Home sweet home – apartments high in demand


Thanks to the huge weight attributed to persistently low interest rates, the Swiss real estate market has so far been relatively unscathed by the coronavirus crisis. Apartments are currently very popular with investors, homeowners, and tenants, which is boosting the owner-occupied home market and keeping the rental apartment market on a more or less stable footing. By contrast, in inverse proportion to the momentum in demand, it is mainly rental apartments that are still being built. According to Credit Suisse economists, the residential segment will therefore remain unchanged for the time being: Residential property prices will continue to rise steeply, while advertised rents will continue to fall owing to increasing vacancy rates in the rental apartment market. The situation is very mixed for commercial properties. With regard to offices the individual location is crucial, whereas retail property is on a losing streak almost everywhere. Logistics properties, however, are now the ones to watch on the commercial real estate market.

COVID-19 may have triggered a great deal of uncertainty, but it has also brought certainty in one respect: Increases in interest rates are still a long way off. In recent months, this consideration, combined with rapid and targeted government support measures, has ensured that real estate values have held up well in the crisis. Residential property in particular has proven to be a crisis-resistant investment, further cementing its status as a rock-solid investment.

Apartments are playing a pivotal role for owners, tenants, and investors
Since the onset of the COVID-19 pandemic, our homes have become the absolute focal point in our lives, resulting in noticeable shifts in demand preferences. So it follows that apartments have to be more attractive, larger, and better. Preferably with outside space and owned rather than rented. Interest from prospective buyers in residential property has reached levels previously thought almost impossible. Greater confidence that interest rates will remain low and the growing concern about negative interest rates being passed on mean that many households are being pushed to pursue the goal of home ownership. Demand indices based on online search registrations suggest record-high interest in condominiums and single-family homes. Credit Suisse economists report that, for each property advertised in Switzerland, there are currently 2.1 search registrations by people looking to acquire property.

The elusive dream of home ownership
The longing to own residential property does not fit with the picture on the supply side: construction of owner-occupied housing has been in decline for years and there is no sign of this trend being reversed. The indications of scarcity are now clear for all to see. Within the last 12 months, prices have surged again by over 5% – from what were already very high levels. As a result, an increasingly small number of households can now fulfill the high financing requirements imposed by the regulator. Two out of every three properties advertised across Switzerland with four or more rooms are no longer affordable for a middle-income household. Newbuilds and properties in central – and therefore more expensive – locations move even further out of reach for households like these. Accordingly, households are increasingly searching for residential property on the periphery of urban centers or in rural municipalities – especially as the trend toward working from home enables a larger search radius with the same time spent commuting per week. The periphery thus tends to offer prospective buyers a greater selection of cheaper and therefore more-affordable properties.

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Demand for rental apartments remarkably robust thanks to “safe haven” effect
Ultimately the rental apartment market also benefited from the higher significance accorded to housing, as well as from the soaring prices for owner-occupied property. In urban areas in particular, very few households are still able to choose between an owner-occupied home and a rental property, which automatically supports demand for rental apartments. The crucial reason demand for rental apartments is remarkably robust was primarily that the much-feared slump in immigration as a result of the coronavirus crisis never came to pass. Faced with less attractive labor market situations in their native countries, many foreigners decided to remain in the safe haven of Switzerland, so that the total number of foreigners moving to Switzerland compared to those leaving was actually significantly larger than in the previous year. Credit Suisse economists expect to see net immigration remain high in the current year too, meaning that despite the coronavirus crisis only a moderate decline in demand is anticipated for the rental market.

Office space requirements are being recalibrated
The coronavirus crisis is hitting commercial properties harder than residential segments. Demand for office space remains very weak, as companies are holding back from renting new premises and reviewing the extent to which they can make long-term savings on office space through home working. The importance of centrally located office workplaces is underestimated at present. Before the second wave of infection, there was evidence of a slow but steady stream of workers returning to the office. This could be an indication that offices may soon experience a stronger comeback than many people believe today. Irrespective of this, Credit Suisse economists expect the oversupply to continue increasing in the years ahead. As a result, vacancy rates are likely to rise while rents fall. Only easily accessible and inner-city locations are likely to remain immune to this trend. The already widening divide in respect of supply, vacancies, and rental prices between the centers and the peripheries of Switzerland’s office property markets is likely to be accentuated even further over the next few years.

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Good retail sales gloss over the difficulties facing bricks-and-mortar retailers
COVID-19 is driving this disparity, creating clear winners and losers in this sector, too. The retail trade benefited from temporary shifts in consumer spending due to restrictions on leisure activities and cross-border shopping, resulting in the biggest rise in sales in decades. The winners include food retailers, which benefited from the closure of restaurants and canteens, and online retailers in particular. In contrast, the smaller specialist retailers are particularly suffering owing to the decline in footfall. Any rise in sales is likely to evaporate again once the pandemic has been mastered. The high level of unemployment and loss of income could lead to caution among consumers. What’s more, a significant proportion of the sales that migrated to the online channel is likely to be lost to the stationary trade forever. Last but not least, model calculations are suggesting a lasting decline in pedestrian frequencies (15% to 20% on average) as a result of the greater proportion of employees working from home in the future – which will affect stores that benefit from spontaneous purchases in particular. In the retail property market, this means the process of rightsizing will still tend to be acutely felt during the next few quarters.

Logistics: Real estate segment of the hour

To the same extent that retail space is losing significance, logistics space is growing in importance. In a world where everything can be ordered at the click of a mouse, logistics services have become a key factor for manufacturers and retailers. COVID-19 has accelerated this development, and the need for logistics space has grown as a result. Switzerland has a shortage of modern warehousing as well as distribution and transportation centers, as many existing buildings have become outdated. In addition, new development projects are encountering resistance almost everywhere, and proceeding only slowly. With suitable sites being in short supply, prices have risen accordingly. Rental prices – unlike in other countries – are only beginning to show an upward trend. The combination of scarcity of supply and a healthy long-term demand picture makes logistics real estate an interesting diversification option for investors looking to benefit from low correlations with other real estate segments, as well as high yield premiums.

Figure: Residential property and large apartments in demand
Change in demand measured by the volume of search registrations


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