Rental apartment market: Demand unaffected by the pandemic
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Demand on the rental apartment market is strong. In spite of the pandemic. 

The demand for rental apartments has been unaffected by the pandemic. In 2022 as well, landlords can expect the market to show keen interest in their rental properties. However, the percentage of newly built apartments for rent is declining. That means the supply of rental apartments is lagging behind the demand.

Steady immigration influencing rental apartment market

Following a brief standstill early in the pandemic, demand on the domestic rental housing market quickly began to recover. The reasons for that are persistently high net immigration as a result of less emigration and a stable Swiss labor market. The result was an increase in net migration of almost 25% to 66,400 in 2020. The total exceeded the pre-pandemic level last year as well. With the ongoing economic recovery, that number is also likely to stay high in 2022 by hitting around 60,000.

Rental apartment market is experiencing structural changes in demand

Demand statistics continue to paint the same picture unwaveringly in spite of the pandemic, but there is one change nevertheless being observed: With more people working from home, demand for larger apartments has soared. This trend has been made apparent once again over the past year. That is because a large percentage of households in rental apartments in 2019 did not have an extra room for a home office. That was the case for 40% of households with at least two persons. These structural changes in demand will probably remain in place once the pandemic is over.

Construction of new rental apartments is lagging behind the demand

In 2021, building permits were issued for nearly 2,000 fewer rental apartments across Switzerland than in the year before. Actual construction activity is likely to have declined even further. First of all, hygiene and social distancing regulations were a major detractor. Secondly, there has been a lack of building materials on account of the global supply chain issues. Whenever projects are actually executed, they are often not carried out on greenfield sites but are increasingly performed on existing housing stock – in the form of renovations, extensions, adding stories, demolition, or replacement construction.

Even if the trend in building activity is pointing downwards for the next two years, there are at least some initial signs of long-term stabilization. The number of newly planned dwellings has hardly fallen any further over the past year. It is unlikely there will be an additional decline in rental apartment production. In Switzerland, that will be the case at least as long as there are no indications of a change in monetary policy as well.

Rental apartment market: building permits at their lowest level since 2013

Rental apartment market: building permits at their lowest level since 2013

Rental apartment permits issued (new construction) by municipality type (*2021: 12-month total as of November 2021)

Sources: Baublatt, Credit Suisse

Last data point: November 2021

Rental apartment market: Trend in rent levels pointing up

The fact that the erosion of landlords' market power in many regions has been stopped outside city centers seems to be gradually reflected in the regional structure of the trend in rent levels. According to analyses performed by Homegate, more rural cantons and those that attract more tourism saw a significant jump in rent levels in the past year.

The rent indices across Switzerland continue to show mixed results – depending on the criteria used for measurement. Yet, the various indices have one thing in common: The growth rates have recently indicated an upward trend. 

Rental apartment market: Price growth shifting to rural cantons

Rental apartment market: Price growth shifting to rural cantons

Advertised rents: Annual growth rates by canton

Sources: Baublatt, Credit Suisse

Last data point: December 2021

Rental apartment market recovery likely to continue in 2022

The recovery in rent levels outside of downtown areas is expected to continue this year. However, advertised rents are likely fall slightly once again (−1.0%) because the pressure from rent levels in city centers is subsiding and, outside the cities, there is still a considerable surplus in many places.

Overall, the rental apartment market appears to have turned the corner. Both the excess supply and the urban-rural discrepancies have grown smaller, but they have not disappeared by a long shot. A lack of change in monetary policy could also lead to a resurgence in monetary policy in the medium term. The result could be another expansion in the surplus, especially in combination with a weak economy.

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