How sustainability and the pandemic shape the real estate market

Swiss real estate investors continue to rate Switzerland as an attractive location for investment in 2022. They predict that sustainability aspects will continue to play an important role in purchasing decisions. A majority of respondents register an increase in the price of ESG-compliant real estate. Most real estate sectors will recover from the effects of the COVID-19 pandemic – but not all.

Three main factors determine real estate investment market

The Swiss real estate investment market remains attractive and will be driven by three main factors this year: In the area of sustainability, CO₂ balances and ESG-compliant strategies are paramount, and in digitalization, smart infrastructure is becoming increasingly important for the development of real estate projects. The third main factor is the COVID-19 pandemic, which continues to act as a market-determining factor: It keeps residential real estate attractive as an investment, while office space and shopping centers in particular are suffering. This is shown by EY’s latest Real Estate Trend Barometer in Switzerland, which surveyed 63 investors active in the Swiss real estate market on key topics.

Switzerland: Attractive location with stagnating investment volume

92% of the investors surveyed continue to regard Switzerland as an attractive or very attractive location for real estate investments in 2022. This can be attributed to the fact that the Swiss economy remained mostly stable in the second year of the coronavirus, as well as to geopolitical uncertainties. Nevertheless, the overall attractiveness as perceived by investors declined by 7 percentage points year-on-year (2021: 99%). 8% of the study participants believe that Switzerland’s attractiveness as a business location will decline in the course of 2022.

68% of respondents expect investment volumes to stagnate at a high level in 2022. According to the survey participants, this assessment can be explained primarily by the lack of investment opportunities and the slow recovery of the economy.

27% of investors expect the volume of investment in Switzerland to increase during this year. Only 3% of the investors surveyed agree with the statement that investment volumes will decline. Last year, a full 15% were still assuming a decline in volume. Overall, investors therefore expect a much more positive development in 2022.

Sustainability important for purchase decisions – ESG real estate rises in price

The vast majority of respondents (89%) agree fully or somewhat with the statement that sustainability criteria will continue to play a decisive role in the future when institutional investors make purchase decisions (2021: 94%). This also appears to be having an impact on the prices of the relevant real estate: 75% of investors observe price premiums for ESG-compliant properties. Almost as many respondents (70%) believe that taking ESG criteria into account will lead to increasing returns in the medium to long term, representing a slight increase on the previous year (2021: 62%).

Around 92% of respondents aim to produce CO₂ balances at the building or portfolio level. At the same time, 92% of respondents believe that the implementation of ESG-compliant strategies is still in its infancy. The positive correlation between the topic of CO₂ and ESG-compliant strategies can be used to promote the advancement of both issues. With an agreement of 100%, the surveyed investors make clear how important an adequate data basis is for the realization of such an ESG-compliant portfolio strategy. Just like data, sustainability standards are also important for investors to be able to develop and establish reliable ESG strategies for their real estate portfolios in the future.

The vast majority of respondents (96%) believe that the real estate industry is under further pressure with regard to the Energy Strategy 2050 and the associated reduction in CO₂ emissions.

Smart infrastructure and rising inflation

Digitalization also remains a determining factor for the real estate market, with a particular impact on future projects: 97% of the investors surveyed state that project developers will in the future have to consider the requirements of smart infrastructure (connectivity, charging points for cars, and smart energy concepts). The constant figure of 97% compared to the previous year confirms the topic’s continued relevance.

The current rise in inflation in the USA and Europe is also having an impact on the survey results of the Trend Barometer: More than three-quarters (77%) of investors expect inflation to play a more significant role for the Swiss real estate market again in the future. At the same time, 84% of survey participants say they consider real estate to be suitable in principle for providing protection against rising inflation.

Pandemic – not all sectors will recover

Investors surveyed consider a recovery from the COVID-19 pandemic possible over the next three years across most real estate sectors. Respondents believe the best chances of success in recovering from the effects of the pandemic are in leisure hotels and micro-living/serviced apartments, both at 70%. Immediately followed by co-working uses (66%) and core office properties (60%).

According to the respondents, however, some sectors will not be able to recover completely even in the long term. The gloomiest forecast is made by investors for office properties in peripheral areas: 68% of respondents do not expect this property class to fully recover. The same is true for the shopping center (58%) and business hotel (47%) sectors, according to respondents.

Outlook – the megatrends for the real estate market

When asked which megatrends will most influence the Swiss real estate market in the next five to ten years, demographic change, digitalization, and climate change emerge as the most important factors.

The majority of respondents (94%) believe that demographic change will continue to have a significant impact on the Swiss real estate market in the coming years. For example, the aging of the population is leading to increased demand for healthcare facilities such as nursing homes and senior residences. And the move away from the traditional family image has resulted in an increased number of single people, which is boosting demand in the micro-living/serviced apartment sector.

Digitalization continues to be seen as a relevant trend and, at 91%, even met with more approval from respondents than last year (89%).

The fact that investors regard the importance of sustainability criteria as high is also reflected in a broader sense in the megatrends: The climate change megatrend (80%) has slightly decreased in importance compared to the previous year (83%) but is still among the defining trends.

Opinions on inflation are also reflected in the megatrends: Compared to last year (69%), this year 80% of respondents believe that interest rate developments will have a significant impact on the Swiss real estate market over the next five to ten years.