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Swiss Real SnapShot!Builder Interest Rate

Current developments in the Swiss real estate investment market

Autumn/Winter 2018

Content04 Macroeconomic

Overview

06 Office Property Market

07 Retail Property Market

09 Residential Property Market

11 Direct Property Investments

12 Indirect Property Investments

14 Residential Property in the Canton of Vaud

Swiss Real SnapShot! 1

2 Swiss Real SnapShot!

Introduction

Dear Sir or Madam

KPMG Swiss Real SnapShot!, published twice a year, provides you with an overview of the current developments in the Swiss real estate market and its influencing factors.

The Swiss real estate market is a heterogeneous and strictly segmented structure. Thus, KPMG Swiss Real SnapShot! concentrates on a global observation. Regional deviations are commented occasionally in a focus article.

KPMG Real Estate has both, Swiss-specific and global expertise in the real estate markets. Our extensive data pools on local markets along with competent andin-depth consultation generate added value for our clients in all areas related to real estate.

Turn to page 16 of KPMG Swiss Real SnapShot! to see what we can do for you and how you can benefit from our services.

We wish you a pleasant and informative reading.

With kind regards,

Ulrich PrienPartner, Head of Real Estate Switzerland

Beat SegerPartner, Real Estate M&A


Builder Interest Rate

Macroeconomic Overview At the end of Q3 2018, the Swiss economy is looking at a bright future. The State Secretariat for Economic Affairs (SECO) is anticipating further positive momentum in both foreign trade and the domestic economy, and by October 2018 it again increased its forecast for GDP growth to 2.9% for the year.

After the spring of 2018, when Credit Suisse and UBS had assessed economic growth to be even lower, namely at 1.7% and 1.8%, both banks now agree with SECO’s forecast thus increasing their estimates to 2.7% and 2.9% respectively. At 2.88%, the average evaluated by the forecasting institutes in the consensus forecast practically matches SECO’s expectations, after standing at 2.1% in H1 2018.

With strong economic prospects – and with population growth also slowing – the situation in the Swiss labor market continues to tighten. In H2 2018, the Swiss forecasting institutes are revising their assessments of the unemployment rate downwards once more. As a result, the consensus unemployment forecast for the unemployment rate as at the end of October 2018 has been lowered again to an average of 2.6% (Spring 2018: 2.9%). For 2019, a further reduction in unemployment (to 2.4%) is expected, despite economic growth weakening to 1.7%.

Over the course of the year, anticipated inflation for 2018 has been revised significantly upwards. Whilst the consensus forecast for the consumer price index in the spring still stood at 0.5%, in October the forecasting institutes unanimously adopted an inflation rate of 1.0% for the current year. Inflation of 0.9% is expected for 2019. Thus, the forecasting institutes agree that the inflation which has prevailed over the past year (0.5%) – after a phase of stagnating consumer prices since 2009 – will continue.

Macroeconomic indicators1

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

P

2019

P

GD

P g

row

th, u

nem

ploy

men

t ra

te

and

Con

sum

er P

rices

Inde

x

Forecast average

GDP growth Unemployment rateConsumer Prices Index

Source: BAKBasel, Credit Suisse, KOF, SECO, UBS and KPMG

1 P = Consensus forecast based on BAKBasel, UBS, Credit Suisse, KOF and SECO


Global economic prospects remain positive. The International Monetary Fund expects global GDP to grow by 3.9% for both the next two years. After an initial increase at the start of the year, the 2018 forecast for industrialized countries increased once again to 2.4%in the second half. Positive growth rates are also forecast in all regions for 2019. However, the IMF expects a slowdown to 2.2% in the growth rate in the advanced economies next year, whilst growth forecasts in emerging and developing countries predict an increase, from 4.9% this year to 5.1% in 2019.

The reasons given for the lower forecasts are the higher risks resulting from the planned exit from an expansionary monetary policy, rising oil prices worldwide, the implementation of Brexit and budget deficits in some European countries. Overall, and despite the political tensions in world trade, the global economic outlook is optimistic for Switzerland as an exporting nation.

Global GDP growth

0% 1% 2% 3% 4% 5% 6%

Global growth

Industrialisedcountries

USA

UK

Eurozone

Japan

Emerging anddeveloping countries

2018 2019

Source: IMF and KPMG

According to the State Secretariat for Migration (SEM), with net immigration of 53,000, net migration fell in 2017 for the fourth time in a row to its lowest level for the past ten years. In its reference model, the Federal Statistics Office (BFS) expects annual immigration to remain static at around 60,000 until 2030 and to stabilize at 30,000 until 2040. In 2018, net immigration up to the end of September had reached 37,100. Therefore immigration to the end of the year should once again turn out lower than in the previous year.

Net migration

-20,000

0

20,000

40,000

60,000

80,000

100,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

L

Net

mig

ratio

n

Germany France ItalySpain Portugal AsiaOther Countries Africa Total

Source: BFS, SEM and KPMG

In December 2017, the Purchasing Managers’ Index (PMI) peaked at 65.6, its highest level since February 2011. At an average of 62.9 in H1 2018, this level could no longer be reached. The index fell in the third quarter and by October 2018 it stood at 57.4, which still is well above the growth threshold. The KOF economic barometer has been fluctuating around its long-term average of 100 since May 2018 and, at 100.1 at the end of October, it is predicting slower growth than the PMI. According to KOF, it is very striking that the slowdown is evident across different indicators. Besides a marked decline in the manufacturing sector, the indicators for the construction industry and banking and insurance institutions, as well as the consumer and export indicators have all dropped.

Purchasing Managers’ Index, KOF economic barometer and

EUR – CHF exchange rate

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

0

20

40

60

80

100

120

140

Jan.

200

1

Jan.

200

2

Jan.

200

3

Jan.

200

4

Jan.

200

5

Jan.

200

6

Jan.

200

7

Jan.

200

8

Jan.

200

9

Jan.

201

0

Jan.

201

1

Jan.

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2

Jan.

201

3

Jan.

201

4

Jan.

201

5

Jan.

201

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Jan.

201

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Jan.

201

8

EU

R – C

HF exchange rateP

MI a

nd K

OF

baro

met

er

EUR – CHF exchange ratePMIPMI growth threshold

KOF barometerKOF barometer 10-year average

Source: Procure, Credit Suisse, SNB, KOF and KPMG

Overall, the outlook for the Swiss economy is promising, and – despite minor corrections in 2019 – positive growth rates can be expected over the short to medium term.


major Swiss cities in 2018: Basel (-2.8%), Bern (-13.1%) and Zurich (-20.7%). In Geneva, in contrast, office space vacancy increased significantly again in 2018, after declining by 43.7% last year. Due to the situation in Geneva, total vacant office space in the four cities has increased again, to around 480,000 sq. m. Nevertheless, even in Basel, Berne and Zurich, despite the renewed fall and the positive economic outlook, there is no talk yet of a significant relaxation. In many locations, the vacant office space gives prospective and current tenants plenty of room to manoeuvre and a negotiating margin, so that asking and contractual rents will remain under pressure.

Office space vacancy in the principal centres

0

100,000

200,000

300,000

400,000

500,000

600,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Vac

ant

offic

e sp

ace

in s

q.m

Basel Bern Geneva Zurich

Source: City statistical offices and KPMG

Office MarketIn the Swiss office space market, despite the strong economic environment, the marketing situation remains quite difficult. The decline in immigration, the ageing population and the sluggish employment rate continue to exert pressure on the demand side. However, the office employment figures are underpinning the office market in 2018.

According to the Federal Statistics Office, office employment has been more or less static at around 1.13 million full-time equivalent (seasonally adjusted) between 2014 and 2017. This year, the good economic prospects seem to be manifesting themselves in office employment. In both Q1 and Q2 2018, employment grew by around 2.65% compared to last year in each case. The miscellaneous economic services sector (Q2: +1.03% compared to last year), the independent professional, scientific and technical services sector (+0.82%) and the information technology and communications (+0.52%) sector have contributed particularly to the growth of full- time equivalent employment. Only the financial and insurance services experienced negative growth figures, dropping by -0.40% in the first quarter and -0.32% in the second quarter.

Compared to last year, the office space market has somewhat recovered as regards vacancy figures in the

80

90

100

110

120

130

140

150

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Q1

2000

Q3

2000

Q1

2001

Q3

2001

Q1

2002

Q3

2002

Q1

2003

Q3

2003

Q1

2004

Q3

2004

Q1

2005

Q3

2005

Q1

2006

Q3

2006

Q1

2007

Q3

2007

Q1

2008

Q3

2008

Q1

2009

Q3

2009

Q1

2010

Q3

2010

Q1

2011

Q3

2011

Q1

2012

Q3

2012

Q1

2013

Q3

2013

Q1

2014

Q3

2014

Q1

2015

Q3

2015

Q1

2016

Q3

2016

Q1

2017

Q3

2017

Q1

2018

Em

ploy

men

t gr

owth

YoY

Index of changesin em

ployment

Other servicesProfessional, scientific and technical services

Property and housing Financial and insurance servicesIT and telecommunications

Annual growthEmployment Index

Public AdministrationOther business services

Changes in typical office employment by sector (seasonally adjusted)

Source: BFS and KPMG


Accordingly, the downward trend in asking rents for office space continued in H1 2018. The most obvious decline compared to last year was seen in Geneva, at -7.5%. But asking rents also fell significantly in Basel (-3%) and Berne (-2.7%). It was only in Zurich that the change in asking rents was only just negative, at -0.5%.

Asking rents for office space in the principal Swiss cities

90

100

110

120

130

140

150

160

170

180

H1

2000

H1

2001

H1

2002

H1

2003

H1

2004

H1

2005

H1

2006

H1

2007

H1

2008

H1

2009

H1

2010

H1

2011

H1

2012

H1

2013

H1

2014

H1

2015

H1

2016

H1

2017

H1

2018

Ren

tal P

rices

Inde

x


Source: WP and KPMG

Besides the existing vacancy rates and the declining trend in asking rents, despite the positive impetus from the growth in employment, the office space rental market still faces structural challenges. Often, older premises no longer meet modern requirements. They are coming under pressure from higher quality or more flexible new premises, so fierce competition and intensive marketing can be expected in future when tenants change.

Retail MarketRetail sales lost their momentum in H2 2018 after an unexpectedly positive outcome last year (+1.5%). According to the Federal Statistics Office, since the beginning of the year nominal retail sales have fallen by around 2.2%, and at the end of September 2018 they were at their lowest nominal level for ten years.

In January 2018, the quarterly consumer sentiment index stood at 5, putting it in positive territory for the first time since July 2014. The positive trend of the Swiss economy and the improved labor market situation have impacted consumer sentiment. However, the recovery was of only short duration. Dropping back to -7 after only two positive quarters, consumer sentiment was back in negative territory as early as July 2018; in October it stood at -6. Despite the positive economic trends, the strongest pressure on consumer sentiment is still coming from insecurity in the job market, with a balance of -44.

Retail sales and consumer sentiment index

-50

-40

-30

-20

-10

0

10

20

30

40

50

80

85

90

95

100

105

110

Jan.

200

8

Jan.

200

9

Jan.

201

0

Jan.

201

1

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201

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201

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201

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201

8

Inde

xed

reta

il sa

les

Consum

er Sentim

ent Index

Consumer Sentiment IndexSeasonally-adjusted retail sales in nominal terms

Seasonally-adjusted retail sales in real terms

Source: BFS, SECO and KPMG

According to the city statistics offices, in 2018 retail space vacancy in Basel, Berne, Geneva and Zurich fell overall by 6%, or 2,500 sq. m, compared to last year. This puts last year’s marked increase (+28%) back into perspective to some extent. Considerable differences can once again be seen between the four major cities. In Zurich22, vacancy has declined by -47%, after a significant increase last year, of +228% (+7,000 sq. m). In Berne, at -11% the trend was also positive. Since 2015, vacancy trends in Basel have been relatively stable, and in 2018 vacancy there was around 1% above last year’s level.

2 In Zurich, only shops larger than 500 sq. m are included in the survey and so the recorded vacancy levels are automatically too low.


Asking rents for office space in the principal Swiss cities

60

80

100

120

140

160

180

200

220

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Q1

2016

Q1

2017

Q1

2018

Ren

tal P

rices

Inde

x


Source: WP and KPMG

With domestic and foreign online trade taking a growing market share, and weak consumer sentiment, there is no prospect of a trend reversal in the retail space market. The shift to online retailing or hybrid formats and the decline in sales in bricks-and-mortar retail spaces mean that retailers are closing poorly frequented locations or reducing their shop surfaces. There is continued demand for retail formats which complement online retailing, convenience stores and flexible sales space in prime locations with high levels of footfall. For property owners in many locations, this results in lower rental income, higher tenant fluctuation and an increased need for active property management.

Retail space vacancy in the principal centres

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Vac

ant

reta

il sp

ace

in s

q.m


Source: City statistical offices and KPMG

Despite lower vacancy rates in some locations, retail space remains under pressure, in particular because of the continued growth in online trade. In H1 2018, asking rents fell again compared to last year in Geneva (-4.2%), Zurich (-2.8%) and Berne (-1.2%). An increase in asking rents was seen only in Basel, at +2.0%. Therefore, H1 2018 asking rents for retail space in Basel stood at almost exactly the same level as in 1998. There are signs of continued pressure on retail rents when leases are extended or renegotiated. A similar downward trend in both asking rents and agreed rents is likely to continue in many locations.


Residential MarketProspects have also deteriorated in the market for residential space. Because the yield differential compared to fixed-income investments remains attractive, residential property remains in favor with investors despite the slowdown in net immigration, and so supply is constantly expanding. In the current environment, it is unlikely that the Swiss National Bank will increase interest rates quickly. Consequently, construction investments remain high.

After a slight decline in construction permits granted for new rental homes, to 27,000 units in 2017, the number of construction permits granted for homes in 2018 is back at the peak level of 2016, at 29,000 units. According to Credit Suisse, compared to the average since 2007, significantly more rental homes were approved by local authorities in the conurbations (+67%) and other municipalities (+68%) than in the city centers (+38%). Still no significant increase in interest rates (which are the strongest driver of the investment crisis and the high level of construction investment) is expected. Pressure on rents and vacancies concerning residential properties is therefore likely to remain high, particularly outside the city centers.

In 2018, at 1.62%, residential vacancies in Switzerland reached a new high point since the end of the 1990s. Besides the decline in immigration, this is largely due to the high level of construction activity. Supply has grown faster than demand, particularly on the peripheries of secondary centers and in rural regions. Accordingly, vacancies in the major rural regions of Eastern Switzerland (2.08%), Ticino

(2.02%) and Espace Mittelland (1.99%) are above the overall Swiss average. Vacancy rates are lower in the more urban major regions of Zurich (0.99%) and Lake Geneva (1.30%), but here too, as in all regions, vacancies have risen again compared to last year. Comparing the cantons, at 2.98% Solothurn recorded the highest vacancy rate, as it did last year, followed by Aargau (2.65%) and Jura (2.56%). Again just like last year, vacancy rates were lowest in Zug canton (0.44%), followed by Geneva (0.53%) and Obwalden (0.70).

Vacancy Rates

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Sw

itzer

land

Lake

Gen

eva

Reg

ion

Esp

ace

Mitt

ella

nd

Nor

thw

est

Sw

itzer

land

Zuric

h

Eas

tS

witz

erla

nd

Cen

tral

Sw

itzer

land

Tici

no

2014 2015 2016 2017 2018

Source: BFS and KPMG

Since January 2017, rents in Switzerland have been on a downward trend. For Switzerland as a whole, as at the end of September 2018 the index of asking rents published by homegate.ch had again fallen by 0.2% year-on-year. In Zurich, asking rents have increased slightly, by +0.5% compared to last year. However, at 117.2 (2009=100), last

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

90

95

100

105

110

115

120

125

130

Mar

09

Sep

09

Mar

10

Sep

10

Mar

11

Sep

11

Mar

12

Sep

12

Mar

13

Sep

13

Mar

14

Sep

14

Mar

15

Sep

15

Mar

16

Sep

16

Mar

17

Sep

17

Mar

18

Sep

18

Inde

xed

chan

ges

in r

enta

l pric

es Change Y

oY – S

witzerland

Change YoY – Switzerland

Rental Price Index for Switzerland Rental Price Index for the canton of Zurich

Rental Price Index for the canton of Basel

Rental Price Index for the canton of Bern

Rental Price Index for the cantons of Geneva and Vaud

Asking rents index, quality-adjusted

Source: homegate.ch and KPMG


year’s index was at the lower end of the levels of 117 to 118 seen in recent months, so that the trend in Zurich appears to be stable.

In the cantons of Geneva and Vaud, after an upward phase from May 2017 to April 2017, quality-adjusted asking rents are now falling again. In September 2018, the index was 2.9% lower than last year. The strongest growth in asking rents was seen in Zug, at +3.2%.

In June 2017, the reference mortgage interest rate was reduced to 1.5%. A reduction of 0.25 percentage points in the reference interest rate entitles tenants to a 2.91% reduction in rent. According to the Federal Housing Office, only 20% to 25% of households requested a reduction in rent, suggesting that changes in the reference mortgage rate have not been passed on in full to landlords. At the end of September, the average mortgage interest rate, on which the reference rate is based, was at a new low of 1.49%. For the reference interest rate to rise, the average rate would need to reach a threshold of 1.625%. Such a slight increase in interest rates cannot not be expected to initially result in a positive impetus for existing rent income.

Changes in reference interest rate

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

1.2%

1.3%

1.4%

1.5%

1.6%

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1.8%

02.0

8.20

1602

.09.

2016

02.1

0.20

1602

.11.

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.01.

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1702

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1702

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02.1

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1702

.11.

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02.1

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.01.

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02.0

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1802

.03.

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02.0

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1802

.05.

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02.0

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1802

.07.

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02.0

8.20

1802

.09.

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02.1

0.20

18

SNB target range (right axis)Mortgages 10-year fixed rate (left axis)

Mortgage reference interest rate (left axis)

Yield on 10-year federal bonds (right axis)

3-month Libor (right axis)

Source: SNB and KPMG

The Federal Office for Migration assumes that immigration will decline further and the high level of construction activity is expected to continue for a while. In the case of new constructions and major renovations, success still depends on meeting tenants’ needs. This requires careful analysis of markets and locations in terms of macro- and micro-location, housing mix and price segment.


Direct Property InvestmentsIn recent years, developments in the Swiss property investment market have been determined largely by yield compression. Whilst trends in transaction-based initial yields for direct property investments were relatively stable in the second quarter compared to last year, valuation-based yields for existing investments fell again.

In Q2 2018, net yields for existing direct property investments declined across all sectors. In the residential segment, the trend of previous years continued, and according to data from SIV/REIDA the median return fell from 4.0% in the same quarter last year to 3.8%. The lower yields for mixed/commercial use properties was less pronounced, dropping from 4.1% last year to 4.0%. For office properties, the previous trend reversal (from 4.4% in 2016 to 4.7% last year) was again overturned. In Q1 2018, net yields for existing investments in office properties were back at 2016 levels, at 4.4%. However, differences between the 30% and 70% quantiles have increased again in this segment in particular. This suggests that property appraisers have placed greater weight on the differences between individual office properties. Whilst high-quality office properties in urban locations continued to be held at decreasing yields, yields in peripheral locations remained virtually unchanged.

Net yields for existing investments by use category

Median

30th percentile

70th percentile

1%

2%

3%

4%

5%

6%

2016 2017 2018 2016 2017 2018 2016 2017 2018

Residential Office Mixed use

Source: SIV/REIDA and KPMG

With a median of 3.0% in the residential segment and 3.6% in the mixed-used segment, an evaluation of initial yields shows that net yields are lower compared to yields for existing investments. For office properties, initial yields at 3.5% are significantly closer to yields for existing investments (4.4%). The difference between the two yields indicates that investors in the commercial segment are less prepared to pay a premium for acquisitions than is sometimes the case for residential properties.

Net initial yields by use category3

1%

2%

3%

4%

5%

6%

2016 2017 2018 2016 2017 2018 2016 2017 2018Residential Office Mixed use

Median

30th percentile

70th percentile

Source: SIV/REIDA and KPMG

With exhausted rental potential and increasing vacancy risks, sound market knowledge, targeted portfolio diversification and risk management are becoming more important. With the positive economic prospects in the United States, Europe and Switzerland, a normalization of interest rates – albeit slow – is expected. This will reduce the relative attractiveness of real estate investments as returns stagnate or even fall. The specific individual characteristics of individual properties will then become more important.

3 The median and the 70% quantile of net initial yields for mixed use properties in 2018 stands at 3.6%


Indirect Property InvestmentsThe yield on 10-year federal bonds has returned to positive territory, at 0.19% in February and 0.16% in April. However, in the third quarter of the year the yield was again mainly negative, falling as far as -0.13% in August. At the end of October 2018, at -0.01%, the yield for Swiss federal bonds was practically zero. After a negative performance in 2016, in 2017 the SMI surged upwards, and at the end of December 2017 it was almost 13% above the level at the beginning of the year. But by H1 2018 the SMI once again lost considerable momentum, and in mid-July it was back at the same level as at the beginning of 2017. After major fluctuations, by the end of October the Swiss stock market had dropped almost 2% below its level at the beginning of the year.

Exchange-listed property companies in particular followed the turbulent movements in the SMI. At the end of August 2018, they were still showing a YTD total return of 3.43%, but by the end of October the overall yield had fallen to -0.97% (YTD). Whilst property funds were less volatile over the same period, in return investors downgraded them further, with an overall yield of -3.93%.

Thus, the premium on quoted Swiss property funds fell markedly, from 25% at the end of March 2018 to 16% at the end of October 2018. Premiums have actually fallen by 21 percentage points from last year›s peak at the end of February 2017 (37%) and thus decreased by more than 50%. Mark-ups of 46% and 38% are being paid for Streetbox Real Estate (62% at the end of March 2018) and La Foncière (56% at the end of March 2018), as was already the case in March of this year.

At an average of 12% at the end of October 2018, premiums over the net asset values of the large Swiss property companies are still below investment fund premiums. However, the price corrections experienced by the property companies were much more moderate compared to those of property funds, averaging 21% by the end of March 2018. Accordingly, the difference in premiums between the funds and the companies had reduced to 4 percentage points by the end of October 2018. Premiums/discounts of individual property companies vary greatly. At the end of October 2018, SPS, the largest Swiss property company, was trading at a premium of 20%. The highest mark-up over net asset value, of 54%, was paid for Intershop, while Züblin lies at the other end of the scale with a discount of 30%.

Movements in quoted property investments

Source: SWX, SNB and KPMG

-0.7%

-0.2%

0.3%

0.8%

1.3%

80

90

100

110

120

130

140

Jan

17

Feb

17

Mar

17

Apr

17

May

17

Jun

17

Jul 1

7

Aug

17

Sep

17

Oct

17

Nov

17

Dec

17

Jan

18

Feb

18

Mar

18

Apr

18

May

18

Jun

18

Jul 1

8

Aug

18

Sep

18

Oct

18

Cha

nge

in In

dex C

hange in 10-yearfederal bonds

Yield of 10-year Federal bonds

Indexed change in overall return for property fundsIndexed change in overall return for property sharesIndexed change in Swiss Market Index


In 2016, the volume of new capital raised by exchange-listed property vehicles was already high, but in 2017 it was exceeded by 27%, with a total of around CHF 4.5 billion. At the end of October 2018, exchange-listed Swiss property vehicles had raised a cumulative total of around CHF 2.4 billion. This means that, after a record year in 2017, capital inflows are at 2016 levels. With the planned issues of CHF 500 million by Swiss Life, CHF 388 million by ZIF Immobilien Direkt Schweiz, CHF 197.1 by Akara Diversity PK and CHF 93.6 million by UBS Direct Residential, several major capital uptakes are planned for the remaining two months.

Like the yields on direct property investments, in recent years indirect property investments also feature low level interest rates. Because of the positive economic outlook, the prospect that the SNB will normalize interest rates is increasing. Because the interest rate differential is so important for currency stability, however, it seems likely that for the time being SNB will wait for the first interest rate increases in the Euro zone. With the mounting reports of increasing vacancy rates and falling rents, there is increasing nervousness on property markets. Even if initially there is no decisive change in the interest rates, investors seem to be differentiating increasingly in their assessment of individual investment vehicles.

0

500

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500

600

700

Jan.

Feb.

Mar

.

Apr

.

May

Jun.

Jul.

Aug

.

Sep

.

Oct

.

Nov

.

Dec

.

Cum

ulative flow of

capital in CH

F million

In C

HF

mill

ion

Property company IPOs Property company borrowingsProperty company issues Property fund issuesCumulative capital inflows in 2016 Cumulative capital inflows in 2017 Cumulative capital inflows in 2018

Source: Bank J. Safra Sarasin and KPMG

Flow of capital into listed property investments in Switzerland

Table of abbreviationsBAK Basel BAK Economics AG

BFS Federal Statistics Office

CREA Center for Research in Applied Economics of the University of Lausanne

ECB European Central Bank

GfK Institute for Consumer Research, market research institute of Switzerland

IPO Initial Public Offering

IWF International Monetary Fund

KOF The Swiss economic research institute of the Federal Institute of Technology

PMI Purchasing Managers’ Index

REIDA Real Estate Data Association

SBB Swiss Federal Railways

Seco State Secretariat for Economic Affairs

SEM State Secretariat for Migration

SIV Swiss Association of Real Estate Appraisers

SMI Swiss Market Index

SNB Swiss National Bank

SWX SWX Swiss Exchange

WP Wüest Partner AG

YTD TR year-to-date total return


Residential Property

in the Canton of VaudWith GDP growth of 19.4% over the past two years, the Canton of Vaud has one of the highest growth rates of any canton in Switzerland. Between 2008 and 2017, the canton has enjoyed average GDP growth of 1.9% per year, well above the Swiss average of around 1.1%. Over the past ten years, Vaud’s share of Swiss GDP has risen from 7.5% to 8.1%. According to CREA (Centre de Recherche en Économie Appliquée), the trend of recent years will continue this year. Growth forecasts for the Canton of Vaud have once again been revised upwards in the second half of the year, to 3.3% (Centre de Recherche en Économie Appliquée) for 2018 and 2.1% for 2019.

Over the same period, the population of Vaud has risen by almost 16%, or 1.6% per annum. In view of this demographic growth, there has been a very high requirement for new residential space over the past few years. As a result, in spite of the 53,071 residential units built in the last ten years (an increase of 15% in housing stock), with a vacancy rate of 1.1% at 1 June 2018 the canton remains undersupplied. The vacancy rate was only lower in the Cantons of Zug, Geneva, Obwalden, Zurich and the two Basel cantons. According to the “Perspectives de population 2015–2040” study by the government of the Canton of Vaud, in the median scenario (annual growth of around 1.1%) the population will reach around 980,000 by 2040, an increase of over 185,000 within the next twenty years. As a result, demand should remain strong in the long term. Based on the current ratio of 1.96 persons per unit, over the next 22 years almost 95,000 new homes will be required, or 4,300 each year. In comparison, over the past ten years housing stock has increased by 5,649 units per year.

In 2016, the cantonal authorities passed the Law on the Preservation and Promotion of Rental Properties (LPPPL4), which came into force on 1 January 2018. This law aims to reduce the housing shortage through the preservation of existing rental housing and to promote the construction of new public housing. To this end, the law provides for, among other things, granting additional building permits for the construction of social housing.

The lack of housing has led to a strong increase in rents, particularly between 2004 and 2012. In regions where supply is short, rents stabilized at a high level. In economically weaker regions, the impetus to build, together with the decline in immigration, has recently led to a slight relaxation in asking rents.

4 LPPPL – Loi sur la préservation et la promotion du parc locatif

Indexed asking rents in canton of Vaud, major regions

100

105

110

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

115

Region of LausanneRegion of NyonRegion of MorgesRegion of VeveyRegion of YverdonRegion of La BroyeRegion of Gros-de-Vaud

120

125

130

135

Source: immodatacockpit.ch and KPMG

All in all, given the sustained high level of construction activity for new apartments, it is unlikely that the trend towards rising rents will continue in the short term – particularly in view of the already high housing costs borne by households.

Implementation of the LPPPL After the Law on the Demolition, Transformation and Renovation of Residential Buildings (LDTR5) in Geneva, the Canton of Vaud has also passed a law to regulate the housing market (the LPPPL). In many cases, the LDTR did not allow investors to increase rents in proportion to renovation costs – which frequently impeded renovations. Moreover, the complexity of the LDTR unnerved investors, causing them to be hesitant about entering the Geneva residential property market. This raises the question of whether the implementation of the LPPPL in Vaud will lead to the same disadvantages.

The primary goal of the LPPPL is the preservation and promotion of residential space to meet the needs of the majority of the population (particularly in quantitative terms). Accordingly, the law affects only municipalities with a housing shortage, whose vacancy rate at district level is persistently below 1.5% according to the Federal Statistics Office. The LPPPL provides for further measures for municipality with an acute housing shortage (vacancy rate below 1.0%). Also, not all housing is affected by the LPPPL (see Art. 3)6.

5 LDTR - Loi sur les démolitions, transformations et rénovations de maisons d’habitation6 The LPPPL applies to rented homes with more than two, and freehold homes with more

than three rooms, which have an area of less than 150 sq. m and an insured reconstruction value of less than CHF 750 / sq. m. If the sale of a building is planned, the nature of the sale is also taken into account. In the case of a sale of an entire residential property with several rental units and a single purchaser who will continue to let them (investment properties), the transaction does not come under the LPPPL. Nor do previously owner-occupied homes or forced sales come under the law. So the law makes it harder to sell condominium apartments.


Specifically, the law focuses on three main areas:

1. Measures to preserve the rental housing stock: Owners of residential properties need a permit for demolition, alterations with accompanying change of use or renovations leading to an increase in rent. Provided that no structural alterations are made to the building, renovation works costing less than 20% of the insured value of the building can be carried out without a permit. For the renovation of an individual home, an estimate of the share of the building’s insured value attributable to the home in question is performed. The calculation basis is the surface area of the building attributable to this home compared to the building’s total surface area. Renovations or changes of use will be permitted if the affected property is not in a region for which there is a shortage, if renovations or changes of use appear essential for reasons of safety or health or if these are in the public interest or make it possible to save energy. The relevant department can also restrict rental increases after demolition, alterations – other than refurbishments to save energy – or renovations. The impact of the LPPPL on a specific construction project depends on the difference between the actual rental income and the objective rental income – calculated on the basis of the insured reconstruction value and the site value. A yield of 3.5% is applied to this target value in order to determine the building’s objective rental income. If there is a housing shortage, the rent control period lasts for up to five years from commencement of the letting of the premises used for demolition, conversion, renovation or purposes other than housing. If there is a pronounced shortfall (less than 1.00% vacant homes), this control can be extended to a maximum of ten years.

2. The promotion of rental housing stock: The promotion of rental housing stock is aimed at the creation of not-for-profit homes (LUP77), and so relates to subsidized housing, homes for the elderly, student housing and affordable rental homes recognized as not-for-profit. In order to promote the creation of LUPs, local authorities can grant higher utilization rates or set LUP quotas. If at least 15% of the total gross floor space of a building is designated for LUPs, the builder can add an extra 10% of floor space.

3. Purchase and first right of refusal: If a municipality intends to allocate new land to a building zone, it can agree to award the owners of the affected property the first right of refusal by way of an administrative contract if no LUPs are constructed on the property within a prescribed time. Moreover, the municipality has a first right of refusal that allows it to purchase a property which is for sale in an approved building zone. This pre-emptive right can be exercised

7 LUP - Logements d’utilité publique

only for the purpose of creating LUPs in a densely populated urban district and if the property has an area of at least 1,500 sq. m. Properties located in a dense urban area, a cantonal center recognized in a cantonal master plan or parcels adjoining a property belonging to the municipality are exempted from this practice. In addition, the first right of refusal cannot be exercised in the case of a sale within the family8. As regards a transfer between related companies, there is no indication that it would not be concerned by a potential expropriation, insofar as there would be a change of ownership in the land register.

Overall, this is a law with numerous measures and a fairly restrictive field of application – for the moment at least. On the one hand, a bonus of 10% can be granted if the proportion of LUPs is 15%. On the other, the complexity and administrative burden involved in renovations and conversions may increase. In future, whether construction costs can be passed on to tenants will depend on a theoretical calculation mostly based on the property’s insured rebuilding cost. Going forward, if residential property is subject to the LPPPL it may be difficult to pass on renovation costs to the same extent as before.

Official vacancy rate by district in the Canton of Vaud

Districts 2015 2016 2017Average

2015–2017

Aigle 1.7 1.9 2.2 1.91

Broye-Vully 1.0 1.5 1.3 1.23

Gros-de-Vaud 0.3 0.7 1.0 0.67

Jura Nord vaudoise 0.6 0.7 1.1 0.78

Lausanne 0.2 0.4 0.4 0.35

Lavaux-Oron 0.7 0.7 0.8 0.74

Morges 0.7 0.7 0.7 0.74

Nyon 0.9 0.9 1.0 0.94

Ouest lausannois 0.3 0.5 0.7 0.50

Riviera-Pays-d’Enhaut 1.0 1.0 0.9 0.97

Source: LPPPL

8 Descendants, relatives in the ascending line, brothers, sisters, half-brothers, half-sisters, spouse, registered partner or cohabitee.


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Editorial deadline: 9th November 2018

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