Swiss real estate still an attractive and growing market – despite some clouds on the horizon
- Shares of listed real estate companies are outperforming the SMI benchmark index
- Investors are reaping a high average dividend yield of 3.9% for 2016
- Values of real estate portfolios are up by 2.2% on average
- Real estate companies benefiting from historically low financing costs
- These positive trends are set to continue over the medium term – but risks include high vacancy rates and new regulations
ZURICH, 6 JULY 2017 – Swiss real estate was once again a very attractive and growing market in 2016. The 12 listed Swiss real estate firms1 analyzed by EY posted gains of 14% last year, while the SMI benchmark index recorded losses of 7%. However, the main reason behind the appeal of shares in these real estate companies is their average dividend yield of 3.9%. This is reflected in the new real estate investment report published by auditing and advisory firm EY.
In addition to share price performance and dividend yields, an analysis of 2016 reveals that office and residential properties also continued to gain in value. This was reflected in the portfolios of the companies under review, which on average registered a 2.2% increase in value. The main driver behind this growth was persistently low discount rates2, which fell by an average of 26 basis points to 4.2% per company compared to 2015, still well above the initial returns3 on the transaction market. According to Claudio Rudolf, Head Real Estate at EY, “The companies we analyze generally take a conservative approach to rating their real estate portfolios.”
Active management of vacant properties
The positive share price performance does not tell the full story – the number of vacant offices and apartments as at the end of 2016 painted a mixed picture, with extremely wide-ranging levels among the real estate companies under review. The average vacancy rate for all companies was 8.1%, lower than as at the end of 2015.
The trend among new builds is for higher initial vacancy rates, even in the residential segment. “Since building activity remains robust, keeping vacancy rates low will continue to be a challenge in future. Real estate companies will also have to manage these vacant properties more actively. Potential measures here include lower rents, rent-free periods or having the real-estate owner invest in extensions and renovations undertaken by tenants,” states Daniel Zaugg, Sector Leader Real Estate, Hospitality and Construction at EY Switzerland.
Companies with solid financing
The equity ratio of the 12 real estate companies under review was 47% on average, with most companies posting an equity ratio of 40%–50% as at the end of 2016. “Thanks to their high equity ratios, Swiss real estate firms have crisis-proof balance sheets and are well prepared for future market corrections,” says Daniel Zaugg. The first half of 2017 saw a slump in demand for office and commercial rental space.
Market requirements are also evolving. At the top of investors’ current list of priorities are low-cost accommodation and specific offers for students. What’s more, increasing regulation is now also impacting the real estate market, which poses a risk that should not be underestimated. This increase in red tape has been exacerbated by a number of factors, such as stricter spatial planning laws and building regulations, potential restrictions on foreigners looking to buy Swiss properties (Lex Koller), more stringent equity capital requirements for buying real estate, and the shorter deadline for repaying mortgage debts.
Nevertheless, Claudio Rudolf remains positive about the future, stating, “There will be no significant changes in the current low interest rate environment in the short and medium term. The Swiss real estate sector continues to be very attractive thanks to rising share prices, high dividend yields, favorable financing conditions and lack of investment alternatives.”
1 Swiss Prime Site AG, PSP Swiss Property AG, Allreal Holding AG, Mobimo Holding AG, Intershop Holding AG, HIAG Immobilien Holding AG, Zug Estates Holding AG, Warteck Invest AG, Swiss Finance & Property Investment AG, BFW Liegenschaften AG, Züblin Immobilien Holding AG and Peach Property Group AG.
2 The discount rate is one of the key parameters used to evaluate real estate. It determines the current market value of a property by indicating the total expected rental income that is currently discounted.
3 This is calculated based on current rental income as a ratio of the purchase price.
- News release (102 KB)
- Study Schweizer Immobiliengesellschaften (5,02 MB)
- Portrait EY Partner Claudio Rudolf
- Portrait EY Partner Daniel Zaugg
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