REAL ESTATE MONITOR: SWITZERLAND - Crédit Agricole Suisse

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Real estate
MonitoR:
sWitZeRlanD
Overview & Outlook of Switzerland’s Residential and Office Markets l October 2012
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Real Estate Monitor: Switzerland
Executive Summary
Our third Real Estate Monitor (REM) outlines recent
trends in the Swiss residential and Geneva and Zurich
office markets. We also present their respective outlooks
for the next two years. The Swiss economy was one of
the strongest performers in Western Europe during 2010
and 2011. This, together with the perceived ‘stability’ of
the country’s property market, have resulted in a ‘flight
to quality’ to this asset class by both private and institutional
investors.
Residential prices in Switzerland have risen dramatically
over the past 5 years, with the average price of an apartment
increasing by 35 per cent and that of a house by 20
per cent over this period. In addition to a resilient economy,
a robust employment market and a lack of investment
alternatives, three factors have been directly responsible
for strong residential price increases in Switzerland:
high population growth as a result of the sustained
level of immigration the country has experienced over
the past five years, historically low borrowing costs, and
the fact that some parts of Switzerland are extremely
supply-constrained relative to demand.
The Swiss National Bank (SNB) has repeatedly raised concerns
about unsustainable house price increases in some
regions. Since raising interest rates is currently out of the
question, the FINMA and the government issued new
constraints on lending from July 1 st , 2012, and these new
guidelines look like they may be having a cooling effect
on asking prices. In spite of this, the SNB stresses that
overvaluation risks remain in certain regions and that it is
ready to implement additional lending constraints if this
dynamic does not moderate.
In the more dynamic regions of the country (the Lake
Geneva Region, Central Switzerland and Zurich), the government’s
efforts to dampen house prices is likely fail to
offset the pressures stemming from low interest rates,
population growth and chronic undersupply of housing in
the short term. Over the next two years prices in these
regions are likely to remain at high levels. If they do
soften, they are likely to do so only marginally.
There are several markets, however, that are at risk of
seeing price falls in the short term 1 . These include Fribourg,
Bulle, Châbles, Gros-de-Vaud, Bern and Aargau.
These markets have seen strong demand for housing
because the cantons around Lake Geneva and Zurich
have become too expensive, and not because of strong
economic fundamentals. Home buyers here are also
Real Estate Monitor: Switzerland - 1
more sensitive to tighter lending conditions and these
markets have seen above-average rates of construction.
There are a number of risk factors for the Swiss residential
market in the medium term, including a downward
revision of economic growth forecasts. 2011 and 2012
were plagued by high-profile job cuts and company relocation
announcements in particular from the pharmaceutical
and the banking sectors. Both are facing strong
headwinds in Switzerland and their negative development
is likely to affect housing demand (and prices). Another
external shock to demand and prices could be a
sharp rise in interest rates, although this is unlikely over
the medium term.
The office segment in Switzerland has elicited strong investor
interest for the same reasons as the residential
segment. High levels of activity from investors with disposable
cash (family offices and institutional investors),
and a lack of investment alternatives, have pushed office
prices north. This has resulted in Geneva and Zurich being
the lowest yielding office markets in Europe. In Q2
2012, prime office yields 2 stood at 3.9 per cent in Zurich
and 4.2 per cent in Geneva, compared to a EU-15 average
of 5.6 per cent.
Demand for office space in Geneva and Zurich has weakened
due to a more uncertain economic and employment
outlook. This has coincided with a relatively strong
amount of new space being delivered in these markets.
Prime rents in both markets have therefore been flat for
a year.
The trend in Zurich is for major companies to consolidate
operations into more fit-for-purpose buildings outside
the CBD as companies are aiming to reduce costs wherever
they can. This, together with elevated construction
levels, is likely to cause prime rents to decrease over the
next two years. Despite the fact that Geneva is also experiencing
weaker occupier demand and a decent level of
construction activity, the fact that this market’s vacancy
rate is very low means that prime rents here are likely to
remain flat in the short term.
The 300-basis-point gap between prime yields and the 10
-year government bond rate is still attractive to domestic
investors and guarantees domestic demand for office
assets no matter how expensive they are. This demand
will protect office values in Geneva and Zurich. Weakening
fundamentals, however, mean that we are unlikely to
see value growth through further yield compression in
these markets.

Real Estate Monitor: Switzerland
National Economic Performance and
Outlook
In spite of a challenging European context and a strong
franc, the Swiss economy held up well over the past two
years, increasing at a quarterly pace of 0.5 per cent from
Q2 2010 to Q1 2012. In 2011, the country posted one of
the strongest rates of GDP growth in Western Europe.
GDP Growth 2011
Greece
Portugal
Cyprus
Italy
UK
Ireland
Spain
Denmark
Netherlands
Norway
Luxembourg
France
Belgium
Malta
Switzerland
Norway (mainland)
Finland
Austria
Germany
Sweden
GDP Growth 2011
-8 -6 -4 -2 0 2 4 6
Percent
Source: Oxford Economics (June 2012 update)
Following the first quarter of 2012 surprise 0.5 per cent
expansion in economic activity, Swiss GDP contracted by
0.1 per cent in Q2. A significant part of the slowdown this
quarter was due to the volatile inventory component 3 .
Private spending continued to increase in Q2 (+0.3 per
cent), supported by relatively low unemployment (3.7 per
cent in Q2), no inflation, strong immigration, and low interest
rates. Government spending also continued its upward
path this quarter (+1 per cent), as there is currently
no need for austerity measures in Switzerland.
The Swiss export industry has been struggling with a
strong franc and weakening global demand. Exports account
for an estimated fifty per cent of Swiss GDP and
Euro Zone purchases account for roughly half of Swiss
exports according to the CIA World Factbook.
Oxford Economics expects the economy of Switzerland to
grow by around 1.5 per cent in both 2012 and 2013 4 ,
which although lower than the previous two years, still
places Switzerland firmly at the top of the pack in Western
Europe. Any gains achieved from domestic demand
will continue to be undermined by weak exports.
These forecasts could potentially be revised downwards,
however. They were carried out before the Q2 GDP
growth rate of -0.1 per cent quarter-on-quarter was published,
and the Purchasing Manager’s Index (PMI) has
almost continuously been below 50 since September
2011.
Real Estate Monitor: Switzerland - 2
Swiss GDP and procure.ch PMI
75
70
65
60
55
50
45
40
35
30
Swiss GDP and procure.ch PMI
Index value Year-on-year change
Q1 1995
Q3 1995
Q1 1996
Q3 1996
Q1 1997
Q3 1997
Q1 1998
Q3 1998
Q1 1999
Q3 1999
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
Sources: Bloomberg, Secrétariat d'Etat à l'économie
The State Secretariat for Economic Affairs’ consumer confidence
index stood at -17 in July, which is significantly
below its mid-2010 level of 16 and under its long-term
reading of -9. According to the index, in July consumers
were more pessimistic about the future economic development
and were anticipating a more pronounced rise in
unemployment. This does not bode well for private consumption
in the near term.
Regional Economic Performance and
Outlook
An analysis of the relative performance of seven regions
of Switzerland shows that Ticino was the star performer
in terms of GDP and employment growth over the last
decade. The Lake Geneva Region (comprising the cantons
of Geneva, Vaud and Valais), the canton of Zurich and
Central Switzerland (comprising the cantons of Lucerne,
Uri, Schwyz, Obwalden, Nidwalden, Zug) also saw aboveaverage
employment and GDP growth during this period.
Average Annual Employment Growth vs. Average Annual GDP Growth in Switzerland
(2000-2011)
Average Annual Employment Growth (2000-2011)
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
Real GDP (RHS) Purchasing Managers' Index (LHS)
Northwestern
Switzerland
Espace Mittelland
Switzerland
0.0%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Average Annual GDP Growth (2000-2011)
Source: Oxford Economics (June 2012 update)
On the other hand, North-Western Switzerland
(comprising the cantons of Basel-City, Basel-Country and
Aargau) and Espace Mittelland (comprising the cantons of
Bern, Fribourg, Jura, Neuchatel and Solothurn) performed
poorly in economic and employment terms relative to the
national average.
Ticin
o
Lake Geneva Region
Zurich
Central Switzerland
Eastern Switzerland
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%

Real Estate Monitor: Switzerland
Average Average Annual Annual Employment Growth Forecast Forecast vs. Average vs. Average Annual GDP Annual Growth GDP
Growth Forecast in Switzerland Forecast (2012-2013) in Switzerland Nuts-2 (2012-2013) Regions
Average Annual Forecast Employment Growth
(2012-2013)
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
Nuts-2 Regions
0.0%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Source: Oxford Economics (June 2012 forecast)
Northwestern Switzerland
Eastern Switzerland
Espace Mittelland
Average Annual Forecast GDP Growth (2012-2013)
Switzerland’s economic performance is expected to be
more muted over the next two years, and this is likely to
weigh down on the national real estate market. The Lake
Geneva Region and Central Switzerland are expected to
outperform the national average in terms of GDP and
employment growth over the next two years. These two
regions’ real estate markets are therefore expected to do
better than the national average.
The Swiss Housing Market
From the first quarter of 2007 to the second quarter of
2012 – a period during which house prices stagnated or
fell in other countries – Switzerland saw the average price
of owner-occupied apartments and single-family dwellings
increase by 35 and 20 per cent respectively 5 . A resilient
economy and employment market and a lack of performing
investment alternatives, have helped boost
house prices. There are, however, three important factors
that have been putting direct upward pressure on house
prices. The first is strong population growth as a result of
the sustained high level of immigration the country has
experienced over the past five years; the second are historically
low borrowing costs; the third is that some regions
of Switzerland are incredibly supply-constrained
relative to demand and very strong price growth in these
regions is pushing up the national average.
Population Growth
After the introduction of full freedom of movement between
Switzerland and the 15 ‘old’ EU member states,
Cyprus, Malta and the EFTA member states on June 1 st ,
2007, the country’s population grew by more than one
per cent per year. Principally as a result of immigration,
the permanent resident population of Switzerland increased
by 8.7 per cent between 2000 and 2010. Immigration
has been driven by a robust national economy, a
low unemployment rate and strong demand for qualified
staff. In fact, employment growth in Switzerland was the
Ticino
Switzerland
Real Estate Monitor: Switzerland - 3
Lake Geneva Region
Zurich
Central Switzerland
second highest in Western Europe between 2006 and
2011, after Luxembourg.
Headcount Employment Change (2006-2011)
Luxembourg
Switzerland
Norway
Norway (mainland)
Malta
Belgium
Austria
Cyprus
Germany
Sweden
Netherlands
Finland
France
Italy
UK
Denmark
Portugal
Greece
Spain
Ireland
Headcount Employment Change (2006-2011)
-15% -10% -5% 0% 5% 10% 15%
Source: Oxford Economics (June 2012 update)
According to a study carried out by the Federal Housing
Office, a correlation could be found between the free
movement of people, shortages of housing and increases
in rents over the period 2005-2010. Another study by the
liberal think tank Avenir Suisse which examines the housing
market since 1970 shows that immigration is not responsible
for the shortage in housing, but that it exacerbates
it 6 .
Evolution of the Permanent Resident Population by Canton (2000-2010)
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
Appenzell Outer-Rhodes
Glarus
Uri
Source: Bundesamt für Statistik
Basel-City
Evolution of the Permanent Resident Population by Canton (2000-2010)
Jura
Schaffhausen
Grisons
Bern
Neuchâtel
Solothurn
Appenzell Inner-Rhodes
Basel-Country
St Gallen
Not all parts of the country have witnessed the same rate
of population growth, however, and four cantons have
even experienced population declines from 2000 to 2010.
The cantons that saw the highest population growth rates
were Fribourg (17 per cent), Vaud (14 per cent), Zug (13
per cent), Schwyz (13 per cent), Zurich (13 per cent), Geneva
(12.5 per cent), and Valais (11.5 per cent). These
cantons have been attracting residents for very different
reasons: Geneva and Zurich are the economic powerhouses
of the country; Schwyz and Zug are low tax cantons;
Vaud and Fribourg are spill-over cantons from the
expensive housing markets around Lake Geneva; and Valais
contains many prestigious ‘Holiday Zones’ 7 .
Thurgau
Lucerne
Nidwalden
Switzerland
Obwalden
Ticino
Aargau
Valais
Geneva
Zurich
Schwyz
Zug
Vaud
Fribourg

Real Estate Monitor: Switzerland
Since it is likely that the rate of economic and employment
growth will moderate nationally over the next two
years, the rate of immigration is therefore likely to subdue.
But at 32,564, net migration during the first six
months of 2012 was not so far off the annual long-term
average since 1991 (40,400). Net migration is not expected
to drop off entirely since the Swiss economy is still
more resilient than those of its neighbours and unemployment
in this country is still low by European standards.
Austerity measures and potential tax hikes in neighbouring
countries, on the one hand, and a strong Swiss
franc on the other hand, are also expected to continue to
attract people to Switzerland 8 .
International Net Migration of the Permanent Resident Population
Level
120000
100000
80000
60000
40000
20000
0
-20000
1991
1992
The one thing that would definitely have an impact on
housing demand in the longer term would be a change in
policy regulating immigration. Although the benefits of
immigration are plain to see, there is a growing unease
about its negative side-effects. Given that Switzerland
operates through direct democracy, this unease could
translate into a vote for more restrictions on immigration.
Borrowing costs
1993
1994
1995
Swiss Mortgage Rates and Bank Mortgage Lending
Concerns about speculation and increasing house prices
led the SNB to raise interest rates in the late 1980s and
Real Estate Monitor: Switzerland - 4
1996
Sources: Bundesamt für Statistik, Bundesamt für Migration
Percentage
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
January 1988
January 1989
January 1990
January 1991
Source: Swiss National Bank
January 1992
January 1993
January 1994
January 1995
long-term average
1997
January 1996
January 1997
1998
January 1998
1999
January 1999
2000
January 2000
2001
Bank Mortgage Lending to Private Households (Total Volume) (RHS)
Variable Mortgage Rate on New Mortgages (LHS)
January 2001
2002
January 2002
2003
January 2003
2004
January 2004
January 2005
2005
January 2006
2006
January 2007
2007
January 2008
2008
2009
Year-on-year growth rate
Time-series corrected for
structural discontinuities
January 2009
January 2010
2010
January 2011
2011
January 2012
january-june 2012
16%
14%
12%
10%
8%
6%
4%
2%
0%
early 1990s. Since at the time most mortgages in Switzerland
were variable rate mortgages, the hikes caused
house prices to collapse as homeowners who could not
afford their repayments were forced to sell. From 1993 to
2000, apartment prices fell by an average of six per cent a
year 9 .
The Euro Zone turmoil increased demand for the Swiss
franc, which resulted in its uncontrollable appreciation.
As this situation was untenable for an export-oriented
country, the SNB responded by slashing the key rate to
near zero in early August 2011. Mortgage rates are therefore
currently at historic lows and mortgage lending is still
growing (in April 2012, it was 5.2 per cent higher than a
year earlier). A long period of ultra-low interest rates has
helped push up house prices that were already surging
from increasing housing demand from immigration. This
is because paying the interest on a mortgage 10 is now on
average cheaper than renting, according to analysis carried
out by Credit Suisse 11 . Given the persistence of the
euro crisis and the pressure on the Swiss franc, mortgage
rates will remain low in the short term, and this will continue
to put upward pressure on house prices if left unchecked.
Cheaper borrowing costs, combined with the poor performance
of other asset classes have also resulted in a cultural
shift towards homeownership. Switzerland has one
of the lowest owner-occupancy rates in Europe, but it has
risen from 31 per cent in 1990 to around 40 per cent today
12 .
Construction and vacancy
Completions of newly built residential units in Switzerland
increased continually since the end of 2010. The gap between
the number of homes under construction and the
number of completions has been widening since the early
2000s, however. According to Credit Suisse, the construction
sector is currently operating at full capacity.
Residential Construction Activity
75000
70000
65000
60000
55000
50000
45000
40000
35000
30000
Q4 1994
Q3 1995
Q2 1996
Q1 1997
Q4 1997
Q3 1998
Q2 1999
Residential Construction Activity
Q1 2000
Q4 2000
Q3 2001
Q2 2002
Q1 2003
Q4 2003
Newly built residential units: totalled over four quarters Residential units under construction: absolute quarterly figures
Source: Bundesamt für Statistik
Q3 2004
Q2 2005
Q1 2006
Q4 2006
Q3 2007
Q2 2008
Q1 2009
Q4 2009
Q3 2010
Q2 2011
Q1 2012

Real Estate Monitor: Switzerland
In spite of increasing construction levels, demand severely
outstrips supply in some parts of the country. According
to the Vacant Dwelling Survey conducted by the Swiss
Federal Office of Statistics on June 1, 2011, 0.94 per cent
of the total Swiss housing stock was vacant. At 0.25 per
cent, the canton of Geneva has the smallest percentage
of vacant dwellings in relation to housing stock, followed
by the canton of Zug, with a vacancy rate of 0.27 per cent.
It comes as no surprise that these are among the most
expensive cantons in the country both in terms of rents
and prices.
Housing Vacancy Rate by Canton (mid 2011)
Geneva
Zug
Basel-Landschaft
Basel-Stadt
Vaud
Zurich
Schwyz
Appenzell Innerrhoden
Fribourg
Ticino
Uri
Lucerne
Obwalden
Graubünden
Nidwalden
Valais
Schaffhausen
Neuchâtel
Bern
Glarus
Thurgau
St. Gallen
Aargau
Jura
Appenzell Ausserrhoden
Solothurn
Housing Vacancy Rate by Canton (mid 2011)
0.0 0.5 1.0 1.5 2.0 2.5
Per cent
Source: Bundesamt für Statistik
This high rate of completions is likely to continue in the
short term as residential projects can take two years to
complete. The risk of course, is that if demand were to
drop off suddenly, developers could quickly find themselves
with unsold properties. This is likely to have a negative
impact in areas where demand is not driven by
strong economic fundamentals, but that are spill-over
areas from the most expensive markets around Zurich
and the Lake Geneva Region.
Recent developments in the housing market
In the second quarter of 2012, the average price of both
owner-occupied apartments and single-family dwellings
in Switzerland increased by 7 and 5 per cent respectively
from a year earlier, and continued to stand above their
respective long-term averages.
Swiss Nominal Transaction Price Index (Average Properties)
Year-on-year change
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
Q1 2001
Q3 2001
Q1 2002
Source: Wüest & Partner
Q3 2002
Q1 2003
Q3 2003
Owner-occupied apartments in Geneva have outperformed
those in other cantons by a long shot. Here, the
Real Estate Monitor: Switzerland - 5
Q1 2004
Q3 2004
Q1 2005
Q3 2005
Q1 2006
Q3 2006
Q1 2007
Apartments (owner-occupied) Houses (owner-occupied)
Q3 2007
Q1 2008
Q3 2008
Q1 2009
Q3 2009
Q1 2010
Q3 2010
Long-term average
Q1 2011
Q3 2011
Q1 2012
average price of an apartment increased by 222 per cent
from the first quarter of 2000 to the second quarter of
2012. Wedged between Lake Geneva and the French border,
this is the sixth smallest canton in Switzerland. It has
seen its population grow by 9.6 per cent from 2000 to
2007, higher than the Swiss average. There has not been
a corresponding increase in construction due to a very
conservative approach to the realisation of new housing.
In fact the vacancy rate in Geneva has fallen from 0.84
per cent in 2000 to 0.25 per cent now 13 . Luckily, the much
larger canton of Vaud next door has been able to absorb
the population growth of Geneva. This has resulted in the
average price of an apartment in the canton increasing by
113 per cent from the first quarter of 2000 to the second
quarter of 2012.
Nominal Transaction Price Index Growth from Q1 2000 to Q1 2012 (Average
Properties)
Glarus
Jura
Uri
Appenzell Ausserrhoden
Solothurn
Schaffhausen
Fribourg
Bern
Thurgau
Graubünden
Aargau
St. Gallen
Lucerne
Appenzell Innerrhoden
Obwalden
Basel-Landschaft
Ticino
Neuchâtel
Basel-Stadt
Nidwalden
Valais
Zurich
Zug
Schwyz
Vaud
Geneva
0% 20% 40% 60% 80% 100% 120% 140% 160%
Source: Wüest & Partners
Given the dramatic rise in residential prices in some parts
of the country and continuous increases in mortgage
lending, the SNB has repeatedly raised concerns about
the potential risks to financial stability if this situation
were left unchecked. The Swiss Financial Markets Supervisory
Authority (FINMA) said in a press release that it
believed that banks have been stretching themselves a
little too much, lending to people who would not be able
to afford to buy under ‘normal’ interest rate conditions 14 .
In July, Standard & Poor’s lowered their outlook on nine
Swiss regional banks that focus on mortgage lending 15 .
Since raising interest rates is out of the question at present,
the FINMA and the government issued new constraints
on lending from July 1 st , 2012. Borrowers must
now make at least a ten per cent cash down-payment
from their own sources, instead of drawing the entire
down-payment from their pension fund assets. Borrowers
are therefore required to be on a healthier financial
footing before they buy a property 16 . The FINMA have
also stipulated that mortgages must be paid down to two
thirds of the lending value within a maximum of 20 years,
instead of waiving amortisation in expectation of rising
property prices, as was previously authorised.

Real Estate Monitor: Switzerland
These new guidelines look like they may already be having
a cooling effect on the housing market. In the second
quarter of 2012, the UBS Swiss Real Estate Bubble Index,
a reference in the market, decreased for the first time
since 2008. UBS cites a drop in asking prices, a rise in incomes,
stagnation in consumer prices and the number of
loan applications for non-owner-occupied properties dipping
slightly as the reasons for this. The ImmoScout24-
IAZI Asking Price Index (monthly) shows that asking prices
for houses fell in August and those for apartments fell in
both July and August.
In spite of these short-term signs of a cooling market, the
SNB has emphasised that this does not mean that they
are letting down their guard, as overvaluation risks remain
in certain regions. In June they announced a plan to
order banks to set aside more assets to cover potential
mortgage defaults. Given the recent slowdown, it announced
that it is unlikely to trigger a move this year 17 .
Third quarter transaction prices will give a clearer indication
of whether the recent guidelines by the FINMA are
having sufficient impact.
ImmoScout24-IAZI Asking Price Index (based on offer prices published on ImmoScout24
in real time)
Index 31.12.2010 = 1000
1'200
1'150
1'100
1'050
1'000
950
900
31.12.2010
31.01.2011
28.02.2011
Source: ImmoScout24-IAZI
31.03.2011
30.04.2011
Residential market outlook
The government’s efforts to dampen house prices might
fail to offset the pressure stemming from low interest
rates, population growth as a result of immigration, and
tight supply in the areas with the lowest vacancy rates.
These drivers are expected to continue to sustain residential
prices in the most dynamic regions of Switzerland.
Given the expected moderation in economic and employment
growth and more strict lending criteria, however,
we will not see the growth rates that have been recently
witnessed in the residential market. We are likely to see a
flattening out of prices at high levels in the short term.
Real Estate Monitor: Switzerland - 6
31.05.2011
30.06.2011
31.07.2011
31.08.2011
30.09.2011
31.10.2011
Houses Apartments
30.11.2011
31.12.2011
31.01.2012
29.02.2012
31.03.2012
30.04.2012
31.05.2012
30.06.2012
31.07.2012
31.08.2012
According to Wuest & Partner, there are several markets
that are at risk of price falls in the short term. These include
Fribourg, Bulle, Châbles, Gros-de-Vaud, Bern and
Aargau. These markets have seen strong demand for
housing because the cantons around Lake Geneva and
Zurich have become too expensive, and not because of
strong economic fundamentals. Home buyers here are
also more sensitive to tighter lending conditions and these
markets have seen above-average rates of construction.
There are a number of risk factors for the Swiss residential
market in the medium term, including a downward
revision of economic growth forecasts. 2011 and 2012
were plagued by high-profile job cuts and company relocation
announcements in particular from the pharmaceutical
and the banking sectors. Both are facing strong headwinds
in Switzerland and their negative development is
likely to affect housing demand (and prices). Another external
shock to demand and prices could be a sharp rise in
interest rates, although this is unlikely over the medium
term.
Offices: Recent Trends and Outlook
Investment trends
Prime Office Yields and Swiss 10-Yr Government Bond Rate
Per cent
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Q2 1995
Q4 1995
Q2 1996
Q4 1996
Q2 1997
Q4 1997
Q2 1998
Q4 1998
Q2 1999
Q4 1999
Q2 2000
Q4 2000
Q2 2001
Q4 2001
Q2 2002
Q4 2002
Q2 2003
Q4 2003
Q2 2004
Q4 2004
Q2 2005
Q4 2005
Q2 2006
Q4 2006
Q2 2007
Q4 2007
Q2 2008
Q4 2008
Q2 2009
Q4 2009
Q2 2010
Q4 2010
Q2 2011
Q4 2011
Q2 2012
Geneva Prime Office Yield Zurich Prime Office Yield CHF Swiss Confederation bonds - 10 YRS
Source: CBRE, Swiss National Bank

Real Estate Monitor: Switzerland
According to the IPD/Wüest & Partner Annual Switzerland
Annual Property Index 18 , in 2011 the office segment
in Switzerland boasted an impressive total return of 7.7
per cent (4.9 per cent income return and 2.7 per cent
capital value growth). During the same year, total returns
of Swiss Equities stood at -4.6 per cent, Swiss Property
Equities (Wupix-A) stood at 6.4 per cent, Swiss Property
Funds (Wupix-F) stood at 6.9 per cent, and Swiss Bonds
(SBI) stood at 8.9 per cent, according to the same source.
The office market in Switzerland has elicited strong private
and institutional investor interest for the same reasons
as the residential market (robust economy and employment
market, good demographics, low interest rates,
and the perceived ‘stability’ of Swiss real estate). According
to KPMG, high levels of disposable cash (e.g. from institutional
investors) and a lack of investment alternatives
have pushed up real estate prices. Investors have been
willing to accept lower net initial yields because they are
still more than 300 basis points higher than the Swiss 10year
government bonds, which are currently yielding less
than one per cent. All the above factors have resulted in
Geneva and Zurich being the lowest yielding office markets
in Europe. In Q2 2012, prime office yields stood at
3.9 per cent in Zurich and 4.2 per cent in Geneva, compared
to a EU-15 average of 5.6 per cent.
Occupier trends
Prime Office Rents - Zurich and Geneva
CHF per SM per annum
1'000
950
900
850
800
750
700
650
600
550
500
Q2 1995
Q4 1995
Q2 1996
Q4 1996
Q2 1997
Q4 1997
Q2 1998
Q4 1998
Q2 1999
Q4 1999
Q2 2000
Q4 2000
Q2 2001
Q4 2001
Q2 2002
Q4 2002
Q2 2003
Q4 2003
Q2 2004
Q4 2004
Q2 2005
Q4 2005
Q2 2006
Q4 2006
Q2 2007
Q4 2007
Q2 2008
Q4 2008
Q2 2009
Q4 2009
Q2 2010
Q4 2010
Q2 2011
Q4 2011
Q2 2012
Source: CBRE
Geneva Zurich
Demand for office space in Geneva and Zurich has recently
weakened due to a more uncertain economic and employment
outlook. This period of weakened activity has
coincided with a strong amount of new office space being
delivered in these markets. Prime rents in Geneva and
Zurich are both currently (Q2 2012) situated at CHF900
per square metre per annum, and have remained at this
level for a year.
Real Estate Monitor: Switzerland - 7
Growth
The trend in Zurich is for major companies to consolidate
operations into one or a few new fit-for-purpose buildings
outside the CBD as companies are aiming to reduce
costs wherever they can. It is reported by DTZ that in Geneva
international companies are becoming less numerous
due to uncertainty on tax. Local international firms
along with Swiss banks have reduced their staff here.
Office outlook
Workplace-based Headcount Employment
Growth
5%
4%
3%
2%
1%
0%
-1%
-2%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Oxford Economics
Long-term average
Geneva Zurich
Forecast
Both economic and employment growth in the country
are expected to be weaker over the next two years. Demand
for office space in both Geneva and Zurich is therefore
likely to degrade over this period.
Weakened demand (in particular in the CBD) together
with elevated construction levels in Zurich, is likely to
cause prime rents to decrease in this market over the
next two years. Despite the fact that Geneva is also experiencing
weaker occupier demand and a decent level of
construction activity, the fact that the vacancy rate here
is very low means that rents are likely to remain flat in
this market in the short term.
The investment performance of the office segment is determined
by the health of the occupier market. Given the
lack of rental growth, prime yields are unlikely to compress
further in either Geneva or Zurich in the next two
years (and prime values are unlikely to increase). The 300basis-point
gap between prime yields and the 10-year
government bond rate is still attractive for domestic investors,
however. Prime values are therefore not expected
to decline in these two markets as domestic investors
are still looking for prime assets in ‘safe haven’ locations.

Real Estate Monitor: Switzerland
Sources
1 According to Wüest & Partner
2 CBRE report ‘net initial yield’, which they define as “the ratio between the net income (excluding charges and taxes)
from a property and the acquisition cost (price of the building plus fees and transfer duties).” ‘Prime yield' represents
“the Yield which an investor would receive when acquiring a grade/class A building in a prime location (CBD, for example),
which is fully let at current market value rents".
3 http://perspectives.pictet.com/2012/09/05/switzerland-economic-growth-gdp-contracted-q-o-q-in-q2/
4 June 2012 forecast
5 Wuest und Partner transaction-price index
6 Ariane Gigon, ‘Role of foreigners in housing shortage examined’, July 15, 2011
7 According to Knight Frank, the current regulations, known as lex koller restricts purchases by non-Swiss buyers to areas
within designated ‘Holiday Zones,’ predominantly in ski resorts and the immediate areas surrounding both Montreux
and Lugano. In all areas, 200m2 is the maximum size of an individual property available to non-Swiss buyers.
8 UBS Real Estate Focus, January 2012
9 Lynne Constable, ‘Housing Special: The Swiss Housing Dilemma’ August 2009
< www.swissnews.ch/fileadmin/daten_Swissnews/PDF_Archiv/2009/08.09/sn08_012_14.pdf>
10 In Switzerland you only amortise 1 per cent of the value of your home per annum.
11 Swiss Issues Real Estate,Real Estate Market 2012, Structures and Prospects, page 8.
12 Housing Special: The Swiss Housing Dilemma. Swiss News August 2009.
13 Julie Varnau, ‘Geneva’s housing crisis: Nowhere to grow?’ 13 November 2008,
14 Tobias Lux, ‘Mortgage financing : FINMA recognises new minimum standards,’ Press Release, 01.06.2012
15 Neil MacLucas, ‘In Switzerland, No Bubble Yet as Real Estate Prices Soar,’ July 20, 2012,
16 Tobias Lux, ‘Mortgage financing : FINMA recognises new minimum standards,’ Press Release, 01.06.2012
17 Veronica DeVore, ‘Mortgage buffer ruled out amid slowing market’, August 27, 2012
18 The IPD / Wüest & Partner Switzerland Annual Property Index measures ungeared total returns to directly held standing
property investments from one open market valuation to the next.
Real Estate Monitor: Switzerland - 8

Real Estate Monitor: Switzerland
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