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Swiss Real SnapShot! Demand is the touchstone Current developments in the Swiss real estate investment market Spring 2018
Swiss Real SnapShot!Demand is the touchstone
Current developments in the Swiss real estate investment market
Spring 2018
Content04 Macroeconomic
Overview
06 Office Property Market
08 Retail Property Market
10 Residential Property Market
12 Direct Property Investments
14 Indirect Property Investments
16 Direct Property Investment Market in the Canton of Geneva
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! limits itself to global observation, without addressing regional deviations in detail.
KPMG Real Estate has both, Swiss specific and global expertise in the real estate markets. Our extensive data pools in local markets along with competent and in-depth consultation generate added value for our clients in all areas connected to real estate.
Turn to page 18 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
Swiss Real SnapShot! 3
Demand is the touchstone
Macroeconomic Overview The Swiss economy has made an optimistic start to 2018. The State Secretariat for Economic Affairs (SECO) is anticipating positive momentum in both foreign trade and the domestic economy, and in March 2018 it increased its forecast for GDP growth in 2018 to 2.4%. Of the major banks, Credit Suisse and UBS are somewhat less optimistic but they are still assuming solid GDP growth of 1.7% and 1.8% respectively. At 2.1%, the average derived from the consensus forecasts for 2018 is therefore slightly below SECO’s expectations.
As the economic situation improves – and with population growth also slowing – the situation on the Swiss labor market is also easing. The forecasting institutions expect that the unemployment rate will fall again in 2018, to an average of 2.9% (2017: 3.2%). Moreover, in 2019 a further reduction in unemployment, to 2.8%, is expected despite slower forecast economic growth of 1.8%.
A slight increase of 0.5% in the Consumer Price Index is once again expected in 2018 (the increase in 2017 was also 0.5%). After a period of stagnation in consumer prices dating back to 2009, there is consensus amongst the forecasting institutions of a return to price inflation.
Macroeconomic indicators1
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
E
2018
P
2019
P
GD
P g
row
th, u
nem
ploy
men
t ra
te
and
Con
sum
er P
rices
Inde
x
GDP growth Unemployment rateConsumer Prices Index
Forecast average
Sources: BAKBasel, Credit Suisse, KOF, SECO, UBS and KPMG
The global economy is also in good shape. The International Monetary Fund expects global GDP growth of 3.9% for both the next two years. The 2018 forecast for industrialised countries was upgraded once again at the beginning of the year, from 2.0% to 2.3%. Positive growth rates are also forecast in all regions for 2019. Compared to the forecast for the current year, the IMF is assuming a slight slowdown in growth in 2019, with the exception of emerging and developing countries.
1 E = Expected value P = Consensus forecast based on BAKBasel, UBS, Credit Suisse, KOF, SECO and KPMG
4 Swiss Real SnapShot!
However, as well as the optimistic prospects there are still significant risks. From the European perspective, these could for example, take the form of a negative impact on stock market prices because of a departure from the current expansionary monetary policy. But increased protectionism in the United States, including its withdrawal from the North American Free Trade Agreement (NAFTA), or the imposition of punitive tariffs could also harm global production chains and restrict economic development in Europe, including Switzerland.
Global GDP growth
0% 1% 2% 3% 4% 5% 6%
Global growth
Industrialisedcountries
USA
UK
Eurozone
Japan
Emerging anddeveloping countries
2018 2019
Sources: IMF and KPMG
According to the State Secretariat for Migration (SEM), in 2017 net migration fell for the fourth time in succession, with net inward migration of 53,000. Whilst this means that inward migration has turned out higher than in the September 2017 projection (49,000), it is at its lowest level for ten years. Despite the optimistic economic outlook, the trend is not expected to reverse for the time being. In its forecast model, the Federal Statistics Office (BFS) expects annual inward migration to remain stable at around 60,000 up to 2030, and to fall to 30,000 p.a. by 2040.
Net migration
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net
mig
ratio
n
Germany France ItalySpain Portugal AsiaOther Countries Africa Total
Sources: BFS, SEM and KPMG
In December 2017, the Purchasing Managers’ Index (PMI) reached 65.6, its highest level since February 2011. The index has remained at that level since then and at the end of February 2018, it was virtually unchanged at 65.5. Whilst the KOF economic barometer, at 106.00, is somewhat less optimistic than in the past, since February 2016 it has also been mainly above the growth threshold of 100 points. According to the KOF, the strongest contributions are from construction, followed by the hospitality industry and domestic consumption. But the export industry is also taking a positive view of the economic outlook. It seems to be coping well with the established Swiss Franc exchange rate of between CHF 1.15 and CHF 1.18 per Euro. During the losses on the stock markets at the start of February 2018, the Franc briefly rose to less than EUR 1.15/CHF. The Swiss National Bank (SNB) still views the Franc as “highly valued” and has repeatedly reaffirmed that it will continue to take active steps to influence the EUR/CHF exchange rate.
Purchasing Managers’ Index, KOF economic barometer
and EUR/CHF exchange rate
00.2
0.40.6
0.811.2
1.41.6
1.8
0
20
40
60
80
100
120
140
Jan.
200
0Ja
n. 2
001
Jan.
200
2Ja
n. 2
003
Jan.
200
4Ja
n. 2
005
Jan.
200
6Ja
n. 2
007
Jan.
200
8Ja
n. 2
009
Jan.
201
0Ja
n. 2
011
Jan.
201
2Ja
n. 2
013
Jan.
201
4Ja
n. 2
015
Jan.
201
6Ja
n. 2
017
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
Sources: Procure, Credit Suisse, SNB, KOF and KPMG
The Fed started raising interest rates and the ECB initiated a gradual reduction of the asset purchase program. If the interest rate differential changes in favour of Switzerland, the Swiss Franc can be expected to appreciate unless countermeasures are taken. It should therefore be assumed that the SNB will not raise interest rates until Europe have increased their own inerest rates.
Overall, the outlook for the Swiss economy is promising and positive growth rates can be expected over the short to medium-term.
Swiss Real SnapShot! 5
and how much this reduction will continue, and its impact on actual use of space, is hard to predict at present. Based on static employment levels, a further reduction of 1.2 sq. m per employee over the next ten years would mean a decline in demand for space of around 1.8 million sq. m, or 8% of current office space requirements2. Suppliers of office space should therefore monitor this structural change with great interest.
On the supply side, substantial capital inflows into the real estate investment market can also be expected this year. Interest rates remain low, fixed-interest bonds are hardly generating any yield and investments in property remain relatively attractive. After a phase with an above-average number of building permits after 2010, the number of permits granted since 2014 remains around the long-term average, with some CHF 2 billion worth of office buildings constructed each year. Whilst the increase in building permits at the end of 2017 runs contrary to this trend, this is largely due to the approval of the second Roche Tower (CHF 550 million) in Basel.
Despite vacancy levels falling back again somewhat in 2017 compared to the previous year in the Swiss centres other than Basel (+9.4%), with -12.9% in Geneva, -9.7% in Zurich and -7.1% in Bern, a significant easing cannot be expected over the medium-term.
2 Estimate based on an average requirement of 15 sq. m per office employee
Office MarketWith such positive economic prospects, sentiment in the Swiss office market is also becoming more optimistic. However, the rental market remains challenging despite the lower vacancy rates. The reduction in inward migration, an ageing population and a sluggish employment rate mean that no stimulus can be expected from the demand side.
According to the Federal Statistical Office, for most of the period since 2014 office employment has been stable at around 1.5 million (seasonally adjusted). In 2017, with 63% of all employees, this stagnation can be attributed particularly to the Financial and Insurance Services sector (+0.20%), the Professional, Scientific and Technical Services sector (-0.12%) and Other Business Services (+0.22% compared to the previous year). Trends in these sectors are substantially influenced by automation and digitisation. In contrast, the IT and Telecommunications sector is benefiting from this trend, with employment growth of 1.85%; the numbers employed in Public Administration have also increased by 4.45%.
With more job sharing, and more flexibility in job locations and hours of work, a reduction in demand for space per employee is to be expected in the long-term. Property Market Analysis has investigated demand for space in the eleven largest office locations in Europe and identified an overall decline of 1.2 sq. m per employee over the past ten years. This represents a decline of 0.6% per year. How long
80
90
100
110
120
130
140
150
160
-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
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)
Sources: BFS and KPMG
6 Swiss Real SnapShot!
Office vacancies 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
Vac
ant
offic
e sp
ace
in s
q.m
Basel Bern Geneva Zurich
Sources: City statistical offices and KPMG
Most asking rents for office premises also fell in 2017 compared to the previous year. The most obvious decline was seen in Geneva, at -5.7%. But asking rents also fell in Zurich (-2.2%) and Bern (-2.7%), and there was a slight increase only in Basel, of 0.8%.
Asking rents for office space in the principal centres
90100110120130140150160170180
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
Basel Bern Geneva Zurich
Ren
tal P
rices
Inde
x
Sources: WP and KPMG
Besides the existing vacancy levels and at best stagnating asking rents, the office market is still facing structural challenges. Often, older premises no longer meet modern requirements. They are coming under pressure from higher-quality or more flexible new premises, meaning that fierce competition and intensive marketing of vacant premises can be expected in future.
Swiss Real SnapShot! 7
Overall B2C online and mail order market by product area
0
1
2
3
4
5
6
7
2012 2013 2014 2015 2016 2017
Sha
re b
y va
lue
in C
HF
billi
on
MediaMultimedia, HiFi and Electrical
Other Food
HomeFashion and footwear
Sources: GfK and KPMG
With Alibaba (also AliExpress) and Amazon, global players are increasingly pushing into the Swiss online market. The Carpathia consultancy, which specialises in e-commerce, estimates that in 2016 Amazon’s turnover in Switzerland was CHF 475 million, whilst AliExpress achieved sales of CHF 130 million. This already places these two online retailers in third and eighth place in the consultancy’s sales rankings3. With their wide product ranges and value for money, in 2017 foreign online retailers increased their market volume by 23% to CHF 1.6 billion. At 1.7%, foreign retailers still have only a small share of the Swiss online market. If price competition between online retailers intensifies, there will be increased pressure on prices in bricks-and-mortar retailing.
According to the cities’ statistics offices, despite a slight decline in 2016, there was a further significant increase overall in retail space vacancy in 2017 in the cities of Basel, Bern, Geneva and Zurich of 28%, or nearly 10,000 sq. m. Trends vary between the four cities. In Bern and Geneva, the percentage increase in vacancy was in single figures. In Basel, retail space vacancy increased by 13% (+1,400 sq. m). The most significant increase of 228% (+7,000 sq. m) was recorded in Zurich, but this was mainly due to starting from a low base because the previous year’s vacancy rate was low4. What is striking is that, according to the Zurich statistics office, the volume of newly vacant space has increased in ten out of the twelve city districts and that the increases cannot be attributed to any major development projects.
3 Ranking of the top 30 B2C online shops and digital sales platforms in 2017 by turnover4 In Zurich, only shops larger than 500 sq. m are included in the survey and so the recorded
vacancy levels are automatically too low
Retail MarketRetail sales grew unexpectedly in 2017. According to BFS, nominal retail sales rose by around 1.5% year-on-year. The strong economic environment, the weakening of the Swiss Franc and positive consumer sentiment all contributed in particular to this positive outcome.
In January 2018, the quarterly consumer sentiment index stood at 5, putting it in positive territory for the first time since July 2014. The recovery of the Swiss economy and the improvements in the labor market are having a positive impact on consumer sentiment. However, there has been little change in consumers’ expectations regarding their own financial situation (index level: -2) and scope for saving (index level: 16). Both sub-indices are still below the 10-year averages of 0 for consumers’ financial situation and 20 for their assessment of scope for saving.
Retail sales and consumer sentiment index
120
115
110
105
100
95
90
85
80
60
40
20
0
-20
-40
-60
Inde
xed
reta
il sa
les
Consum
er Sentim
ent Index
Jan.
200
8
Jan.
200
9
Jan.
201
0
Jan.
201
1
Jan.
201
2
Jan.
201
3
Jan.
201
4
Jan.
201
5
Jan.
201
6
Jan.
201
7
Jan.
201
8
Consumer Sentiment IndexSeasonally-adjusted retail sales in nominal terms
Seasonally-adjusted retail sales in real terms
Sources: BFS, SECO and KPMG
Apart from the overall retail trend, the other critical factor for the retail property market is the ongoing structural change associated with the move towards revenue from online retailing. 2017 saw further strong growth in online and mail order sales of 8.7% (excluding C2C) (2016: 8.3%). With a volume of CHF 91.9 billion, Swiss online and mail order retailing achieved a share of 6.9% of overall Swiss retail sales. The driving force in online and mail order sales is the non-food sector, which grew again by 9.7%. Online retailers saw a particular increase in sales in the Home and Multimedia, HiFi and Electrical segments (+11.1% and +11.7% respectively).
8 Swiss Real SnapShot!
Vacant retail space in sq.m
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
Vac
ant
reta
il sp
ace
in s
q.m
Basel Bern Geneva Zurich
Sources: City statistical offices and KPMG
The decreasing demand for space and the growth in supply are putting further pressure on asking rents. Between the second half of 2012 and the second half of 2017, there has been a clear negative trend in asking rents for retail space in Bern, at -19%, and Geneva, at -18%. In Zurich, the correction in asking rents, of -17%, did not take place until the first half of 2013, and in Basel it was even later, with a drop of -18% after the first half of 2014. The reason for the delayed effect in Basel and Zurich could be that demand for space was more dynamic. The situation has stabilised somewhat in Basel and Geneva, where asking rents rose by around 4% in 2017. In contrast, in Zurich and Bern the downward trend is continuing, at -1.4% and -4.0% year-on-year respectively. It is worth noting that it is not only asking rents that are affected; tenants are also demanding reductions in rents for existing leases, and this is not reflected in the statistics.
Asking rents for retail space in the principal centres
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
Ren
tal P
rices
Inde
x
Basel Bern Geneva Zurich
Sources: WP and KPMG
Retail formats which complement online sales, as well as convenience stores and flexible retail premises in prime locations with high footfall remain popular with consumers. Flagship stores are still of central importance for building customer loyalty. Well-located shopping centres such as ShopVille in Zurich (2016: sales of CHF 24,539 per sq. m) and the shopping centre in Bern railway station (2016: sales of CHF 30,619 per sq. m) boast solid sales figures and a high level of sales productivity per unit area. Formats which are integrated into or attached to railway stations generally benefit from commuter traffic in the main centres. In their 32 largest stations, SBB (the Swiss Federal Railways) posted in 2016 third party retail sales of CHF 1.6 billion, of which CHF 365 million is generated at Zurich Central Station. Increasingly, operators of shopping centres in less well-frequented locations are trying to offer services in the fields of fitness, wellness and health, which are affected less by online retailing and which encourage consumers to stay longer in their centres.
With the increased market share of both domestic and foreign online retailers, despite the positive consumer sentiment there is no reason to expect that trends on the retail market will reverse in the near future. The shift to online retailing or hybrid formats and the decline of sales in bricks-and-mortar retailing mean that retailers are closing poorly frequented locations or reducing the size of their shops. For property owners, this results in lower rental income, higher tenant turnover and an increased need for active property management. The structural change also presents opportunities for specific retail premises tailored to the new requirements and demand, which impact on the composition of owners’ portfolios.
Swiss Real SnapShot! 9
Vacancy Index
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
2013 2014 2015 2016 2017
Sources: BFS and KPMG
According to the offer data collected by immodatacockpit, in 2018 there has also been a clear increase in the average advertising period for homes for rent in Switzerland, from 21 days at the start of 2016 to 31 days in 2018. The lengthening advertising period is also affecting cities, not just peripheral locations. The greatest increase was in the city of Basel, of 15 days to 29 days, followed by an increase of 13 days to 27 days in Zurich. The increase was less in Geneva, now at 23 days, and Bern, at 24 days. Besides the increase in vacancy, the longer advertising period also points to reduced liquidity in the residential market. Even in the cities, active marketing is increasingly necessary in order to let residential space.
Residential MarketProspects for the residential market are subdued. Against the background of the yield gap compared to fixed-income investments, and despite the slowdown in growth on the demand side, investment in residential property is continuing, and therefore supply is still growing.
After reaching a high point in 2016, with planning consents for 29,000 homes for rent, the number of planning consents granted in 2017 has fallen slightly to around 27,600 units. However, the number of applications for planning consents for homes for rent – around 31,000 – has changed little compared to the 31,400 in the previous year. The KOF forecasts, which identify the construction industry as the most important factor underlying the current positive economic outlook recorded in its economic barometer, currently at 108, also suggest that construction output will remain strong. A significant increase in the current low interest rates, which are the strongest source of investment pressure and decrease the high level of investment in construction, is not expected in the short-term. Despite the slight decline in the number of planning consents granted, a continued high level of construction activity can be expected this year.
Across all regions of Switzerland, the vacancy rate rose again in 2017. At 1.45%, the current vacancy rate for the whole of Switzerland has not been seen since the end of the 1990s. Besides the decline in inward migration, this is largely due to the high level of construction activity. There are significant variations in vacancy between regions and cantons. The cantons of Solothurn and Aargau are particularly severely affected, with vacancy rates of 2.8% and 2.3% respectively. In contrast, vacancy rates are much lower in the cantons of Zurich and Zug, at 0.9% and 0.4% respectively.
10 Swiss Real SnapShot!
Average time on market5
0
5
10
15
20
25
30
35
Zurich Basel Bern Geneva
Day
s
Time on rental market 2016Time on rental market 2018Swiss average 2016Swiss average 2018
Sources: immodatacockpit and KPMG
Since the start of 2017, rents in Switzerland have been on a downward trend. For Switzerland as a whole, as at the end of February 2018 the index of asking rents published by homegate.ch had fallen by 0.2% year-on-year. In Zurich, the index is still steady, moving by 0.0%. Conversely, in the cantons of Geneva and Vaud, following a downward phase from November 2015 to April 2017, quality-adjusted asking rents have been rising again since May 2017. In February, the index increased by 2.9% compared to the same month last year. Apart from the cantons of Geneva and Vaud, in February 2018 only Solothurn and Aargau recorded a slight year-on-year increase, of 0.1% each. In the cantons of Basel-Landschaft and Basel-Stadt, asking rents fell by 1.2%, and in Bern they
5 Evaluation of offer data collected by immodatacockpit as at the end of February
fell by 0.3%. The most obvious fall in asking rents was in the canton of Ticino, where the difference was 1.6%.
Whilst asking rents have fallen throughout Switzerland, in 2017 the rental index for existing tenancies increased slightly by 1.5%. After a long period of increasing divergence in asking rents and existing rents, the opposing trends in the indices mean that the rental market is easing.
Indexed changes in current and asking rents
100
110
120
130
140
150
160
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Inde
xed
chan
ges
Existing rents Asking rents
Sources: WP, BFS and KPMG
In certain regions, the letting of homes for rent is increasingly calling for creative solutions. This raises the question to what extent the demand side can be revived in the short to medium-term as the economy picks up. The final determinant is the low interest rate environment, and this is likely to continue for a while. Accordingly, a reversal of the trend on the residential market cannot be anticipated in the near future.
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
90
95
100
105
110
115
120
125
130
Jan.
09
Jul.
09
Jan.
10
Jul.
10
Jan.
11
Jul.
11
Jan.
12
Jul.
12
Jan.
13
Jul.
13
Jan.
14
Jul.
14
Jan.
15
Jul.
15
Jan.
16
Jul.
16
Jan.
17
Jul.
17
Jan.
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
Quality-adjusted asking rents
Sources: homegate.ch and KPMG
Swiss Real SnapShot! 11
seem to have been willing to accept higher purchase prices and the associated lower initial yields, even away from central locations. The difference between initial yields and net current yields, and the willingness of purchasers to pay such prices in the investment market, indicate continued strong pressure to invest.
Net initial yields by use category
Median
30th percentile
70th percentile
0%
1%
2%
3%
4%
5%
6%
7%
Residential Office Mixed use20
15
2016
2017
2018
2015
2016
2017
2018
2015
2016
2017
2018
Sources: SIV/REIDA and KPMG
With reduced rental potential and increasing vacancy risks, sound market knowledge, targeted portfolio diversification and risk management are becoming even more important. With the positive economic prospects in the United States, Europe and Switzerland, a normalisation of interest rates – albeit slow – is expected, and this will reduce the relative attractiveness of real estate investments as returns stagnate or even fall. The specific characteristics of individual investment properties will then assume greater importance.
Direct Property InvestmentsIn recent years, developments in the Swiss property investment market have been determined largely by the low interest rate environment. Despite the high level of construction activity and reduced rental income potential, initial yields for direct property investments have fallen again, and yields for existing holdings also remain low.
In the residential and mixed-use segments, net yields for existing holdings have fallen again in the first quarter of 2018. According to SIV/REIDA, over the past year residential yields have fallen from a median of 4.3% in 2017 to 4.0%, and for mixed properties they have fallen from 4.3% to 4.1%. In contrast, office property yields for the properties analysed rose from a median of 4.4% in the previous year to 4.7% in 2018. Moreover, the difference between the 30% and 70% quantiles has increased. Because of the continued levels of office space vacancy, it is unlikely that this increase in yields is the result of improvements in rents or lower vacancy levels. One driver of the increased yields could be lower property management costs. The increased attention being paid in property valuations to the subdued outlook for office properties in all qualities of location is also affecting the key yield data.
Net current yields by use category6
Median
30th percentile
70th percentile
0%
1%
2%
3%
4%
5%
6%
2015
2016
2017
2018
2015
2016
2017
2018
2015
2016
2017
2018
Residential Office Mixed use
7%
Sources: SIV/REIDA and KPMG
With a median of 2.9% in the residential segment and 3.6% in the mixed segment, an evaluation of initial yields shows that net initial yields are lower compared to net current yields. For office properties, initial yields at 4.4% are significantly closer to net current yields (4.7%). In 2017, the difference between the median initial yield and the median net current yield in the residential segment increased further compared to the previous year. Also, the entire distribution of net initial yields moved downwards. This also points towards a further reduction in yields even away from the prime locations. In the past year, property investors
6 Yields for mixed uses are available from 2016.
12 Swiss Real SnapShot!
Swiss Real SnapShot! 13
peaking last year at the end of February 2017 (37%), premiums have reduced by 12 percentage points (-32%), but they are still high by historic standards. The reasons for the high premiums include the use of property investments in place of the low interest rates paid on long-term government bonds and debentures.
At an average of 21%, premiums over the net asset value of the large Swiss property companies are slightly below the investment fund premiums. There are large variances between the premiums/discounts of individual shares. SPS, the largest Swiss property company, was trading with a mark-up of 23% as at 2nd April 2018. The highest premium over net asset value of 66% is paid for Intershop. Züblin lies at the other end of the scale, with a discount of -30%.
In 2016, the amount of new capital raised by quoted property vehicles was already high, but in 2017 it was exceeded by 27%, with a total of around CHF 4.5 billion. A comparatively high level of issues by property funds was seen, with a total volume of CHF 2.7 billion. Last year, property companies raised borrowings of around CHF 1.5 billion.
Indirect Property InvestmentsAt the start of 2018, the yield on 10-year government bonds moved back into positive territory, from -0.10% to +0.05% (per 29.03.2018). After a negative performance in 2016, the SMI (Swiss Market Index) moved upwards again in 2017. At the end of December 2017, the index stood almost 13% above its level at the beginning of the year. The relative attractiveness of quoted real estate investments declined slightly due to the positive movement of the SMI and rising yields on Swiss federal bonds. Property shares in particular could not escape the turmoil on the stock markets in January 2017, and at the end of March they were showing an overall yield of 0.27% (YTD). With a total return of -1.86% (YTD), real estate funds have also made a weaker start to the year following the previous year’s exceptionally good result.
Quoted Swiss real estate funds continue to boast high premiums, with an average of 25% at the end of March 2018. Streetbox Real Estate and La Foncière trade at the highest mark-ups (62% and 56% respectively). Since
Performance of listed property investments
Sources: 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.
17
Aug
. 17
Sep
. 17
Oct
. 17
Nov
. 17
Dec
. 17
Jan.
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
14 Swiss Real SnapShot!
After two relatively steady years (2016: 7.2%; 2015: 7.4%), the performance of the property investment foundations (KGAST Index) has declined, particularly in the residential segment (6.1%), whilst that of business properties (4.8%) and mixed properties (5.4%) has remained stable. The poorer performance in the residential segment is due mainly to the lower capital growth yield in 2017 compared to the preceding years. While the cash flow yield in the residential segment is only slightly lower, at 3.8%, compared to the previous year (4.0%), the capital growth yield fell from 3.3% to 2.3%.
In a similar way to the yields on direct property investments, in recent years indirect property investments have also been characterised by the low level of interest rates. With the positive outlook for the economy, the labor market and the exchange rate, there is an increasing likelihood that the SNB will raise its base rate. Since the interest rate differential is so important for currency stability, it seems likely that for the time being it will wait until the first interest rate increases in Europe. The underlying conditions for property investment vehicles should therefore remain positive overall this year, despite poorer prospects in the residential, office and retail markets. However, the performance of recent years is unlikely to be repeated.
Cashflow yield Change-in-value yield
Total Residential Mixed use Office
0%
1%
2%
3%
4%
5%
6%
7%
8%
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
0
1,000
2,000
3,000
4,000
5,000
0
100
200
300
400
500
600
700
800
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 issuesProperty fund issues Cumulative capital inflows in 2016 Cumulative capital inflows in 2017
Sources: KGAST and KPMG
Sources: Bank J. Safra Sarasin and KPMG
Yearly performance KGAST Index
Flow of capital into listed property investments in Switzerland
Swiss Real SnapShot! 15
The most active players were insurance companies, investing CHF 354 million (54% of the investment volume), followed by real estate companies with around CHF 143 million (22%) and private investors with CHF 116 million (18%). Over the past 12 months, insurance companies have invested more than CHF 716 million in the canton of Geneva alone.
On the sell side, the banks continued the process of disinvestment which has been observed in the real estate sector for several years. The largest seller group over the longer term, private investors and individuals, which has accounted for just over 50% of the transaction volume since 2014, made sales of nearly CHF 162 million in the first quarter of 2018.
Prime Yields Although the negative interest rate environment seems to be gradually coming to an end, investment in real estate continues to boast an attractive yield/risk profile. Investors were under heavy pressure to invest in the search for “safe” returns and had few alternatives; this has led to the historic low yields from real estate investments.
In the search for alternatives to fixed-income investments, investors are increasingly showing a preference for high-quality investment properties. Premium locations are in demand, whilst it is hard to find buyers for properties in secondary locations.
As of 29th March 2018, the yield on ten-year federal bonds stood at +0.05%, a rise of 15 basis points over 12 months (-0.10% as at 3rd April 2017). Also, since 18th January 2018 yields have no longer been in negative territory.
In view of the lack of premium properties on the market, prime yields are likely to remain stable in the short term even if interest rates increase slightly. Initially, this is likely to reduce the yield differential between investment properties and bonds.
Range of net yields as at 1st April 2018
Residential 2.5% – 3.0%
Office 3.0% – 3.5%
Commercial 3.0% – 3.5%
Source: KPMG
Prospects for 2018 The strongest demand is still for residential properties. But demand remains strong in Geneva for other real estate investments (offices, retail and industrial), as long as the location is high-quality and the occupancy rate is satisfactory. Because of limited supply, “trophy assets” in the central city core are still highly sought-after.
With the continued inflow of capital, a shortage of high-quality investment properties and the absence of
Direct property investment market in the canton of Geneva7 Investment VolumeThe dynamism observed in the direct property investment market in the canton of Geneva at the end of 2017 continued into 2018. By the end of March, CHF 658 million had been invested (excluding share deals in property companies). The volume of investment was 52% higher than in the first quarter of 2017. In 2017, SBB made a significant contribution to the total transaction volume (CHF 2.115 billion) with the Lancy Pont-Rouge development (cumulative total volume CHF 435 million). In the first quarter of 2018, 67% of the transaction volume was accounted for by the sale and rentback of the Lombard Odier and Edmond de Rothschild portfolios for a total of CHF 442 million which commenced in 2017 and is now concluded. Over the past 12 months, more than CHF 2.3 billion has been invested in the direct property market in the canton of Geneva.
Whilst in 2017 only 38% of investment by volume took place in the city of Geneva, in the first quarter of 2018 nearly 66% (CHF 432 million) was invested in the city’s core area. The area around the left bank of the river attracted 15% (CHF 102 million), the right bank attracted 10% (CHF 67 million) and the eastern left bank attracted 9% (CHF 56 million) of the capital invested in the canton of Geneva.
Geneva market by sector
Source: KPMG
7 The direct property investment market consists of property transactions over CHF 5,000,000, but excluding share deals in property companies and purchases by private individuals for residential purposes. This review takes account of figures up to 28th March 2018
GenevaEastern left bankWestern left bankRight bank
16 Swiss Real SnapShot!
alternatives to investment in real estate, competition between investors is likely to remain fierce in 2018. Given the downward trend in real estate investment prices away from prime locations, opportunistic investors may once again become more active in the acquisition market.
On the supply side, some investors are of the view that the current cycle has reached its peak and are beginning to consider realising their capital gains by disposing of assets. Others are waiting to see how corporate tax reforms in the canton of Geneva develop up to 2020/21. Capital gains generated by legal entities from the sale of immovable property or property shares form part of their taxable profits and so are basically subject to normal profits tax.
As no substantial changes in long-term interest rates can be expected this year, property investors are unlikely to make significant changes to their strategy.
Focus on Selected Transactions in the First Quarter of 2018 In the first quarter of 2018, 6 transactions8 of more than CHF 15 million were recorded, with a cumulative total of around CHF 540 million (87% of the volume invested).
8 Share deals in property companies were not taken into account in this analysis.
Table of abbreviations
Top Real Estate Transactions in the first quarter 2018 (net)
Purchaser Seller Price (CHF) Address City/town Property type
AXA Leben AG Banque Lombard Odier & CIE SA 298,810,000 Boulevard Georges-FAVON 35, 37Rue de la Corraterie 16–22Rue de la Cité 15, 17Rue de la Corraterie 9–13Avenue des Morgines 2, 4, 6
Genève-CitéGenève-CitéGenève-CitéGenève-CitéLancy
OfficeOfficeOfficeOfficeOffice
PSP Real Estate AG Edmond de Rothschild (Suisse) SA 143,315,000 Rue Jean-PETITOT 12Rue François-DIDAY 8Rue de Hollande 14Rue Jean-PETITOT 15Rue de l’Arquebuse 8
Genève-CitéGenève-CitéGenève-CitéGenève-CitéGenève-Cité
OfficeOfficeOfficeOfficeOffice
Baloise VIE AS ROVIM SA 37,300,000 Chemin de l’Esplanade 18–22 Vernier Residential
DARIA SA Fondation de prévoyance de la métallurgie du bâtiment
28,000,000 Rue de Saint-Jean 26 et 28 Genève-Petit-Saconnex Residential
AXA Assurances SA Private 17,900,000 Rue Jean-Antoine GAUTIER 8 Genève-Cité Residential
MALAGNOU 155 SA Private 15,000,000 Malagnou Chêne-Bougeries Residential (Project)
Source: Ground register and KPMG
BAK Basel BAK Basel Economics AG
BFS Federal Statistical Office
ECB European Central Bank
GfK Institute for Consumer Research, Market Research Institute of Switzerland
IPO Initial Public Offering
IWF International Monetary Fund
KGAST Conference of the Managing Directors of Swiss Investment Foundations
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
SNB Swiss National Bank
SWX SWX Swiss Exchange
WP Wüest Partner AG
Swiss Real SnapShot! 17
M&A/Capital Market• Structuring and execution of transactions (Lead Advisory)
– Asset deals: Acquisition and disposal of properties and portfolios – Share deals: Mergers, spin-offs, IPOs, private placements
• Arrangement of indirect investments, such as funds or trusts• Fund raising for specific projects• Debt & Capital Market Advisory
Investment Advisory• Investment advisory for national or international indirect real estate investments• Structuring of real estate investments within portfolios• Qualitative and quantitative analysis of investment products• Monitoring and investment controlling, portfolio performance measurement
Strategy/Organization• Strategy development and implementation
– Business planning/business modelling – Corporate/public real estate management – Asset and portfolio management
• Analysis of organization and processes; organizational development, internal control system
• Performance management/MIS/investment monitoring• Risk management and financial modelling• Turnaround and financial restructuring• Support in digital transformation
Valuation/Due Diligence• DCF -valuations of properties and real estate portfolios or companies• Independent valuation reports for financial statements• Valuations for acquisitions or disposals• Feasibility studies and valuation of real estate developments• Transaction-focused due diligence and process management• Major Project Advisory
We are also pleased to answer your tax-related, legal and regulatory questions regarding real estate and we support you in process and cost optimization as well as solutions for your technological infrastructure.
All-encompassing Real Estate Advisory from one Source
18 Swiss Real SnapShot!
Editorial deadline: 4th April 2018
Please contact us KPMG AG Advisory, Real Estate Badenerstrasse 172Postfach 8036 Zürich
KPMG SARue de Lyon 111 Postfach 3471211 Genève 13
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Philipp SchelbertDirectorReal Estate+41 58 249 77 [email protected]
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Swiss Real SnapShot! 19
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