Immospektive February 2024

Sebastian Zollinger

Director, Head Real Estate Advisory, PwC Switzerland

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The cycle of interest rate hikes appears to have come to an end for the time being, with a renewed absence of any increase in the key interest rate in December 2023 and in light of the recent stable inflation trend. As a result, the reference interest rate also isn’t expected to rise again during the current year. However, unlike for existing tenants, the situation is becoming increasingly difficult for new tenants. The rental housing market remains under high pressure due to record net immigration levels. From the tenant’s perspective, the continued lack of construction activity in the residential sector is particularly frustrating and is in contrast to the high demand. Although production and construction costs have by and large returned to normal, no growth is expected in the building construction segment over the next two years. This will put greater pressure on rents as well as policymakers. The situation in the owner-occupied housing market remains unchanged. Short supply is causing prices to continue to rise. In the commercial sector, varying regional developments with high fluctuations can be observed.

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

Key interest rate and inflation remain stable for now

The Swiss National Bank (SNB) refrained from raising interest rates for the second time in a row on 14 December 2023. The key interest rate will therefore remain at 1.75% for the time being. The decision was less eagerly awaited than the penultimate one in September 2023, as inflation rates returned to normal in the second half of 2023. Inflation ultimately amounted to only 1.3% in 2023. The growth prospects in Switzerland and elsewhere in Europe are described as weak, yet the macroeconomic risks are perceived to be high.

In its key interest rate decision in December 2023, the SNB referred to the inflation rate of 1.4% in November 2023, but also emphasised the persistent uncertainty of the economic situation in its letter. Inflation could rise again, due in particular to higher electricity prices and the increase in VAT at the start of 2024.¹ The SNB is forecasting inflation of 1.9% and 1.6% [11] respectively for the current and coming year, while other central government agencies such as the Swiss State Secretariat for Economic Affairs (SECO) and the KOF Swiss Economic Institute at ETH put it at 1.9% and 1.7% respectively for 2024 followed by 1.1% (SECO) and 1.0% (KOF) for 2025 [6]. Without adjusting the key interest rate, these institutions consider inflation to be outside the SNB’s target range of 0% to 2%.

Slight positive economic growth is still expected. After growth of around 1% in 2023, the SNB foresees GDP growth of 0.5% to 1% in the current year.² KOF and SECO are forecasting real growth of 1.5% and 1.7% respectively for the current year [6]. The institutions Raiffeisen, Swiss Life and UBS have a similar estimation of GDP growth in 2024 to the SNB, putting it at 0.8%, 1% and 1.2% respectively [6, 73]. 3 4

The global economy grew more than expected in 2023, but the SNB still sees major risks in the assessment of future growth. In particular, it referred to stubborn inflation rates in some countries, possible energy shortages and geopolitical tensions.⁵ Swiss Life estimates 0.4% real growth in the eurozone, while the OECD forecasts it at 0.9% and the EU Commission at 1.2%. These institutions estimate inflation rates of 1.9%, 2.9% and 3.2% respectively [71].⁶ J.P. Morgan and the Federal Reserve Bank (FED), the US central bank, expect the US economy to grow by 2% and 2.4% respectively in real terms in 2024. These institutions estimate inflation at 2% and 2.1% respectively. ^{7 8}

^{1 SNB, Geldpolitische Lagebeurteilung vom 14. Dezember 2023

2 SNB, Geldpolitische Lagebeurteilung vom 14. Dezember 2023

3 UBS Outlook Schweiz, Januar 2024

4 Swiss Life, Perspektiven Konjunktur, Februar 2024

5 SNB, Geldpolitische Lagebeurteilung vom 14. Dezember 2023

6 Swiss Life, Perspektiven Konjunktur, Februar 2024

7 J.P. Morgan Asset Management, 2024 Year-Ahead Outlook, Dezember 2023

8 Federal Reserve Bank Philadelphia, First Quarter 2024 Survey of Professional Forecasters, Februar 2024}

Unabated increase in the cost of rental housing

The upward trend for rents on the rental housing market continued in the last quarter with growth of +2.5%. The last quarter of the year thus provided a further boost to overall annual growth, which again equated to a substantial rise of +5% [27].⁹Meanwhile, from a tenant’s perspective, the economic fundamentals do not allow any optimism for future improvement.

The high level of net immigration, which has entered new spheres, is leading to a sharp rise in demand for housing in Switzerland. The pace of immigration has ramped up over the last two years in particular [13]. Since the introduction of the free movement of persons, net immigration is expected to reach a record high in 2023 with around 100,000 immigrants.¹⁰ This is especially due to the solid economic development compared to other countries and the associated demand for labour.¹¹

The tense situation on the housing market is joined by the continued lack of construction activity in the housing sector. According to the construction index of the Swiss Federation of Master Builders, the volume of building applications in residential construction continued to fall in the last quarter. The report emphasises the long-term potential of residential construction due to low vacancy rates and high demand. Construction volumes are expected to fall in the first two quarters of 2024, however. The reduced attractiveness of residential construction for investors due to the turnaround in interest rates and the challenges in the regulatory area as well as a lack of building land reserves are stated in particular as reasons for the lack of growth in residential construction in the short to medium term.¹² The independent economic research institution BAK forecasts an annual change in residential construction activity of -2.6% for 2024. Following stagnant development in 2025, a return to growth in the residential construction segment isn’t expected until 2026 [14].

On the cost side, the production cost index shows signs of returning to normal again in building construction / industrial construction at -3.3% following a comparatively sharp decline of -11.4% in the previous year. The annual rates of change in stone and concrete construction for multi-family and single-family units have remained constant at +0.9% and +0.7% respectively [16]. The construction price index, which covers market prices for the execution of construction projects more comprehensively than the production cost index, also shows the lowest growth rates since 2021 at +1.5% for office buildings and +1.4% for residential buildings compared with the previous year [17].

Further sharp increases in rents in the residential sector are inevitable in the short to medium term. The reference interest rate-based round of rent increases for existing contracts has come to an end for now, although ZKB doesn’t expect the reference interest rate to rise again until 2025.¹³ However, only one conclusion can be drawn from the demand and supply-side forecasts for the rental housing market: the housing shortage situation will become even worse, leading to a further increase in the price of housing in the rental segment. As the strong positive net migration can’t be regulated in the medium term, the NZZ points in particular to the political duty to ease regulations in residential construction.¹⁴

An increase of +2.9% was observed for new-build housing in the fourth quarter of 2023, while rents for older housing rose slightly less at +2.2%. Rents for new-build housing rose by a hefty +6% on an annual basis. Older housing still recorded strong growth of +3.9%. The Zurich region and the Jura region recorded the highest quarter-on-quarter and year-on-year increases at 2.9% and 6.2% respectively. The Jura region and the Basel region also recorded the lowest growth rates, with an increase in market rents of +1.9% compared with the previous quarter. Year on year, an increase of +2.7% was recorded for the southern Switzerland region [25]. At regional level, the rates of change in market rents presented a uniform picture. All regions were between +1.9% and +2.9% compared with the previous quarter, with Zurich coming out on top and Basel and Jura bringing up the rear. Year on year, most regions recorded increases of between +4.1% and +5.4%. Only the Jura region recorded stronger growth at +6.2%, while southern Switzerland was the only region to record weaker growth at +2.7%.¹⁵

^{9 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien, Februar 2024

10 Staatssekretariat für Migration, Statistik Zuwanderung, November 2023

11 Tagesanzeiger, Zuwanderung aus der EU steig rasant, November 2023

12 Schweizerischer Baumeisterverband, Bauindex, 4. Quartal 2023

13 Zürcher Kantonalbank, Prognosen, Februar 2024

14 Neue Zürcher Zeitung, Wohnen wird zum Luxusgut: Die Preise erklimmen Rekordhöhen – es fehlt an Bauland, Februar 2024

15 FPRE, Marktindizes für Renditeimmobilien, Februar 2024}

Regional variation in the office space market

A slight decline in office rents of -0.4% was observed in the fourth quarter of 2023. Over the year as a whole, however, office rents rose by +4.5% at national level. In the German-speaking economic centres of Zurich and Basel, rates of change of +0.4% and -0.2% respectively were recorded in the last quarter. Year on year, rents showed extremely robust development with rates of change of +7.8% and +9% respectively. The situation is different in the Lake Geneva region of western Switzerland, where office rents fell by -4.7% and -4.9% compared with both the previous quarter and the previous year.¹⁶

In the other regions, only central Switzerland reported a positive rate of change compared with the previous year, with an increase of +8.5%. Southern and eastern Switzerland recorded similar trends to western Switzerland at -2.1% and -4.8% respectively. Market participants are therefore only expecting to see continued growth in income for the Zurich region in 2024. The market assessment for the Lake Geneva region is bleaker, changing from positive to stable. For all other regions, stable income or even a decline in income is also expected. It’s interesting to note that the market participants don’t foresee the market values of office properties rising again until 2025. This is the case for the Zurich, central Switzerland and Lake Geneva regions [43].

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 a record-high proportion of employers considered expanding their workforce in the second quarter of 2022, this proportion has since fallen in six out of seven quarters. However, the number of employers willing to recruit is still considerably higher than the proportion of companies planning to cut jobs, and the employment indicator is still above the long-term average. In addition, representatives from all sectors, with the exception of manufacturing, are optimistic or neutral about an expansion in employment over the next three months.¹⁷

The unemployment rate in Switzerland is rising. It reached 2% in October 2023, 2.3% in December 2023 and 2.5% in January 2024.¹⁸ The KOF and SECO forecasts assume an average unemployment rate of 2.3% for 2024, and 2.4% and 2.5% respectively for 2025 [6]. The growth in the number of vacancies has been declining steadily in all sectors since mid-2022, which may be interpreted as an indication of companies’ conservative assessment of the future [10].

Negative total returns for investment properties in 2023

For the first time in 20 years, multi-family units in Switzerland recorded a negative total annual return of -7.7%. The cash flow return remained stable at +2.9%, while the return on changes in value was down at -10.6%. The office segment also recorded a negative total return of -4.8%, although a similar level has previously been reached three times in the last ten years. The cash flow return contributed to the total return with +3.3% and the return on changes in value contributed with -8.1%.¹⁹

Since spring 2022, when the minimum discount rates for multi-family units temporarily bottomed out at 1.71% (in net, real terms), the minimum required rate of return moved rapidly in the other direction and stood at 2.03% in mid-2023. Since then, the figures haven’t changed significantly and, in the fourth quarter of 2023, this important key figure stood at 2.09%. [32].

The market values of multi-family units have developed in line with the decrease in minimum discount rates [25]. From the peak in the first quarter of 2022 to the third quarter of 2023, the market values of multi-family units fell by -14.1%. A slight increase of +1.6% was recorded in the last quarter of 2023, which is probably mainly attributable to the increases in income made possible by rises in reference interest rates. The annual performance in 2023 shows a negative total return of -7.7%. This figure comprises an unchanged cash flow return of +2.9% compared with the previous year and a negative return on changes in value of -10.6%. This was the first time in over 20 years that the overall annual performance of multi-family units was negative. There were few major regional fluctuations. The Alpine region closed the year with the best total return of -4.8%. The economic centres of Zurich, Basel and Lake Geneva ended the year with returns of -8.3%, -7.8% and -7.6% respectively. The other regions reported returns of between -6.9% and -7.9%.²⁰

There was increased volatility in the office segment in 2023. The year began with strong negative trends, but recovered in the third quarter with positive rates of change. The last quarter again saw a slightly negative rate of change in both net income and market values. While the rate of change over the year as a whole remained negative at -4.5%, net income achieved a positive rate of change of +4.5% [38]. There were major regional differences in terms of returns. Eastern and southern Switzerland reported the highest negative returns at -13.3% and -12.1% respectively. The Lake Geneva region recorded a total return of -5%, while the other regions, including the economic centres of Zurich and Basel, only had to shoulder a slightly negative total return of -3.1% to -3.8%.²¹

^{16 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien, Februar 2024

17 KOF, Beschäftigungsindikator, Februar 2024

18 SECO, Die Lage auf dem Arbeitsmarkt, Januar 2024

19 FPRE, Marktindizes für Renditeimmobilien, Februar 2024

20 FPRE, Marktindizes für Renditeimmobilien, Februar 2024

21 FPRE, Marktindizes für Renditeimmobilien, Februar 2024}

Unspectacular price increases in the owner-occupied residential property segment

The market for owner-occupied residential property again showed a rise in prices. Overall, owner-occupied residential property prices recorded a rate of change of +0.3% quarter on quarter and +3.4% over the last 12 months. Over the last five years, average prices in Switzerland have risen by an incredible +27.6%.²²

The growth in mortgage volume lost momentum towards the end of 2023. Between May 2023 and November 2023, the annual growth rate fell from +3.8% to +3.1%. The total volume amounted to 1,173.8bnCHF [22]. The SARON interest rate was stable and stood at 1.7% in December 2023 [19]. Sharp reductions in interest rates were observed for fixed-rate mortgages in 2023. The interest rate on a three-year fixed-rate mortgage fell from 2.92% in the second quarter to 2.14% in December. Five-year and ten-year fixed-rate mortgages showed a decrease from 2.89% to 2.17% and from 2.89% to 2.32% respectively [21]. The KOF and SECO expect the SARON interest rate to remain stable at 1.7% in 2024. A reduction to a range from 1.3% to 1.5% is not expected until 2025 [18].

Prices for single-family units decreased slightly by -0.2% compared with the previous quarter and rose by +3.3% over the last 12 months. In contrast, growth rates of +0.9% and +3.6% respectively were observed in the owner-occupied apartment segment [56, 62]. At regional level, negative performance in non-peripheral areas was reported for the first time in many years. The Zurich region reported negative growth of -0.5% compared with the previous quarter. Eastern, central and southern Switzerland recorded rates of change of -0.1% to -1%. The other regions performed positively compared with the previous quarter. Year on year, prices increased in all regions of Switzerland. The Jura region is the frontrunner with +6%. However, the eastern Switzerland region (+5.3%), the Alpine region (+4.1%) and the Lake Geneva region (+4%) also reported strong growth. In the other regions, rates of change between +2.1% and +3.6% were observed, with the Zurich region recording the lowest growth. In a five-year comparison, however, the Zurich region clearly comes out on top with an increase of +35%. Only the region of eastern Switzerland comes close with +30.2%. With the exception of southern Switzerland, which is trailing far behind at +14.7%, the other regions show five-year rates of change of between +25.2% and +28.6%.²³

^{22 FPRE, Transaktions- und Baulandindizes für Wohneigentum, Februar 2024

23 FPRE, Transaktions- und Baulandindizes für Wohneigentum, Februar 2024}

The information on market developments on which the Immospektive is based on can be found in FPRE's property meta analysis.

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