The Covid-19 effect on the rise and fall of the Swiss real-estate market

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The Covid-19 effect on the rise and fall of the Swiss real-estate market

Séverine Cauchie - Senior Fund Analyst and Portfolio Manager, Open Architecture

Séverine Cauchie

Senior Fund Analyst and Portfolio Manager, Open Architecture

The pandemic has turned our lives upside down and thrown the financial markets into upheaval for over a year. We have been forced to embrace new habits faster than ever before. But how has this affected the residential property market? Up to now it has been remarkably resilient - but will that continue? And what are the trends that are driving Switzerland's real estate market and what does the future hold there?

It usually takes a full generation for new habits around how we live, work and travel to take hold. But Covid-19 has overthrown all of that thinking

A surging demand for home ownership

It usually takes a full generation for new habits around how we live, work and travel to take hold. But the pandemic has overthrown all of that thinking. Now there are a series of shifts in demand which have had major repercussions on real estate and its value - people will now spend on their home rather than a holiday; there is more demand for country living; bigger spaces; extra rooms for offices and prioritising the quality of workspaces. As people are now only commuting a few days a week, they are more willing to spend more time in the car or on public transport in order to get to work.

The result of all of these changes is that aspirations towards home ownership only dropped briefly during the pandemic. And when the first lockdown was lifted, demand surged. Flats and mountain retreats are in huge demand. Broye, Vallé de Joux and Sion have all seen spikes in demand for detached houses.

The result of all of these changes is that aspirations towards home ownership only dropped briefly during the pandemic. And when the first lockdown was lifted, demand surged

But just because there is demand doesn’t mean that people are getting what they wish for. Why? Because banks estimate affordability based on a sustainable interest rate rather than an effective one thus many are still unable to purchase. In fact, just 42% of properties advertised for sale are currently affordable for average-income households. And this drops to 26% for single-family homes1.

As prices go up, these figures are only going to go down. In Zurich, single-family homes have increased by almost 10% in the past 12 months while apartment buildings have stalled. We see a similar trend in the Lake Geneva region.

So while demand is on the up throughout Switzerland, supply is expected to stall this year and single-family home prices will be pushed up before stabilising in 2022, while flat prices look set to continue rising in the Lake Geneva and Zurich regions.

In Zurich, single-family homes have increased by almost 10% in the past 12 months while apartment buildings have stalled. We see a similar trend in the Lake Geneva region

Rental residential shows buoyancy

Rental residential building prices were steady last year but investment in the area is being propped up by demand from institutional investors looking for positive returns in Swiss francs. The Covid-19 pandemic did create some jitters at the start of last year, and this was felt both in the transactions market, with prices falling, and in the amounts invested in multi-family buildings. But this did not last.

Rental residential assets bounced back between the end of last year and the start of this one and the number of buildings under construction is on the rise- showing that the construction market is picking up again. Overall, residential supply still exceeds demand.

Funds exposed to regions with higher vacancy rates have turned in weaker operating performances. However, thanks to the overall solid market, results for residential portfolios at the end of last year have generally included positive growth

However, this does vary from one canton to another. Vacancy rates are high in peripheral areas such as Jura, Valais and Neuchâtel in French-speaking Switzerland and Soleure, Argovia, Thurgovia and Saint-Gall (2.41%) in the German-speaking part, according to the Centre d'Information et de Formation Immobilière (CIFI). Yet highly urbanised cantons where development potential is limited and housing demand is high have much lower housing vacancy rates - such as in Geneva, Zug, Zurich and Basel-City. In those areas, demand is so high that some portfolio managers have reported that potential tenants often contact them before their developments go on the market.

These contrasts show in the results of investment vehicles. Funds exposed to regions with higher vacancy rates have turned in weaker operating performances. However, thanks to the overall solid market, results for residential portfolios at the end of last year have generally included positive growth in rental income, net earnings growth and improved pay-out ratios.

Investors got it right in 2020 as the share prices of residential real estate funds bounced back after being hit with a shock in March due to coronavirus

So where will the funds on the stock market be in the near future? Investors got it right in 2020 as the share prices of residential real estate funds bounced back after being hit with a shock in March due to coronavirus. In fact, the residential segment outperformed the rest of the market by a wide margin by delivering a total return of 16.6% over the year, pushing valuation to unprecedented levels2.

This article was produced in collaboration with Yves Cachemaille, Real estate expert at CBRE and President of the CEI (Swiss Chamber of Expert Property Valuers)

 

1 Data unless otherwise referenced is from 'Trends in Switzerland's residential real estate market', a report from Lombard Odier
2 Lombard Odier data. Past performance is not a guarantee of future results

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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