unlikely. Although the SNB’s decision will push down rates for SARON mortgages, this is not enough to induce a significant reduction in the reference interest rate.⁶ Meanwhile, quoted rents continue to rise sharply because of the shortage of housing, which means higher housing costs for renting households in the long term.⁷

Since 2017, immigration has increased steadily year after year. Net immigration in the second quarter of 2024 was 19’488 people and remains at a high level. However, the first two quarters of 2024 have not matched the levels of net immigration recorded in the first two quarters of 2023, a record year [10]. Net immigration is expected to remain high, resulting in continued lively demand for housing. On the supply side, however, there is no sign of an increase in construction activity. According to BAK forecasts, construction activity will decline by –1.6% in 2024, will expand by a slight +0.6% in 2025, and will then increase by a significant +2.1% in 2026 compared to 2025 [14]. The current structural deficit between required and planned housing is unlikely to narrow to any extent in the short to medium term. This discrepancy between supply and demand in the rental housing market will enable real estate investors to achieve higher rents for new tenancies and relettings. Tenants, on the other hand, will probably have to give up on their hopes of rents stabilising any time soon. In its forecast, Zürcher Kantonalbank (ZKB) assumes an increase in quoted rents across Switzerland as a whole of +4.0% in 2024 and 2025. In the canton of Zurich it is forecasting an even steeper rise of +4.5% in each of the two years.⁸

In the Zurich region, residential rents grew by +1.1% in the second quarter of 2024 compared to the previous quarter. Over the last 12 months, the rate of change was as high as +6.0%. The effects of the housing shortage are particularly evident in the annual rate of change of +6.6% for new tenancies in new-build housing. In the Lake Geneva region, residential rents rose by +1.5% in the last quarter, increasing by +5.1% in the year-on-year comparison (new-build: +5.9%). In the Basel region, quarter-on-quarter and year-on-year growth rates of +4.2% and +8.2% respectively (new-build: +8.5%) were observed. The central Switzerland region recorded above-average rates of change at +1.4% and +6.2% respectively (new-build: +7.0%). In comparison with the previous quarter and the previous year, the regions of eastern Switzerland (+1.9%, +6.0%, new-build: +6.7%), southern Switzerland (–1.6%, +4.8%), new-build: +4.8%), the Alpine region (+3.0%, +6.3%, new-build: 6.7%) and the Jura (+2.0%, +5.0%, new-build: 4.6%) likewise all showed positive annual rates of growth in rents.⁴

^{4 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien Schweiz, August 2024.

5 Raiffeisen, Economic Research, Immobilien Schweiz, 2. Quartal 2024.

6 NZZ, Hypotheken, Mieten, Sparkonten: Was die Zinssenkung der SNB für Sparer, Wohneigentümer und Mieter bedeutet.

7 Raiffeisen, Economic Research, Immobilien Schweiz, 2. Quartal 2024.

8 Zürcher Kantonalbank, Prognosen zum Schweizer Immobilienmarkt, Juni 2024.}

Civil engineering and public-sector contracts bolster construction spending. Costs in building construction remain at a high level

In 2023, capital expenditure on construction in Switzerland rose slightly, with increases in civil engineering and renovation work, while capital expenditure on new buildings and building construction declined. Public-sector customers increased their spending significantly, while private-sector customers reduced theirs. Construction prices in building construction stabilised at a high level because of falling material costs and despite rising energy prices.

In 2023, capital expenditure on construction in Switzerland rose in nominal terms by +0.2% compared to the previous year, as announced by the Federal Statistical Office (FSO) on 18 July 2024. At the same time, capital expenditure on building construction fell by –0.3%, while in civil engineering it increased by +2.7%. New-build projects recorded a decline of –2.5%, while capital expenditure on renovation projects increased by +4.4%. Overall, total construction expenditure, which includes capital expenditure on buildings and public-sector maintenance expenditure, increased by +0.3%, although in real terms a contraction of –2.5% was recorded. Public-sector customers increased their nominal spending on civil engineering by +3.9% and on building construction by +8.5%. Private-sector customers pared back their capital expenditure in both civil engineering, by –2.3%, and in building construction, by –1.9%. The backlog of work for capital expenditure in construction for 2024 increased by +0.4%, while the backlog for public-sector maintenance work shrank by –2.4%.⁹

The construction price index for April 2024 published by the FSO on 22 June 2024 shows that price increases in building construction have continued to slow over the past 12 months and most recently amounted to a moderate +0.8% compared to the previous year.¹⁰ After a sharp increase of +8.1% in 2022, construction prices are now stabilising at a high level.¹¹ A key reason for the slowdown in price increases is the fall in material costs recorded between May 2023 and May 2024. In particular, reinforcing steel and other building materials became cheaper, while sand and gravel became more expensive. Despite falling material prices, energy and fuel prices will rise again in 2024, which will have a countervailing effect on construction prices.¹² As various factors such as rising energy costs and wages continue to exert upward pressure, we expect construction costs to continue to rise slightly at a high level.

^{9 Bundesamt für Statistik, Bauausgaben: Daten, Indikatoren.

10 Bundesamt für Statistik, Baupreisindex: Aktuelle Resultate April 2024.

11 Bundesamt für Statistik, Schweizerischer Baupreisindex im April 2022.

12 Bundesamt für Statistik, Materialpreisindizes KBOB.}

High rents despite high vacancy rates in the market for office space

Office rents in Switzerland fell slightly in the last quarter, but increased year on year. This is despite the fact that office vacancy rates have risen to their highest level in several years. Most regions, with the exception of southern Switzerland and Lake Geneva, recorded rising rents. Rent rises were particularly marked in the central Switzerland and Basel regions. The Swiss Economic Institute's (KOF) employment indicator shows a slight increase in employment prospects for the third quarter of 2024, particularly in the manufacturing and banking sectors. By contrast, a decline can be observed in the retail and hospitality sectors. The unemployment rate remains stable, but has risen slightly.

Across Switzerland as a whole, office rents fell by –0.7% compared to the previous quarter, while year on year an increase of +4.2% was observed.¹³ The estimated proportion of vacant office space increased significantly in the second quarter of 2024 compared to the first quarter of 2024, representing the highest vacancy rate since 2020 [41]. In terms of the different regions, all regions except southern Switzerland and Lake Geneva recorded a rise in office rents compared to the previous year. In the central Switzerland region, rents for office space showed a very pleasing trend from an investor’s perspective, with quarter-on-quarter and year-on-year rates of change of +1.6% and +10.5% respectively. This was equally true in the second-largest economic centre in German-speaking Switzerland, the Basel region, with rises of +0.8% and +8.0% respectively. The Zurich region, with figures of –3.0% and +5.3%, and the eastern Switzerland region at –1.2% and +0.4% likewise recorded a positive rate of change year on year.14 No data were available for the Jura and Alpine regions. Overall, these trends show that, despite some short-term fluctuations, demand for office space in many regions of Switzerland remains stable and in some cases is actually growing, which points to positive economic trends [35].

For 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. The KOF Employment Indicator is showing a slight increase in the third quarter of 2024 compared to the previous quarter, for the first time since mid-2022. Employment prospects have improved in the manufacturing sector in particular. Following its peak in the second quarter of 2022, the indicator declined in every quarter, but it has now gone up slightly and is above its long-term average. More companies are planning to take on more staff than to cut staff. In the manufacturing sector, a small majority of companies now consider their staffing level to be appropriate and are planning to increase it, after job cuts were expected in the last quarter. The indicator also shows a slight increase in the banking sector. An opposing trend was revealed by the KOF Employment Indicator in the retail and wholesale trade, with the majority of companies planning to reduce their workforce. In the hospitality sector, the indicator actually fell to its lowest level since the third quarter of 2021.¹⁵

The unemployment rate in Switzerland has increased slightly over the last 12 months but should remain stable in the long term. The highest level in the last ten years was reached during the coronavirus pandemic, at around 3.4%. In 2023, the unemployment rate actually fell to just below 2% for a while [7]. In July 2024, the unemployment rate remained at 2.3%. According to forecasts from KOF and the State Secretariat for Economic Affairs (SECO), the average unemployment rate will be 2.4% in 2024 and is predicted to rise to 2.5% and 2.6% respectively in 2025 [6].

^{13 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien Schweiz, August 2024.

14 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien Schweiz, August 2024.

15 KOF, Beschäftigungsindikator, August 2024.}

Investment properties show clear recovery trends

In 2023, negative total returns for multi-family units were recorded in Switzerland for the first time in two decades (–7.7%). However, a strongly positive annual performance of +6.3% was achieved again in the second quarter of 2024. The annual performance of the cash flow return is +3.4% and that of the return from changes in value is +2.9%. The average minimum discount rate for multi-family units has been moving sideways for around a year and was quoted at 2.03% in mid-July (previous quarter: 2.06%) [32]. A discount rate at this level indicates stable and growing demand for high-quality housing. All segments – existing buildings, new-builds in the mid-range segment and upmarket new-builds– are benefiting from stable market conditions and increasing rental income and market values in 2024. While the market value of existing buildings and mid-range new-builds will see a further increase, the market value of premium new-builds are estimated to remain stable in 2025. Regional differences are also significant, with market values increasing in most large urban areas while they should remain stable for the time being in eastern Switzerland and the Jura [30; 31]. There was also a trend reversal in the more volatile office segment. While a negative total return of –4.8% was recorded last year, a positive interim performance of +6.6% was achieved in the second 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 +2.8%.¹⁶

In line with the minimum discount rates, the market values for multi-family units have increased slightly [25]. Between their peak in the first quarter of 2022 and their low point in the third quarter of 2023 market values fell by around –14.0%. Since then, there has been a recovery trend. Market values went up by +1.3% in the last quarter and have climbed +4.0% over the last 12 months. In contrast to the period prior to 2022, the increase in net income is currently making a greater contribution to the positive trend in market values. Net income increased by +1.3% in the last quarter and by +5.7% year on year.¹⁷

In the regions, different, yet 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 1.4%, +0.6% and +1.7% on a quarterly basis (year-on-year comparison: +3.8%, +2.7%, +4.0%). In the central Switzerland, eastern Switzerland and southern Switzerland regions, the rates of change in the second quarter of 2024 were +1.3%, +2.0% and –0.3% (year-on-year comparison: +4.4%, +5.2%, +3.9%). The peripheral Jura and Alpine regions recorded quarter-on-quarter increases of +1.5% and +1.7% (year-on-year comparison: +4.4%, +5.2%).¹⁸

For both existing buildings and new-builds (mid-range or premium segments) the market situation is generally stable and in some cases is showing growth. In 2024, demand for existing multi-family units remains stable. Supply and initial returns also show no significant fluctuations, indicating a balanced market situation. Despite this stability, rental income is expected to increase in 2024 and the market value of existing multi-family units is expected to rise in both 2024 and 2025. For mid-range new-builds, demand remains stable, as do supply and initial returns. This steady market situation offers security to investors and owners. In common with existing buildings, mid-range new-builds are also expected to record an increase in income in 2024 and in market values in 2024 and 2025. A similar picture emerges in the premium new-build segment. Demand, supply and initial returns remain stable in 2024. While income and market values will increase in this segment in 2024, market values are expected to remain stable in 2025. This suggests that the luxury real estate market is saturated but continues to offer solid returns for investors [30; 31].

In the office segment, the differences between the regions were significant. The results for the economic centres of Basel and Zurich of +2.6% and –2.6% respectively compared to the previous quarter (year-on-year comparison: +10.7%, +5.6%) made up for the negative rates of change from last year. Meanwhile, the Lake Geneva region is facing a strengthening in the office segment at +4.3% compared to the previous quarter, although a negative rate of change of –5.2% is still to be observed compared to the previous year. At +1.9% and +10.2% compared to the previous quarter and previous year respectively, the central Switzerland region kept pace with growth in the Basel region. Eastern Switzerland remains in slightly negative territory at –0.5% compared to the previous quarter and with a year-on-year rate of change of –0.7%. At –4.9% and –4.0%, 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, August 2024.

17 FPRE, Marktindizes für Renditeimmobilien, August 2024.

18 FPRE, Marktindizes für Renditeimmobilien, August 2024.

19 FPRE, Marktindizes für Renditeimmobilien, August 2024.}

Owner-occupied property prices continue to rise, buyer pool shrinks

The trend of rising transaction prices continues in the market for single-family units and owner-occupied housing. Compared to the same quarter last year, prices for single-family units increased by +4.7% and those for owner-occupied units were up +1.2%. A comparison with the previous quarter shows a mixed picture. Prices for single-family units rose by +0.6%, while those for owner-occupied units fell by –1.1%.²⁰

According to Raiffeisen, even minor decreases in price on the owner-occupied residential property market are unlikely because of the unexpectedly early interest rate rise. Prices are expected to continue to rise, though not as rapidly as in recent years. That is because the financial sustainability and equity requirements now significantly restrict the pool of potential buyers.²¹

The annualised growth rate of the mortgage volume in May 2024 was 2.9% and therefore increased slightly compared to April 2024, when it was 2.8%. The total volume amounted to 1,188.9bnCHF in May 2024 [22]. The SARON interest rate fell from 1.45% in April 2024 to 1.21% in July [19]. A downward trend was observed in fixed-rate mortgages. The interest rate on a three-year fixed-rate mortgage fell in August 2024 from 2.14% to 1.76% compared to May 2024. Five-year and ten-year fixed-rate mortgages showed a decrease from 2.16% to 1.78% and from 2.30% to 1.91% respectively [21]. SECO expects the SARON interest rate to increase slightly to 1.40% in 2024. KOF anticipates a SARON interest rate of 1.30% in 2024. Both bodies expect a reduction to a range between 1.0% and 1.1% for 2025 [18].

While owner-occupied property prices have increased year on year across Switzerland as a whole, there are regional differences in the comparison with the previous quarter. Compared with the previous year, all regions except southern Switzerland have recorded increases. The Zurich and central Switzerland regions posted the highest growth rates, rising +0.9% and +0.4% compared to the previous quarter (previous year’s quarter: +3.7%, +5.1%). They were followed by the eastern Switzerland region at +0.3% (+3.1%), the Jura at –0.1% (+4.0%), Basel at –0.3% (+3.3%) and the Alpine region at –0.5% (+4.7%). Geneva at –0.5% (+2.1%) and southern Switzerland at –2.3% (–1.4%) brought up the rear in quarter-on-quarter terms.²²

Analysis of price stability for owner-occupied housing shows that the significant increase in mortgage interest rates after the coronavirus pandemic led to a reduction in the affordability of properties. As a result, demand declined and the upward trend in property prices weakened [55]. However, the shortage of housing in Switzerland prevented a decline in real estate prices across the board. Now, lower interest rates could boost demand again, making a negative price correction even less likely in the future.

^{19 FPRE, Marktindizes für Renditeimmobilien, August 2024.

20 FPRE, Transaktionspreis- und Baulandindizes für Wohneigentum, August 2024.

21 Raiffeisen, Economic Research, Immobilien Schweiz, 2. Quartal 2024.

22 FPRE, Transaktionspreis- und Baulandindizes für Wohneigentum, August 2024.}

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