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Insidious Stability

Credit Suisse Publishes Its 2012 Study on the Swiss Real Estate Market

The Swiss real estate market has been virtually untouched by the pronounced economic and capital market fluctuations of recent years. Development should continue to be stable in 2012 too, as Swiss real estate market fundamentals appear to be largely intact for the current year. The market is still being driven by low interest rates and a persistently high level of immigration. The current economic slowdown is too modest to be able to cool the market for residential property, which is prone to overheating. The market shows increased signs of demand-driven overvaluation, but the latest study published by Credit Suisse does not indicate a speculative price bubble. The economists discern more of a threat in the fiercely-contested market for investment property.

The Swiss real estate market has remained virtually untouched by the global crises and economic reversals of recent years, even though these have affected the Swiss economy too. The stable development of this market has increasingly attracted the attention of private and institutional investors, with the problem of overheating and a scarcity of investment opportunities emerging as the dominant themes. Over the medium term, the abnormally low interest rate environment – which is already leading to market distortions – is expected to cause further problems. Many observers have been warning of a bubble for years, fearing that history is going to repeat itself. But although the current environment does harbor risks, they are different from those seen in Switzerland in the 1990s, or more recently in the US. There are no signs that the Swiss real estate market is being heavily driven by speculation, nor is there any evidence of excessive growth in mortgage lending volumes. As the construction sector is coming up against its capacity limits, there is not yet any supply overhang looming on the horizon. However, one potential threat does exist, namely the great stability that has recently characterized the Swiss real estate market – as this lures private and institutional investors alike into a false sense of security. Low interest rates are insidious. They seduce investors into attaching too high a price to investment property.

Stampede into Owner-Occupied Property
As a result of interest-rate-related cost distortions, two very different developments are becoming increasingly apparent in the residential real estate market. On the one hand, an unprecedented stampede into owner-occupied property, which has almost exhausted supply and triggered worrying price rises. On the other, growing sales problems for rental apartments, particularly in the newbuild and the high-price segment, which is only being alleviated by a persistently high immigration rate. This effect is being compounded by the fact that the expansion of supply – which is being driven by heightened interest on the part of institutional investors in investment property – is increasingly focused on rental apartments. This trend is likely to continue in 2012, as no changes are anticipated where the market fundamentals are concerned. Both supply and vacancy rates for owner-occupied property will continue to fall to the lowest levels seen for years. This is likely to lead to persistent price surges in the owner-occupied segment, which will be mirrored by rising vacancy rates in the rental accommodation area.

Office Premises Market: The Calm before the Storm?
The low interest rate environment and low vacancy rates in an international comparison have sparked off a wave of projects in the office premises market, and at first glance the project volumes involved look to be worryingly large. An increase in vacancy rates can be expected, particularly in the office premises markets of German-speaking Switzerland. In the wake of the ongoing trend toward concentrations of business locations, a number of office premises are likely to become vacant and prove difficult to re-let. But there are also a number of positive indicators. Robust demand for office workspace in a rapidly transforming work environment, together with the wide geographical diversification of the above-mentioned projects, suggests that the supply overhang will not reach excessive levels. In particular, existing "middle-aged" properties that are not ideally situated in locations with good public transport links are likely to come under pressure. The office premises market of Berne, Basel and Zurich-North are likely to be affected most of all, whereas the office premises markets of French-speaking Switzerland are likely to remain strongly in demand.

Size Is King in the Retail Market
Although retailers are looking to the future with their customary optimism and are for the most part intending to expand their retail space, the data paints a different picture. The excessive recent expansion of supply may be considered at an end, as confirmed by the low number of current large project approvals. This consolidation has helped to make the retail space market more stable, as manifested in constant vacancy rates and falling supply rates. However, the trend of declining rental prices is at odds with this picture. In-depth analysis shows that the downward trend is affecting small retail areas above all. These are the losers in the process of structural transformation, as size continues to be king. One of the drivers of this structural change is the emergence of specialist markets that have now largely based themselves at more than three dozen locations around Switzerland. This segment, which the economists of Credit Suisse have for the first time identified and analyzed across the country, is likely to continue to grow. Otherwise, the market is likely to continue to be characterized by restraint on the demand side, because in the border areas of the Swiss market in particular, the year-on-year rise of some 20 to 30% in "shopping tourism" is causing headaches for Swiss retailers.