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Swiss Real Estate Market Surges Ahead
Credit Suisse Publishes Its 2011 Study on the Swiss Real Estate MarketThanks to low interest rates, prices in the Swiss real estate market – especially for residential and investment property – are continuing to spiral upward. In some regions, this is widening the gap between real estate prices and household income to a worrying extent. Consequently, the possibility of the market overheating looks increasingly real. Commercial property is less at risk of overheating because demand for this type of real estate (as opposed to residential property) was hit by the recession. With employment growing steadily, the economists at Credit Suisse expect demand for office space to pick up in 2011 even though – for the time being at least – there is still a certain amount of overcapacity in the market. The study also shows that retail property came through the crisis relatively unscathed, and that the effects of structural change are now being thrust into the foreground. This trend is benefiting prime sites in particular, whereas properties in second-ranking locations are losing out.
In some parts of Switzerland, real estate prices can now be said to be excessive. Once interest rates return to their long-term average, financing problems would arise in these high-price regions not only for people in the lowest income brackets but also for middle-income households. This would inevitably start to squeeze real estate prices in those areas. A relentless continuation of the upward-pointing price trend – which could be further amplified by self-perpetuating mechanisms such as a universal belief in constantly rising property prices – could ultimately lead to the widespread formation of a bubble. We do not expect any price corrections in the near term, however, as demand remains intact and the market continues to be driven by the persistently low interest rates.
High Demand for Residential Property
A detailed comparison of the cost of owner-occupied property against rental costs shows that buying is currently about one-third cheaper than renting. This result is confirmed by the high demand for condominiums in all strata of the population. As a consequence, the market for new rental apartments has started to flag – as evidenced by higher vacancy rates and slower growth in rents. Moreover, the owners of investment properties are faced with margin compression: On the one hand, there are limits to the continued growth of rents; and on the other hand, the introduction of the new reference rate means that it now takes a long time for interest rate rises to be passed on to tenants. This is clearly underscored by the reference rate model calculations undertaken by the Credit Suisse economists.
Office Property Markets: Exodus of Major Corporations from City-Center Locations
Although buoyant labor markets softened the recent recession's impact on the office property market, they could not prevent a marked rise in the amount of property on offer. Recently, moreover, vacancy rates have been rising too. Mildly positive signals suggest that demand will firm up in 2011, which should facilitate absorption of the numerous properties that were planned in the boom and are now coming onto the market. In the centers of the main cities in particular, the office space market is being shaped by location-optimizing moves by large corporations. For reasons of efficiency, process or cost management, these companies are transferring jobs (especially back-office positions) to the outskirts. Such moves are being prompted by lower rents (up to 50% cheaper outside of the centers), the lower operating costs of large administrative buildings, and state-of-the-art building systems. Although this structural change began some years ago, it has been spreading rapidly of late and looks set to leave a few gaps in the business districts.
Switzerland Now Well Covered by Shopping Malls
The recovery of the retail property market is already more advanced: Although the supply of space had risen considerably, it has been receding again since the middle of 2010. The main impact of the financial crisis was that it interrupted the expansion of floorspace observable in Switzerland for many years. The reduced volume of retail property planned is clearly evident from the development of new shopping malls: After a decade that had seen a steady stream of new malls being opened, new building starts in this segment are becoming a rarity. This is due to the high density of shopping malls in Switzerland – a fact that emerges from a new indicator devised by Credit Suisse economists for the first time, which reveals that surplus capacity has developed around St. Gallen and in Chablais in western Switzerland and that only a few regions (e.g. around Thun) are still under-served by shopping malls.