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Swiss Real Estate Market 2019: Floor plans are a deciding factor

Credit Suisse publishes ‘Swiss Real Estate Market 2019’ study

Construction activity is set to continue as long as negative interest rates persist. This means that the Swiss real estate market will have to adapt to even higher vacancy rates for rental apartments. Vacancies are forcing landlords to refocus their attention on the quality of their products – i.e. the standard of housing they offer. In addition to locational factors, it is primarily the floor plan of properties that determines how much benefit tenants can derive from the number of square meters they rent. Using new technologies, it is now possible to measure floor plan characteristics and to thus differentiate objectively between good and poor layouts.

The ‘Swiss Real Estate Market 2019’ study published today by Credit Suisse examines the quality of floor plans. Credit Suisse economists have joined forces with the Swiss start-up Archilyse to analyze the different aspects that determine layout quality. Using algorithms, floor plan criteria such as brightness and versatility in furnishing can now be measured, making it possible to compare the different aspects that enhance the quality of a property. Sooner or later, tenants should profit not only from a larger selection of properties and more affordable rents but also from enhanced floor plans. In contrast, residential landlords can benefit from the continuation of this period of low interest rates. It appears that buying will remain a cheaper option than renting for the foreseeable future. According to Credit Suisse economists, the ownership discount currently stands at an average of 18% compared to the cost of renting in Switzerland.

Importance of floor plans neglected
The quality of floor plans was largely overlooked for a long time. Surprisingly, layout quality has never really been assigned much importance in the real estate business, even though prospective tenants name it as the fourth most important factor in evaluating a home, after rent price, size, and brightness. This aspect may have been neglected because the Swiss housing market was skewed in favor of landlords for a long time after the end of the 1990s, meaning that they didn’t have any difficulty in closing new leases. The situation was exacerbated by the fact that floor plan quality was difficult to measure.

Algorithms: Making layout characteristics measurable
With the advance of digital technologies, it is now possible, for example, to calculate the amount of direct light entering every room in an apartment, allowing its brightness to be quantified. “Floor plan characteristics can thus be compared more closely, and prospective tenants have access to more information without having to visit the apartment," explained Matthias Standfest, CEO of Archilyse. Together with the innovative start-up that has mastered these digital technologies, Credit Suisse economists want floor plans to be assigned the level of importance that they actually deserve. A well planned layout can substantially enhance the user value of an apartment and, in particular, help to significantly reduce the risk of vacancies. This means that the real estate agent's mantra about the factors that determine value in the housing market – “Location, location, location!” – will have to be updated to include floor plan quality.

Owner-occupied housing: Buying is cheaper than renting for the foreseeable future
Despite current high property prices, owner occupancy remains the most economical form of housing in nearly all regions of Switzerland. Based on a calculation of the full costs involved, a condominium is, on average, 18% cheaper than a comparable rental apartment. If only the cash-effective costs are included, the result is even more pointedly in favor of owner occupancy. This can be attributed to persistently low mortgage rates, which – when combined with the favorable economic environment and the healthy labor market – should actually boost demand. This is not the case because of the high financing hurdles imposed by regulations, which limit the demand for owner-occupied property.

Consequently, price growth should remain modest in 2019 and is unlikely to exceed the 2% threshold, according to forecasts by Credit Suisse economists. The fact that prices are rising at all is due to the low level of construction activity. Since developers are concentrating on building rental apartments, which are snapped up by investors, the production of owner-occupied housing is in steady decline. This leads to shortages in some places, driving up prices. With demand constrained by regulations and the construction of owner-occupied housing on hold, the ownership rate – which currently stands at around 39% – is likely to fall in 2019 for the first time in many years, according to the study by Credit Suisse economists.

Rental apartments: Quality protects against vacancies
The decline in immigration has come to a halt thanks to the economic recovery. Net immigration is likely to increase again by around 10% in 2019. The demand for rental apartments should subsequently recover, even if economic momentum decelerates. The German-speaking region of Switzerland is most likely to benefit, since the immigration trend has not yet been reversed in Western Switzerland. This difference between regions can be attributed to the increased emigration of Portuguese nationals, who make up the largest foreign contingent in Western Switzerland.

Since there has been virtually no reduction in construction activity, 2019 will once again see large numbers of rental apartments released onto a market that is already oversaturated in many regions. Building is concentrated in the suburbs, while construction activity in the major centers is falling drastically compared to that in other types of municipalities. Consequently, the housing shortage in the major centers is actually a self-inflicted problem. Total construction activity remains too high as a direct result of low interest rates, and it is focused on the wrong areas, with an insufficient level of densification.

The disparity between supply and demand outside major urban centers will lead to an increase in the number of vacant apartments in 2019 for the tenth consecutive time, even if vacancy rates are rising at a slower pace than in the previous year. Meanwhile, Credit Suisse economists expect advertised rents to trend more markedly lower, falling by 1% to 2%. Locational quality will thus be more important than ever when competing for tenants. The topography of vacancies (see chart) clearly shows that the accessibility of a location, and its proximity to major centers, is a key factor in reducing vacancy risk.

Evolving demand for office space
There are greater forces at work in the market for office space than might be assumed based on the relatively intact market data. The world of work is in a transition phase. Digitalization and automation are transforming work activities. Atypical working relationships are becoming more widespread. They include: Part-time work, temporary assignments, freelance careers, job sharing, working on call, or internships. Flexible working models are likewise becoming more prevalent, as they meet a great need among the workforce. The obstacles that prevent people from working anywhere have been eliminated thanks to laptop computers, powerful broadband connections and cloud solutions. Nevertheless, more than 80% of workers are still active at a fixed location, reflecting the importance of being able to spontaneously share information with colleagues in the workplace. However, workers are harnessing the power of technology and are increasingly working in transit or from a home office.

As a result, companies have incentives to shift from an immobile workplace model to an activity-based one, where the task at hand determines the appropriate workspace. Consequently, providers of office space must prepare to meet new requirements in terms of the flexibility and layout of their properties. Open, flexible, smart office layouts are in demand. Fixed spatial structures are being rearranged, which is only possible with highly mobile office furnishings and the corresponding architectural parameters. Communication is becoming a key factor that calls for unconventional office spaces. Moreover, greater flexibility is also being sought with regard to leasing conditions – such as the term of leasing contracts.

Source: Swiss Federal Statistical Office, Navteq, Geostat, Credit Suisse 

 

The complete study ‘Swiss Real Estate Market 2019 – Location, location, floor plan’ is available online in English, French, German and Italian at:
www.credit-suisse.com/realestatestudy