• Beat Seger, Partner |

Positive price expectations – economy uncertain

The aggregated Sentiment Index rose by 30.2 points to +31.0 points in 2019, which now puts it back in clearly positive territory. This increase is driven by the Price Expectation Index, which climbed 44.3 points to an all-time high of +41.3 points after having been slightly negative the previous year.

The second component of the Swiss Real Estate Sentiment Index, an assessment of the economic situation for the next 12 months, fell by 26.9 points to -10.4 points.

Whether the negative appraisal of the economy’s performance will put greater pressure on real estate investments remains to be seen. The survey’s more than 340 respondents feel that market risk for real estate investments has declined slightly compared to the previous year, and their average risk assessment is at its lowest point in the survey’s history. This is based on a confirmation bias, however. Investors’ risk appetite has risen. While one in three investors was willing to accept some greater element of risk in the previous year, that was the response given by 42 percent of the participants of this year’s survey. The appraisers participating in the survey actually indicated that 55 percent of their clients are more willing to take a chance on riskier investments.

Focus on central locations and residential properties

Price expectations have risen considerably year over year for all location categories.

This increase was greatest for medium-sized centers, which climbed 37.3 points to +25.0 points. Significant upside potential is still being attributed to prices for central locations, which came in at +91.0 points in the Price Expectation Index. At -69.8 points, price expectations for peripheral locations remain in clearly negative territory, even despite an increase of 31.0 points.

Assessments have been following precisely the same pattern since the sresi was first compiled in 2012, with this even more evident in the trend for location preferences. Rising prices are being forecast for six of Switzerland’s eight economic centers, with respondents expecting the biggest increases in Zurich (+84.8 points) and Geneva (+59.6 points). Declining property prices are anticipated at the investment locations of St. Gallen (-45.7 points) and Lugano (-41.6 points).

This also shows that the sresi is based on participants’ qualitative assessments since St. Gallen, in particular, has been reporting upward pressure on transaction prices for the past few years, regardless of how market players assess the prices.

Of those surveyed, 59 percent indicated a preference for investments in residential properties, while this same preference was expressed by nearly three quarters of the pension fund representatives who took part in the survey. With that in mind, it comes as no surprise that the Price Expectation Index for residential properties shot up again to +56.4 points, even despite the fact that it had dropped to +18.7 points the year before, its lowest level since the survey was first conducted. Market players seem to have come to terms with the whole issue of overproduction, which appeared on the real estate industry’s radar just over a year ago.

Assessments on the availability of adequate investment opportunities for office space have continued to decline and are now just slightly negative at -15.1 points. For the first time in the survey’s history, price expectations for the office segment are in positive territory at a stable +2.1 points. The price index for office space, which shot up by 53.3 points, boasts the strongest gain of all the sub-indices. That probably isn’t only due to positive reporting on successful rental activities and a reduction in vacancies, but also to the fact that the offerings in the office use category have been realigned to better suit users’ changed requirements and that, in turn, has shifted investors’ focus back to this category.

Pressure to remain high

While expectations regarding economic performance were rather negative overall (-10.4 points), these don’t seem to have influenced respondents’ opinions on the attractiveness of office space investments during the survey’s reference period (2019) any more than discussions about the impact of digitalization, which was still a hot topic one year ago.

They might, however, play a role in how respondents assess the attractiveness of retail space. Just over 4 percent of available capital was invested in retail properties in 2019 compared to 7 percent in 2015. At -99.0 points, expectations regarding price trends for retail space are clearly negative. Commercial properties are gaining popularity among investors and price expectations for these properties are approaching the stability threshold, with the index currently coming in at -21.8 points. At +22.0 points, price expectations for special-purpose properties are even in positive territory.

Of those surveyed, 91 percent plan to make acquisitions sometime in the next 12 months. Nearly one third of the respondents do not see any need to adapt their investment approach or real estate allocation. Somewhat more than a quarter of those surveyed are seizing the opportunity to sell specific properties to optimize their portfolios. Diversification outside Switzerland seems to hold little appeal, though, and only 8 percent of those surveyed would take this kind of investment opportunity into consideration (2018: 9 percent; 2017: 15 percent; 2016: 11 percent; 2015: 10 percent; 2014: 8 percent and 2013: 6 percent). The industry expects pressure on Swiss investment properties to remain high in the next 12 months as well.

Gain more in-depth insights into market sentiment with our interactive dashboards at www.sresi.ch.

*The Swiss Real Estate Sentiment Index serves as a leading indicator for developments in the Swiss real estate investment market and is based on the qualitative assessments of more than 340 real estate investors and appraisers.

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