The start of 2022 was marked by a rise in oil and energy prices, against a background of persistent geopolitical tensions.
The EU zone, weakened by the restrictive measures put in place during the two-year health crisis, is seeing its economic recovery restricted by the Ukrainian war and inflation.
Purchasing power has fallen significantly in France, Germany, and the United Kingdom, with a first quarter decline of between 4% and 7.5%.
As a safe haven in times of crisis, the strong Swiss Franc has preserved the country’s economy from inflation, with the rate stagnating at 2.1% in the first half of 2022.
Happening in the wake of the health crisis and its consequences for the supply of raw materials, the war in the Ukraine is further amplifying the inflation phenomenon.
Despite the inflationary context, growth above inflation is still expected, attesting to the good health of the Swiss economy which, despite a steep decline of the stock markets, is doing well.
Government bonds are following this upward trend, despite yields being still slightly below inflation rate.
In parallel the rise in mortgage rates, which began in January 2022 to curb an overly rapid economic recovery, is being confirmed without affecting institutional investors eagerness to purchase commercial real estate portfolios, that are better protected against asset depreciation thanks to rent indexation.
In the first quarter of 2022, SPGI Geneva alliance partner of Cushman & Wakefield, has sold portfolios that reached record values with yields of 2.2% on 120 Mio.
The relative size of the Swiss real estate market favours this trend, with demand outstripping supply, resulting in yields that remain aggressive despite the global economic context.
Corona restrictions lifted
The Federal Office of Public Health has lifted the national restrictions and bans. The cantons may take measures if required.
Inflation above average
The Swiss National Bank (SNB) is retaining its expansionary monetary policy. It is keeping the policy rate at -0.75 %. In addition, if needed, it is willing to intervene in the foreign exchange market to reduce pressure on the Swiss franc. Russia’s invasion of the Ukraine has led to worldwide uncertainty. This is one of the reasons why the Swiss franc remains highly valued. In February inflation reached 2.2 %. This is mostly due to the significant increase in the price for oil products and goods. The pressure on the prices is likely to persist further due to the war in the Ukraine. The SNB’s new conditional inflation forecast stands at 2.1 % for 2022, and 0.9 % for 2023 and 2024. The forecast assumes that the SNB policy rate remains at -0.75 %.
GDP growth slowed
Economic growth has slowed in Switzerland. The SNB expects GDP growth of around 2.5% for 2022. However, the forecast for Switzerland is subject to high uncertainty due to the future course of the war in the Ukraine and further sanctions as well as the tight supply of raw materials.
Liquidity in the rental housing market has generally declined. Advertised apartment rents fell by an average of 2.6 %. Blurring the boundary between home and work encourages a reassessment of the housing situation. Various real estate market indicators such as search subscriptions, vacancies and insertion times continue to confirm a shift in demand towards less central locations and larger apartments. Additionally, the second-home market is currently booming.
A decline in supply and demand for home ownership still on a high level is noticeable. This led to price increases of 6.7% for a medium-sized condominium and 8.3% for a medium-sized single-family house in the last 12 months. Nevertheless, the purchase of residential property is still attractive in terms of housing costs because mortgage interest rates are still very low. In 2022, further price growth is expected owing to supply shortage. Across all sub-segments, an average increase is of 2.5% for condominiums is forecasted and 3.0% for single-family houses.
After the pandemic-related restrictions were lifted in March, many people have returned to their offices. However, we assume that about 30% of working time will still be spent outside the office, which may curb space demand by ca 10%. Average rent has decreased by 2.6% compared to prior-year quarter.
The recovery in the retail market continues to progress. This can be explained, among other things, by the fact that more foreign visitors can travel again and are spending their money in Switzerland. On the other hand, the effects of structural change in the retail sector are still observable. Average rent has decreased by 2.9% compared to prior-year quarter. Nevertheless, retail space in central locations is still in demand.
Swiss real estate investments remain attractive. The transaction market has been active, especially in the residential sector. Retail and office properties in top locations are still perceived as good investment.
Corona restrictions eased
The Federal Office of Public Health announced easement of further Corona restrictions from the 17 February. Masks and Covid certificates are no longer required to enter shops, restaurants, cultural venues and other public settings and events. The recommendation to work from home has also ended. Only the requirements to isolate in the event of a positive test and to wear masks on public transport and in healthcare institutions are to remain till the end of March.
Inflation above average
The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. It is keeping the policy rate at −0.75%. The SNB’s new conditional inflation forecast for 2022 is slightly above that of September 2021. This is primarily due to higher import prices, above all for oil products and for goods affected by global supply bottlenecks. According to the Swiss Federal Statistical Office the annual inflation rate in Switzerland reached 2.2% in February of 2022. It was the highest inflation rate since October 2008. It is still to remain below the levels of most major industrialised countries, but above its average of the last 10 years.
According to the State Secretariat for Economic Affairs SECO, Swiss GDP grew by 0.3% in the last quarter of 2021, following a 1.9% increase the previous quarter. The recovery continued at a more moderate pace.
Despite high demand, advertised apartment rents fell by an average of 2.7% compared to the previous year. This decline is due to the still large supply volumes in some places and a shift in the overall market towards more peripheral locations. The trend towards home offices is also increasing the demands on bigger apartments. The number of search subscriptions for rental apartments with 3 to 5½ rooms has increased sharply, while the demand for small apartments with 2½ rooms or less has decreased.
Widespread demand for home ownership is noticeable in the dried-up market. In the last 12 months, the supply fell by a further one-fifth. Vacant building land is generally in short supply in many regions. This again drove up transaction prices for residential property. According to the Swiss Federal Statistical Office, prices of single-family houses rose by an average of 6.0% last year, and prices of condominiums by an average of 5.5%. The increase in single-family house prices was particularly pronounced in the urban municipalities of a medium-sized agglomeration. Prices for condominiums rose most strongly in the rural municipalities.
Due to the easement of pandemic-related restrictions, many people are returning to the offices. As a result, most companies expect demand for office space in top locations to remain stable. There are large regional differences in terms of supply. High market liquidity can be observed in the transaction market on Lake Geneva, in southern Ticino and in the Zurich conurbation. In Switzerland's five largest office markets - Zurich, Geneva, Bern, Basel, and Lausanne - the supply ratio of available space increased from 4.3% to 4.7% within twelve months. This is also due to the construction of new office space.
As e-commerce has gained further share in the retail market, it can be assumed that demand for retail space will remain under pressure. Average rent has decreased by 1.3% compared to prior-year quarter. Rents for retail space away from top locations are expected to continue to decrease. However, retail space in unique locations is still in demand.
Swiss real estate investments have remained attractive. The transaction market has been lively, especially properties in top locations. Despite some concerns about inflation, many institutional investors express interest in real estate.
After weeks of decreasing coronavirus infections despite the easing of lockdown measures, cases are increasing again. The vaccination rollout is continuing across the country; however, Switzerland is lagging most countries in Western Europe. Since the end of June, eligible travellers who are fully vaccinated can enter Switzerland without restrictions. The Swiss population accepted the COVID-19 Law in June 2021, which grants the federal council additional powers to mitigate the negative impacts of the corona pandemic on society and the economy. The most important measures are payments for short-time work (furlough leave), compensation for loss of income, assistance in cases of hardship, and support for cultural and sports organisations.
Due to the high investment pressure of institutional investors, the Swiss real estate market was highly resilient during the whole pandemic. The ongoing investor appetite generates a high demand for real estate with stable cash flows, particularly in good locations. Yields for CBD Offices and high street retail properties are almost unchanged.
Additionally, owner-occupied housing also experiences an unprecedented price growth. This derives from a surge in interest for owner-occupied housing due to the pandemic with a combined decline of supply over the last few years.
The improving epidemiological situation in Switzerland has allowed the easing of lockdown restrictions. As of 19 April, restaurant terraces, sport facilities, leisure and cultural facilities were able to reopen. Universities could go back to teaching in the classroom with a maximum of 50 people and events with capacity restrictions are permitted.
The vaccination roll-out is in full swing, with around 1,000,000 people fully vaccinated and people over the age of 16 now able to register for the vaccination in most cantons. Private gatherings are still limited to a maximum of 10 people, clubs, bars and the inside of restaurants remain closed and working from home remains mandatory.
Due to the lockdown measures by the Federal Government, parts of the service sector have seen a decline in business activity. The SECO (State Secretariat for Economic Affairs) therefore assumes a prop of Switzerland’s GDP in the first quarter. If the epidemiological situation permits further easing of the lockdown measurements, the domestic economy is expected to recover. For 2021 the SECO expects GDP growth of 3%, which would be an above average growth rate. The unemployment rate is expected to decrease gradually to 3.3%.
Institutional investors and pension funds continue to have high investment pressure, which led to the high resilience of the Swiss real estate market. However, the real estate investment market is increasingly characterised by geographical and sectoral differentiation, which has been further reinforced by the COVID-19 pandemic. Investors are focusing on the main cities of Zurich, Basel, Lausanne and Geneva and the residential market. At the same time interest in storage and logistics properties is further growing due to the increased e-commerce activities sparked by the pandemic. Investment properties in good locations and secure cash flows were particularly sough after, and limited supply of such properties let net initial yields tighten even more.
Residential rents in the major cities are expected to remain stable or slightly increase. Outside of the major cities, the residential rental market is increasingly becoming a tenant’s market due to higher vacancy rates.
The supply of office space in Swiss agglomerations increased as a result of the pandemic-related home office obligation. Companies are feeling uncertain about the future and postponed decisions regarding their office space planning. While demand has fallen in the
agglomerations, the major cities have seen an increase in demand. The changes in the demand are also reflected in the rent price as well as the yields for office properties.
Asking rents for retail properties on high streets have remained stable. The stability is due to the inertia of the retail market with its long contract terms and termination periods. In addition, the financial assistance from the federal government in form of short-time work compensation and bridging loans likely had a stabilising effect.
The count of COVID-19 cases could not be brought under control so the Federal Government decided to take further measures. The number of customers per square metre in shops has been reduced, there is a two-household rule for private gatherings and restaurant visits, and there are now various restrictions for ski resorts. Furthermore, the Federal Government continues to strongly recommend working from home.
The net yields for Swiss residential properties remain stable throughout the COVID-19 pandemic. The vacancy rate in the top cities such as Zurich and Geneva remain very low with stable median rent prices of CHF/sq m 330 in Zurich and CHF/sq m 370 in Geneva. The interest rates are expected to remain low until at least the end of 2021, which makes residential properties in sought after locations still a favourable investment for pension funds, other institutional investors as well as wealthy private investors.
The office market in Zurich, Geneva and Basel remained stable during the year of 2020. Prices declined slightly in the middle of 2020 but surged again towards the end of the year. The vacancy rate in Geneva stayed the same (5%), office space in Basel slightly increased from 1.8% to 2.2% and in Zurich the vacancy rate dropped from 1.4% to 1.1%. The median rents per square metre are CHF 360 in Zurich, CHF 240 in Basel and CHF 470 in Geneva. In peripheral locations and locations with weaker infrastructure the impact of COVID-19 is noticeable. The economic outlook as well as the increasing demand for a modern working environment make these locations less desirable. Potential tenants in peripheral locations are highly price sensitive, which drives prices down.
The rent prices for retail space in the high street of Zurich increased to CHF/sq m 440 from CHF/sq m 400 at the beginning of the year. Retail properties in the cities of Basel, Lausanne, Berne as well as Geneva also experienced a slight increase in its rental prices. Non-food retail space located within walking distance of the high street as well as on the outskirts experienced a decrease in demand with consequent price decline.
In summary, demand for real estate with stable cash flows in good locations remains high amongst Swiss investors. Net yields for residential, CBD offices as well as high street retail properties are almost unchanged. The yields for office and retail in secondary locations experienced a noticeable increase.
The number of new COVID-19 cases has risen almost exponentially over the last weeks, and as of today, the federal government in Switzerland has decided on several additional measures that will drastically impact everyday life.
Gatherings in public spaces and private events are now limited to 15 and 10 people, respectively, and masks must be worn practically everywhere.
Sports and cultural activities are restricted to an extent that will make most of them impossible. Nightclubs must close and there is a curfew from 23.00 to 6.00, universities must switch to distance learning, and working from home is strongly recommended.
Appetite for real estate investment remains high, also driven by Swiss pension funds and insurance companies whose cash surplus increased during the first lockdown.
We have seen a lot of traction on transactions relating to property types including:
- mixed-use; and
- commercial/industrial including developments.
Investors are still looking at core offices, but there are currently only smaller properties on the market. We expect most ongoing deals to be closed before end of the year - now accustomed to the pandemic situation, most investors have experience on how to deal with it.
Office space demand from occupiers is fluctuating, with some corporates still securing large spaces going forward, while others are now focusing on more flexibility.
The outbreak of the COVID-19 pandemic led to the most serious slump in economic activity in Switzerland for over four decades. Even though there are signs of the business situation easing, there is still a measurable decline in demand.
The development of the Swiss economy will remain dependent on that of the pandemic. In updated scenarios, a leading Swiss Economic Institute forecasts that output will shrink by 4.9% this year, based on the assumption that a likely increase of new infections in the winter months can be contained.
Nevertheless, the Swiss economy is coming through the crisis relatively well compared with the rest of Europe, with a 2021 GDP growth rate of 4.1% expected after all. Residential real estate and certain core products crystallise as a safe haven for investors, and the importance of new asset classes like data centers is elevated.
Switzerland has had very few new COVID-19 cases since the middle of May, so that in June most restrictions have been lifted. Due to slightly rebounding case numbers in July, it is since then mandatory to wear a mask on public transport and self-quarantine for ten days upon entering Switzerland from high-risk territories. Business continues as usual.
Corporate occupiers are bringing people back into their offices (with and without social distancing) and there is a debate as to whether they would be looking into reducing the existing footprint. Though we have some examples of companies putting excess space on the market, this seems to be rather linked to a difficult economic situation and decline in business turnover as opposed to implementation of alternative workplace strategies.
Office and retail letting activities are picking up again as tenants with expiring leases are searching for attractive opportunities. Even with demand being slightly less than normal, because of low supply, the major centres of German-speaking Switzerland exhibit paradox increase of market rent in certain submarkets (e.g. Zurich CBD). However, differences in office vacancy rates and market rents are expected to widen between city and fringe locations.
The funding situation of Swiss institutional investors has not changed, and they are still looking to invest in core and core+ real estate with a home bias. Large transactions initiated pre-COVID are now continued, with the sale of the 53,000 sq m Glatt Centre in Zurich and other notable transactions having been announced lately.
Last Thursday the Federal Council announced a plan for ‘the way back’ to the ‘new normal’:
- 27 April: some shops can open again, such as: hairdressers, DIY/garden centres, florists
- 11 May: all retail shops can reopen, schools as well
- 8 June: universities to reopen, as well as museums and zoos
Borders are still more or less closed, people are still being told to stay home and work from home. No specific date for restaurants, bars, coffee shops and sports facilities to reopen has been announced. This said about 75% of Swiss companies are still working normally.
The commercial real estate market starts to react to the slowing down of the economy. Landlords with restaurants and shops in their portfolios face a lot of pressure to reduce rents or even waive rent. We see that the retail real estate-sector and the hospitality and leisure-industry are for the time being almost ‘dead’. In the office market, we see transactions go further as if nothing had changed and others are put on hold or are even stopped. In the investment market we see transaction-processes not being started, some are put on hold, some deals still will close.
Since last week, the lockdown in Switzerland has been extended to 26 April. Schools, universities, shops (grocery stores, gas stations still open) and restaurants remain closed.
In Switzerland the lockdown was announced on 13 March. Schools, universities, shops (grocery stores, gas stations remain open) and restaurants are closed at least until the 19 April. People have been told to stay at home. Offices, construction sites and factories are still working - although everyone is asked to work from home wherever possible.
The authorities have developed several packages to try to help those affected by measures taken by the Federal Council (Bundesrat). Such as:
- short time work for all sectors
The commercial real estate market has started to react to the slowing down of the economy. Landlords with restaurants and shops in their portfolios face pressure to reduce rents or even waive rent - at least until the end of the lockdown.
Even though some landlords already face difficulties in securing rents for commercial space the real estate industry has not reacted so far.
There is no clear vision for the future, but it seems the retail-sector, is for the time being almost ‘dead’, particularly as all shops are closed right now.
There is also uncertainty in the office market. Some transactions are proceeding as normal whereas others have been put on hold or are even stopped entirely.
In the investment market we see transaction processes not being initiated, some being put on hold, some are closed. Pricing still looks quite high and unchanged.