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Remember butter mountains and milk lakes? Welcome to the apartment glut.
Following on from butter mountains and milk lakes in former times, Switzerland is now confronted by a glut of empty apartments. In 2018, the total number of empty apartments has recorded another increase – this time by 8,020, the size of a small ghost town. But unlike the excess agricultural production of the 1980s, this unwelcome development is not the result of subsidies, but of purely private sector activity. Investors are essentially acting rationally in their indefatigable drive to build ever more rental apartments: They are buying into the attractive net returns offered by real estate investments. Against the backdrop of an environment in which it has become very difficult to generate positive returns with limited risk, real estate investments offer a promising alternative. And while rising vacancy rates are putting downward pressure on rental incomes, they are not really spoiling the rosy yield outlook.
For quite some time now, the strength of the economic recovery in Switzerland has been underestimated, at least by official statistics. Only now, at a late stage in the recovery, has it become clear from the data that the Swiss economy is chugging along at full steam, with a dynamism that far outstrips its potential growth rate, even putting the powerful European economy in the shade. What's more, the figures for Swiss gross domestic product (GDP) are now being revised significantly upward all the way back to 2016, which suddenly casts a rather different light on the economic situation back then. Real estate demand will doubtless benefit from this powerful economic surge.
Acceleration in rise of vacancy rate for residential properties
But the boost to demand triggered by Switzerland's economic growth will not suffice to close the gap that exists between supply and demand in the rental apartment market. The latest rise in the number of vacant apartments – by a further 8,020 – is greater than at any time in the last 20 years. Put another way, the number of empty Swiss apartments has more than doubled over the last nine years – to a new absolute record high of 72,294 residential units. As has been the case so often in previous years, it is primarily rental apartments that are sitting empty. The Swiss-wide vacancy rate in the residential apartment segment has accordingly risen to 2.51%.
We are expecting the vacancy rate in the rental apartment market to increase further over the coming year. That said, the rise is likely to be rather less pronounced, given the strong economic growth, no further decline in immigration numbers, and sideways development in the number of building permits issued. However, a trend reversal resulting in a decline in the vacancy rate is not on the horizon. The real estate project pipeline remains chock-full, and the economic environment will continue to support demand for real estate investments in the future too. Moreover, the latest appreciation of the Swiss franc has made it more unlikely that the Swiss National Bank will abandon its policy of negative interest rates – which indirectly have the effect of boosting construction activity – in the near future. Negative interest rates are likely to be with us until 2020, which means robust construction activity should be a feature of the economic landscape for quite a while yet.
Residential property prices up almost everywhere
The robust economic recovery and the decline in Swiss unemployment are supporting demand for residential property ownership. Furthermore, financing costs are being kept down by the persistence of very low interest rates. Additional factors supporting residential prices include the ongoing decline in the number of new properties coming onto the market for private ownership, which means price growth is developing in the bandwidth we expect, namely 2% to 3%. The trend of rising prices can be expected to lose some of its momentum over the next few quarters, as high capital requirements and the affordability criteria imposed by the regulator are limiting potential demand and acting as a drag on further price gains.
Gradual trend reversal evident in office property market
The impact of Switzerland's economic upturn is likely to be most strongly felt in the market for office property. Historically, demand for office premises has been rather more volatile than demand for residential property, for example. This factor is likely to support the incipient trend reversal in the office property market, and could facilitate the absorption of the additional space expected to come onto the market in 2019/2020. Vacancy rates in city centers are continuing to decline across Switzerland, with the exception of Geneva and Neuchâtel. It is striking that the rise in the vacancy rate in Geneva was sufficiently strong on its own to result in a renewed rise of vacant office space across Switzerland as a whole.
Logistics real estate – more than just a niche
The Swiss logistics real estate market is in a state of flux. Online trading, urbanization, and digitalization are the three megatrends shaping market developments here. Although the high cost of land and high wage costs mean that Switzerland is not an international logistics hub, the domestic logistics industry nonetheless handles a significant – and increasing – flow of goods. By far the greatest driver of the market at the moment is the consistent growth of online trading volumes. This is a market in which consumers have a preference for the provider who can offer the simplest and most rapid delivery. Once a purely mechanical activity, logistics has now evolved into a service of strategic significance. Accordingly, logistics real estate is also now of great strategic importance. Both location and building specifications are crucial to the service quality a logistics company can offer. It is therefore hardly surprising that logistics real estate is gradually becoming a focus of investor attention.
Figure: Strongest rise in vacancy rate evident in north-eastern Switzerland and Ticino Residential vacancy rates in 2018; arrow: change on previous year
Source: Credit Suisse, Datastream
The complete study "Real Estate Monitor Switzerland Q3 2018" is available online in German, English, French, and Italian at: www.credit-suisse.com/realestatemonitor