Corona won't bring Swiss real estate market to its knees
The Swiss real estate market will not emerge from the corona crisis unscathed. Fears of an imminent crash are nevertheless unfounded. The housing sector in particular is likely to be a stable anchor in turbulent times.
Coronavirus reaches the real estate market
The coronavirus crisis is engulfing the entire world and temporarily bringing parts of the economy to a standstill. To protect the population, the Swiss Federal Council declared a national state of emergency in mid-March. Our experts agree that a recession is inevitable in 2020. The precise scale of the economic shock remains uncertain, as the duration of the lockdown will be the crucial factor.
The turbulence seen on equity markets has prompted fears that the coronavirus crisis could also derail the Swiss real estate market. The real estate market will inevitably take a hit, although the impact will vary from one segment to another. In overall terms, an objective analysis of the situation nevertheless shows that fears of an impending crisis in the real estate market are unfounded.
Swiss housing market remains stable overall
Despite recurring fears of a crash, the housing segment is a stable anchor for the Swiss real estate market. Under no circumstances do we expect a wave of selling in the owner-occupied market. Fact is, low mortgage interest rates mean that home ownership is currently cheaper than renting. Moreover, the emergency package agreed by the Federal Council is likely to go a considerable way to alleviating any income shortfalls.
We anticipate a relatively stable situation on the mortgage front too, and would rule out the prospect of a significant increase in defaults. This is due to the low mortgage interest burden seen in recent years, as well as the fact that financing requirements have been tightened on several occasions. Specifically, this means a majority of home owners are unlikely to have any difficulty servicing their mortgage debt in the event of a temporary reduction in their income.
Little sign of a fall in house prices
Although many effects of the coronavirus crisis remain to be seen, one thing can be said with certainty: Negative interest rates are now likely to be with us for longer. The fact that mortgage interest rates are therefore set to remain very low over the long term will shore up prices of owner-occupied residential property. The likelihood is that prices here will be only marginally affected by the crisis – even if the number of transactions looks set to fall sharply in the near term. The low level of construction activity seen in recent years is also likely to prove supportive. Indeed some parts of the owner-occupied housing market were experiencing shortages until only recently.
Once the pandemic subsides, the residential property market is likely to return to its pre-crisis state relatively quickly. One exception is the luxury segment, which will probably be feeling the effects of the corona crisis for a longer time to come.
Rising vacancies in rental apartments market
The coronavirus crisis will have a significantly more adverse impact on the rental apartments market than on the owner-occupied segment. The virtual closure of borders, rising unemployment, and widespread uncertainty are likely to lead to a decline in demand.
We expect an additional 7,000 to 8,000 rental apartments to be vacant as of 1 June of this year. That compares with just 3,000 additional rental apartment vacancies last year. The vacancy rate is therefore likely to rise to 2.9%, adding to the downward pressure on advertised rents. Consequently, we expect rents for new lettings advertised this year to be 1.5% to 2.0% lower.
Commercial real estate markets more heavily affected
Commercial real estate markets are likely to be more heavily affected than the residential market. The demand for additional office space will come to a standstill, while the retail property market and the hotels sector will see a significant correction – at least in the short term. Fact is, the absence of demand from foreign and domestic consumers will lead to a severe income shortfall.
Summary: Real estate market will be hit – but no crash
The coronavirus crisis is a virtually unprecedented shock for the economy. It is therefore understandable that some voices are warning of a crash on the real estate market – although we believe these fears to be unfounded. An objective analysis of the changing situation, examination of the courses of action available, together with a comparison with other asset classes shows that:
Individual segments will be hit, in particular commercial real estate segments such as the retail property market and hotels. The corona crisis will not bring the Swiss real estate market to its knees, however. Indeed we actually expect demand from investors to increase in view of the greater security of rental income compared with other cash flows.