Swiss Real Estate getting risky

ZURICH Buying a house or a flat in Switzerland is a less attractive proposition now than it has been in the last 10 years. While property values have reached a high, according to the UBS Real Estate Focus Report 2014 earlier this week, there has been a decline in momentum, which could mean that residential prices will fall. Commercial real estate values are also expected to drop. The report maintained that the average price growth for housing real estate fell slightly last year because apartments grew by only 3.5%, less than the 10-year average. Prices for single-family homes, on the other hand, rose 4.5% in 2013, slightly more than the year before. Overall, however, price growth has slowed, due to factors such as the doubling of long-term interest rates, the introduction of the anti-cyclical capital buffer (to ensure that banks have enough capital to weather another financial crisis), and tougher minimum standards in mortgage lending.

“Momentum may be slowing, but that cannot hide the fact that risks have continued to rise. Inflation-adjusted real estate prices are only roughly 5% lower than in 1989, when the last real-estate bubble burst in Switzerland,” Claudio Saputelliand Daniel Kalt wrote in the UBS report. They added that prices are still climbing faster than rents, household incomes, and consumer prices. “Nevertheless, we do not expect an across-the-board correction in home prices this year despite the weaker impetus from key market drivers (population growth, economic growth and interest rates).”

Instead, UBS forecasts weak price growth of 2% for single-family homes and condominiums in 2014. Political decisions on immigration, interest rates and the potential tightening of lending conditions will determine whether the market’s current calm will degenerate into a correction phase in 2015.“A credit squeeze would bring the risk of an abrupt drop in prices. Failing a slump in demand, however, there is a risk that real estate prices could soar to dizzying heights,” the report said. However, if the macroeconomic picture does not change, the Swiss home-owned housing market (as opposed to the rental market) should get a big enough boost to mean that buying is still a good idea in the medium term.

At the same time, this would build up “enormous risks for the economy”. Office valuations have also climbed to lofty heights in recent years, pushing net initial yields for prime locations to a historic low of 3%. This trend is driven by strong growth in lease prices. However, rental revenue is not expected to grow in the near future because there are so many construction projects going on, which is likely to reduce occupancy. UBS expects the vacancy rate of rented accommodation to increase by 1.2% by 2015.Retail properties are forecast to develop along similar lines. Swiss retailers are struggling to increase nominal revenues due to steep price reductions for consumer goods, and are thus less willing to pay for retail space.