Immospektive November 2024

Sebastian Zollinger

Director, Head Real Estate Advisory, PwC Switzerland

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The Swiss National Bank (SNB) has lowered the policy rate several times in 2024, most recently to 1% in September, in order to support moderate economic growth and declining inflation. These interest rate cuts will boost investment activities as well as demand. In the rental housing market, the price increases of the first half of 2024 did not continue into the third quarter. However, – due to the housing shortage – any reversal in the trend for rising rents is not expected in the medium term. Residential construction activity is not forecast to ramp up until 2026. Residential investment properties will continue to follow a positive trend in 2024, with rising market values and higher demand for residential properties. In the office space market, there was a slight drop in rents across Switzerland, with trends varying from one region to another. However, investment office properties will remain stable to slightly positive in 2024. Prices for single-family units and owner-occupied units continued to rise slightly and the pool of buyers remains limited in many regions.

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.

Focus on monetary policy: SNB ensures a stable investment environment

The Swiss National Bank (SNB) has already lowered the policy rate three times this year, most recently from 1.25% to 1% in September. This further reduction is in response to the continuing decline in inflationary pressure and a slight fall in inflation, which stood at 1.1% in August (compared to 1.4% in May). The main factors behind the fall in inflation are the appreciation of the Swiss franc and the lower prices of imported goods.¹ SNB revised its inflation forecast downwards and now expects average inflation of 1.2% for 2024, 0.6% for 2025 and 0.7% for 2026 [9]. The interest rate cut – which the majority of market participants had been expecting – is intended to support the economy and make sure that inflation remains stable in the long term.²

The Swiss economy experienced solid growth in the second quarter, driven by the chemical and pharmaceutical industry, while other sectors grew moderately. SNB expects GDP growth of around 1% for 2024 and around 1.5% for 2025. In this environment, unemployment could continue to rise slightly and the utilisation of production capacity is likely to fall. However, the outlook is uncertain, particularly due to potential geopolitical tensions and inflation in other countries.³ SECO is therefore forecasting an increase in the unemployment rate from 2.4% to 2.6% for the year 2025 [6]. The situation on the real estate market remains stable overall, with vulnerabilities in this area having eased slightly.⁴ The interest rate cuts will boost demand for real estate investments and further stimulate the transaction market.⁵

^{1 SNB, Geldpolitische Lagebeurteilung vom 26. September 2024

2 Handelszeitung, Ein Abschiedsgeschenk ganz im Stile Jordans, September 2024

3 SNB, Geldpolitische Lagebeurteilung vom 26. September 2024

4 SNB, Geldpolitische Lagebeurteilung vom 26. September 2024

5 Julius Bär, Immobilienmarkt-Bericht Schweiz, 4. Quartal 2024}

Rental housing market surprises: Slight dampener in the long-term upward trend in rents

In 2024, the rental housing market in Switzerland has been developing at a stable rate but with regional variations. While market rents fell slightly compared to the previous quarter, particularly for new builds, annual growth rates remain at a high level. This development reflects the high demand, which is supported by continuing immigration and by stagnation in the construction sector. In this context, market participants are increasingly criticising the lack of effort at municipal level to facilitate the creation of additional living space. For example, at the beginning of 2024, only 43% of municipal land-use plans were adapted in line with the Swiss Federal Spatial Planning Act as revised in 2014.⁶

The rental housing market in Switzerland paints a less differentiated picture in the third quarter of 2024. Compared to the previous quarter, market rents for older apartments fell by –0.3% and for new builds by –0.7%, which means an average fall in overall market rents of –0.5%. Year on year, the growth rates for older and new-build properties remained high at +5% [23]. One reason for the slight downward trend could be the increasing reluctance of existing tenants to move, as the discrepancy between existing and new rents has risen sharply in recent months and years. Due to the excessive costs of moving, tenants are staying in their existing flats and only changing flats opportunistically and often under the table. As a result, the rental property market is becoming static and loses momentum.

There are few regional differences. The Lake Geneva region experienced a slight decline in total rents of –0.4% in the third quarter, with an increase of +3.8% year on year. In the Jura region, rents fell by –0.2% in the quarter but showed an annual increase of +4.7%. The Central Switzerland region recorded a quarter-on-quarter decline of –0.7%, while the annual rate rose by +5%. Similar trends were observed in Zurich, where rents fell by –0.9% but increased by +4.4% by annual comparison. Eastern Switzerland remained relatively stable with quarterly growth of 0.1% and recorded an increase of 6.1% for the year. The Alpine region showed strong growth of +1.2% in the quarter and 7.1% for the year, while Southern Switzerland recorded a decline of –0.7% in the quarter and annual growth of 4.8%.⁷

The Basel region recorded a stable trend in rents for older buildings and a slight decline of –0.3% for new builds, which led to a small decrease in overall rents of –0.1%. Nevertheless, a strong year-on-year increase in market rents of 7.8% was observed [23]. Yet it would be premature to link this development with the drastic tightening of the regulatory hurdles for re-lettings following refurbishments in Basel-Stadt and the effects on Basel’s urban municipalities.

The trends show a certain corrective effect after the sharp rise in rents in the first half of 2024. Growth in rents will be robust in most regions throughout 2024. The strength of expectation among market participants that residential rents will rise over the next 12 months has steadily decreased over the last three quarters, but remains clearly in positive territory [28]. High immigration pressure and stagnating construction activity will ensure that rents continue to rise in the future. The tension on the rental housing market will not ease in the medium term.⁸ ZKB anticipates a reduction in the reference interest rate by March 2025 at the latest, although this will not help the situation as only existing tenants will benefit from it.⁹

^{6 Swiss Life Asset Management, Real Estate House View Schweiz, Zweites Halbjahr 2024

7 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien Schweiz, November 2024.

8 UBS, Real Estate Outlook Schweiz, Zweites Halbjahr 2024

9 ZKB, Immobilienbarometer 3. Quartal 2024}

Office space market: stability in core regions, challenges in peripheral areas

The Swiss office property market in 2024 shows a mixed performance, with office rents across Switzerland rising by +0.1% year on year but falling by –0.6% in the quarter [35]. While rents in the Lake Geneva region and Central Switzerland rose slightly, Basel and Zurich recently recorded declines. Vacancy rates throughout Switzerland have reached a pre-pandemic level. Central and high-quality office space remains in demand, while vacancies and differences between the regions characterise the market.¹⁰ The employment indicator of the KOF Swiss Economic Institute at ETH shows a stable trend in the last quarter after several quarters of declining development.¹¹

There are some significant differences between the regions. In the Lake Geneva region, office rents rose by +2.1% quarter on quarter, although the year-on-year figure fell by –1.5%. In Central Switzerland, there was strong rental growth of +5.2% year on year, while a slight decline of –0.8% was recorded in the quarter. In the Basel region, rents fell by –2.2% quarter on quarter, but showed moderate growth of +2.1% year on year [35].

In Zurich, office rents fell both quarter on quarter (–1.3%) and year on year (–0.9%), which is probably due mainly to a surplus of supply. The Eastern Switzerland region recorded slight rental growth of +1.1% quarter on quarter, while a slight year-on-year decline of –0.2% was observed. Southern Switzerland continued to record a negative trend with office rents falling by –0.9% quarter on quarter, and a more significant decline of –8.6% year on year. No figures are available for the Jura and Alpine regions.¹²

Overall, the Swiss office space market remains differentiated. High-quality office space in central locations is experiencing more stable demand and better rental growth, while peripheral and older office space remains under pressure. This segmented demand and the persistent vacancy rate in some regions are likely to remain decisive for rental trends and returns in the office property market.

^{10 Handelszeitung, Büroflächenangebot in der Schweiz ist zurück auf Vorkrisenniveau, November 2024

11 KOF, Beschäftigungsindikator, November 2024.

12 FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien Schweiz, November 2024.}

Positive growth in returns: stability and opportunities in the real estate market

In 2024, the market for investment properties in Switzerland is showing a clear recovery following the negative total returns of the previous year. The annual performance of multi-family units rose significantly compared to the previous year, accompanied by a stable to slightly declining discount rate. The office space market is also showing signs of recovery, albeit with significant regional variations. While cities such as Zurich and regions like Eastern Switzerland are experiencing positive returns from changes in value in 2024, some peripheral regions such as the Lake Geneva region are lagging behind these developments. Overall, the market situation in the central areas is stable to slightly growing, indicating sustained demand in both the housing and office segments.

In 2023, negative total returns of –7.7% for multi-family units were recorded in Switzerland for the first time in two decades. In the third quarter of 2024, the recovery for 2024 – which was already evident in the first half of the year – continued to consolidate. The annual performance now stands at +7.4%, with a cash flow return of +3.4% and a return from changes in value of +4.1% [51]. The average minimum real discount rate for multi-family units has stabilised and was estimated at 1.98% in mid-October 2024 [32], which is slightly lower than in the previous quarter (2.03%). This trend points to continued strong demand for high-quality residential property and is fuelled by SNB’s interest rate reduction strategy.

The regional differences largely point in the same direction. In the Lake Geneva region, the market values of residential properties rose by +3.1% compared to the previous quarter and by +6.6% over the year, while net income increased by +0.7% quarter on quarter and +4.6% year on year. In the Zurich region, net income increased by +0.4% quarter on quarter and +4.6% year on year, while market values rose by +1.5% and +6.8% respectively. The picture is similar in Basel, with net income up 1.2% and 6.4% respectively. Market value growth was surprisingly high at +3% and +8.4% respectively.¹³ In this regard, there is no observable dampening effect from the strict rent regulation.

The more peripheral regions of Jura, Central Switzerland, Eastern Switzerland, the Alpine region and Southern Switzerland also show strong positive rates of change. Net income rose by +1.4%, +0.8%, +1.1%, +1.6% and +1% compared to the previous quarter, while increases of +5.6%, +5.4%, +5.8%, +6.3% and +5.4% were recorded compared to the previous year. Market values rose sharply in all regions both in comparison to the previous quarter (+3.7%, +3.6%, +3.8%, +5.3%, +3.7%) and in comparison to the previous year (+8.4%, +8.5%, +9.4%, +9.9%, +8%).¹⁴

The office space market is experiencing stable development throughout Switzerland, albeit with marked regional differences. At national level, market value growth for office space equated to +1.3% in the last quarter, with net income falling by –0.5% [52]. The return from changes in value is once again in positive territory after 2023. In the Lake Geneva region, the market value for office space rose by +5.6% in the quarter, accompanied by an increase in net income of +2.9%. Year on year, the market value rose by +1.2%, while net income fell by –3%. The return from changes in value in this region for 2024 remains negative, with a cash flow return of +3.6%. In Zurich, both net income and market value development in the previous quarter were negative at –1,5% and –0.3% respectively. Compared to the previous year, market values rose by +1.8%. The return from changes in value of +4.2% made a positive contribution to the total return of +7.6% in 2024. In the Basel region, we saw rates of change in market values of office space of –1.3% in the quarter, accompanied by a decline in net income of –2.6%. Compared to the previous year, both key figures are in positive territory at +7.1% and +2.5% respectively. The return from changes in value of +8.2% made a particularly strong contribution to the high total return of +11.8%.¹⁵

Although there may be quarterly deviations, the majority of developments confirm the observation that office properties in peripheral regions are coming under pressure. On the other hand, office space is still in demand in the economic centres and investors are willing to pay. This finding is emphasised in particular by the return from changes in value, which was negative for all regions in 2023.

^{13 FPRE, Marktindizes für Renditeimmobilien, November 2024

14 FPRE, Marktindizes für Renditeimmobilien, November 2024

15 FPRE, Marktindizes für Renditeimmobilien, November 2024}

Moderate price increase for owner-occupied residential properties

In the Swiss market for single-family units and owner-occupied housing, transaction prices continue to rise, albeit at a more moderate pace. Compared to the previous year, single-family units increased by +3.2% and owner-occupied housing by +1.2% [55; 61]. The price increases are mainly due to the housing shortage. Regional differences can be observed: the Zurich and Central Switzerland regions recorded the highest increases, while Southern Switzerland experienced slight price declines. The SARON interest rate, which has fallen further since July, currently stands at around 0.95% and is forecast to rise to 0.7–0,8% in 2025 [18; 19]. Falling interest rates are likely to further increase demand, which should cause prices to rise steadily while supply will remain tight.

The trend of rising transaction prices continues in the market for single-family units and owner-occupied housing. Compared to the same quarter of the previous year, single-family units recorded a price increase of +3.2%, while prices for owner-occupied housing rose by +1.2%. The situation is congruent compared to the previous quarter: prices for single-family units rose by +0.9%, while prices for owner-occupied housing increased by only +0.6%.¹⁶

According to Raiffeisen’s assessment, even slight price declines in the market for owner-occupied housing are unlikely due to the still stringent requirements for affordability and equity. Prices are expected to continue to rise, though not as rapidly as in recent years. This development is due to the fact that stricter mortgage rules and higher capital requirements are increasingly restricting the pool of potential buyers.¹⁷

The annualised growth rate of the mortgage volume was 2.8% in August 2024, down slightly from 2.9% in May 2024. The total volume amounted to CHF 1,194.1 billion in August 2024. There has been a significant reduction in the development of SARON interest rates. While SARON was still at 1.21% in July 2024, it stood at just 0.95% as at October 2024 [19]. SECO expects the SARON interest rate to fall further to 0.8% in 2025, while the KOF expects SARON to remain at 0.7% [18].

Regional differences in the price trends for residential property (single-family units and owner-occupied housing) are still clearly recognisable. Compared to the previous year, all regions recorded a price increase with the exception of Southern Switzerland (–2.2%). The region most impacted by this was the Alpine region at +4.4%, while Eastern Switzerland was the least impacted at +0.7%. At +3.1% and +2.4% respectively, the Lake Geneva and Zurich regions continued their long-standing, steady price growth. In the quarterly comparison, some regions such as Jura (–0.4%), Central Switzerland (–0.2%) and Eastern Switzerland (–0.2%) recorded slight price declines. The Lake Geneva (+2%) and Zurich (+1%) regions recorded the strongest growth.¹⁸

Overall, these developments are continuing the steady, positive price growth that has been observed in the owner-occupied housing market in recent years, even though the sharp post-pandemic rise in mortgage interest rates significantly reduced the affordability of properties. Although this led to a decline in demand, the upward trend in real estate prices was supported by the housing shortage in Switzerland and a noticaeble price decline was averted. In view of the fact that SARON interest rates have now fallen significantly again and demand remains high, continued positive price growth is also likely in the future.

^{16 FPRE, Transaktionspreis- und Baulandindizes für Wohneigentum, November 2024.

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

18 FPRE, Transaktionspreis- und Baulandindizes für Wohneigentum, November 2024.}

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