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Swiss Real Estate Market 2017: Tenants wanted

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03/07/2017 | 10:07am CEST

The downturn in the rental apartments market is progressing at full speed, according to Credit Suisse economists. Despite rising vacancies, investment in the Swiss real estate market will continue, boosting construction activity in the rental apartments segment. This makes it inevitable that vacancies will continue to grow. Negative interest rates are driving this trend, as they ensure high yield spreads to other investments and continue to make real estate investments look attractive. These circumstances are likely to cause prices of multi-family dwellings to increase again in 2017, despite falling rents. Prices of owner-occupied housing, on the other hand, are no longer rising. After 14 years, the price growth came to an end in the fourth quarter of 2016. For most households, owner-occupied housing is a fata morgana: The low actual housing costs are just an illusion, as regulation and high prices put home ownership out of reach for many households. In their latest study, Credit Suisse's real estate specialists examine also the commercial real estate market and discuss the impact of digitalization and automation on the demand for office space.

Real estate remains very high up in investors' favor. The run on 'concrete gold' can be seen in the ongoing construction boom in rental apartments, the growing share of real estate in the portfolios of institutional investors, and the good to excellent performance of real estate funds and equities in the past year. The longer the run lasts, however, the more it will undermine its own basis as vacancies rise unchecked and rental incomes come under pressure.

Rental apartments: downturn progressing at full speed

The downturn that began in the rental apartments market last year is set to continue in 2017. The negative interest environment prevailing for over two years and the investment crisis resulting from this are driving the construction of rental apartments to very high levels - despite the fall in demand due to lower immigration. Thanks to the economy's gradual recovery from the Swiss franc shock, the Credit Suisse economists do not expect any further decline in immigration in 2017. Nevertheless, the structural trend toward lower tenant purchasing power is set to continue because immigrants increasingly come from poorer countries and well-off Swiss households are switching to home ownership. This is depriving the rental apartments market of purchasing power. Vacancies are set to increase further and marketing to become more difficult. The competition for tenants will therefore become more intense. While risks in the market are therefore rising for the landlord, tenants are likely to have an easier time finding accommodation and will increasingly benefit from lower rents. The oversupply will be more closely felt in the agglomerations in the medium term, as construction activity is being stepped up above all in these municipalities. Housing remains scarce in the urban centers, on the other hand, where the lack of land and a high regulatory burden are hindering the growth of supply.

Home ownership: a fata morgana for many

After 14 years, price growth in the owner-occupied residential sector is at an end. Yet despite slightly falling prices, the ownership segment remains in calm waters. In contrast to the other markets, there is no oversupply prevailing or foreseeable. The promoters of owner-occupied housing recognized at an early stage that the high prices in combination with tightened financing guidelines were curtailing and partially deflecting demand. Despite a restrained expansion of supply, however, the market environment is also not getting any easier for owner-occupied housing. A growing number of households are no longer able to shoulder the financing of owner-occupied housing due to the increased financial requirements. The low mortgage interest rates are in this sense merely an optical illusion for many households. Demand in the current year will therefore continue to concentrate more on regions with prices that are still affordable as well as the low and mid-priced segments. While the Credit Suisse economists expect a continued rise in prices in these regions, prices in the high-price regions and the high-price segment in general are expected to fall further - although at a lower speed. The Credit Suisse real estate specialists expect a fall in owner-occupied prices in 2017 of no more than 0.5%.

Living alone: trend toward single living

Single-person households are today the most common type of housing in Switzerland, and this is likely to remain the case. The reasons for living alone are extremely varied. A fairly new trend is for individuals to prefer living on their own despite being in an existing relationship. Microapartments are an innovative residential concept that has recently arisen from the trend toward single living. These are optimally tailored to the needs of many single households in terms of zeitgeist and requirements. High living costs in the urban centers are shifting the focus of demand to smaller homes. Micro apartments fit in perfectly with the new lifestyle of minimalism: space-saving technological developments and a growing range of services delivered to the door have boosted the acceptance level of small properties. Micro apartments are an attractive type of housing for investors, as their rental income per square meter is higher than that of larger apartments and the target groups are very diverse.

Office property: unclear long-term demand outlook

Rising vacancies and falling rents characterize the office property market. The downturn is slowing, however: The supply rate has not increased any further on the whole, and has actually fallen in a majority of the major centers. The Credit Suisse economists found that this was due to a slight pick-up in demand as well as the disappearance of previously unsuccessful office projects from online portals. Spurred on by negative interest rates, expansion is set to continue at the current level. Construction is often being carried out for the investor's own needs, at very good locations and increasingly in medium-sized centers. The oversupply is barely likely to shrink against this background. Vacancies are merely shifting and concentrating on poorly accessible or aging office properties. In central business districts, the situation for landlords is likely to improve gradually. However, rents are continuing to fall outside of these centers and the long-term prospects for the demand for office space are also uncertain. The savings pressure due to the strong Swiss franc is forcing companies to enhance their processes and reduce costs. This is affecting the office property market in the form of resource-efficient workplace models or cuts in jobs that are falling victim to either outsourcing abroad or automation. Digitalization is stimulating the automation of office activities, and it remains to be seen whether new activities created by the digital revolution can offset the loss of rationalized office jobs quickly enough. These would need to make up for around one-fifth of office space in the long term, the Credit Suisse economists predict.

Credit Suisse Group AG published this content on 07 March 2017 and is solely responsible for the information contained herein.
Distributed by Public, unedited and unaltered, on 07 March 2017 09:07:03 UTC.

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Financials ( CHF)
Sales 2017 21 438 M
EBIT 2017 2 312 M
Net income 2017 1 454 M
Debt 2017 -
Yield 2017 3,09%
P/E ratio 2017 19,75
P/E ratio 2018 11,19
Capi. / Sales 2017 1,59x
Capi. / Sales 2018 1,54x
Capitalization 34 123 M
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Average target price 14,5  CHF
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Tidjane Thiam Chief Executive Officer
Urs Rohner Chairman
Pierre-Olivier Marie Bouée Chief Operating Officer
David R. Mathers Chief Financial Officer
Richard E. Thornburgh Vice Chairman
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