Sentiment in the Swiss real estate investment market has returned to moderate optimism after two cautious years. Although economic trends have been assessed much more pessimistically than last year, the KPMG Swiss Real Estate Sentiment Index (sresi®) Price Expectation Index has risen significantly, interrupting the index’s downward trend.
This change in sentiment is probably consequence of the ground-breaking decision by the Swiss National Bank (SNB) on 15th January 2015, when the SNB abandoned its efforts to prop up the Euro / Swiss Franc exchange rate. At the same time, the rate of interest payable on credit balances in current accounts exceeding a specific threshold was reduced to -0.75%. The Libor target range moved further into negative territory, to -1.25% to -0.25%.
Whilst the manufacturing and export industries stared in amazement at this sudden change in underlying conditions and rushed to implement their response, the real estate investment arena was surprisingly quiet. After a negative performance last year, and in spite of the uncertainties in the real economy, listed real estate companies started to scale new heights in the first half of 2015. However, this initial euphoria was followed by a period of calm.
This optimism is reflected in the current mood of market participants. In Summer 2015, over 210 experts for Swiss investment real estate responded to questions concerning possible market trends over the coming 12 months in the survey for the KPMG Swiss Real Estate Sentiment Index (sresi®). The sresi® measures sentiment in the Swiss real estate investment market on a scale of -200 to +200.
Pessimistic assessment of economic trends
After slightly optimistic initial assessments of the economic situation last year, the survey participants’ expectations for the coming months have clearly slipped back into negative territory (from +10.1 pts. to -45.2 pts.). Over half of respondents anticipate a deterioration in economic conditions.
As a contrast, price trends for investment real estate were assessed more optimistically, interrupting the downward trend of the Price Expectation Index. Last year’s negative index, which was close to the limit of stability, has improved by 38.9 pts. and now lies within the positive range at 29.8 pts.
Concentration of investments is driving property prices
At 74.3 pts., the Price Expectation Index for the housing segment exceeded its previous record level from 2012 (73.4 pts.), bringing a halt to last year’s more pessimistic assessments. Price expectations for office properties remain firmly in negative territory. Last year’s figure (-101.8 pts.) improved slightly to -84.4 pts., possibly a result of corrections which have already taken place, together with revised yield expectations. With regard to price trends for the other commercial market segments, respondent sentiment was pessimistic. Stable price trends are anticipated only for special purpose properties. Last year’s slight easing of tension in price expectations for retail and commercial / industrial premises did not come to fruition. The index for these two real estate market segments now stands at -72.5 pts. and -63.5 pts. Respondents obviously expect the economic trends to affect income drivers in retail and commercial uses.
Investors remain resolutely focused on central locations. At 92.7 pts., the Price Expectation Index for this location type has reached its highest ever level since the survey began. Even medium-sized towns (14.5 pts.) are expected to see moderate price rises. Survey participants consider peripheral areas to be on the losing side. The index currently stands at -77.7 pts., which is its lowest ever level and the fourth year in succession in negative territory. This concentration of investor interest is leading to a further widening of the price gap between the individual location qualities.
Location preferences are reflected in the price expectations for the major economic centres. With an index of 62.2 pts., Zurich remains in the lead, followed by Basel (35.0 pts.) and Lucerne/Zug (28.8 pts.). Respondents expect moderate price rises in the case of Bern (13.4 pts.) and Lausanne (19.0 pts.). The picture is similar for Geneva (12.3 pts.), where the Price Expectation Index lost a staggering 80.8 pts. between 2012 and 2014, moving into moderate negative territory last year for the first time. The downward trend in terms of price expectations for Lugano and St. Gallen has come to an end, although a slightly negative price trend is expected in these two centres over the coming months, at -26.7 pts. and -11.1 pts. respectively.
Supply remains scarce
The availability of suitable investment products to satisfy acquisition goals is unchanged across all market segments from last year. The major shortage in the residential segment has increased further, to -136.0 pts. Supply in the commercial segment is regarded as reasonable; however, respondents expect the supply of suitable investment options to improve slightly in the office (24.4 pts.) and commercial / industrial (9.1 pts.) market segments. A moderate shortage is anticipated for the retail (-9.0 pts.) and special purpose property (-38.2 pts.) segments.
Higher risk perception
58% of participants expect market risk to increase over the coming 12 months. This corresponds to an increase of 8 percentage points since last year. As before, the effects of developments in Europe, interest rate risks and stricter regulations are identified as the greatest risk factors. The assessment of the risk of a possible change in interest rates has increased compared to previous years.
A potential further tightening of regulations is at the top of the concerns, but the assessment of this risk has reduced slightly since last year. This reduction is due to the fact that the industry was already exposed to a number of regulatory measures in 2014 (including the mass migration initiative, increase in the counter-cyclical capital buffer, amendments to the voluntary self-regulation of banks and the CTR III Corporate Tax Reform). Stricter regulations appear to be of concern to developers, professional investors and real estate companies in particular. The latter would also be severely affected by the once again proposed tightening of the Lex Koller regulations. Nonetheless, 44% of investors are inclined to accept some greater element of risk in their real estate investments in the coming 12 months (last year: 29%). In 61% of responses, appraisers reported a slight reluctance to risk aversion on the part of their clients (last year: 41%).
Focus topic: Portfolio and Asset Management
This year’s focus topic in the sresi® survey looks at portfolio and asset management. We were interested to understand the impact that the current economic climate is having on demand in the real estate portfolios. What strategies are investors pursuing to deal with the “trilemma” between the three objectives of portfolio expansion, securing returns and maintaining a consistent risk profile? What measures are being taken to secure returns and which KPIs are being used to analyse and control portfolios? The interesting answers to these questions can be found in our detailed analysis.
The opinions received from appraisers and investors for the Swiss Real Estate Sentiment Index will help you evaluate current sentiment and momentum in the Swiss real estate investment market and to adapt your approach in anticipation of future trends.
Predicted supply and Price Expectation Index by market segment
(Source: SRESI, click graphic to enlarge)
Hint: the lower the Supply Index, the shorter the supply of properties. The higher the Price Expectation Index, the more optimistic the assessments of price trends.