For the eighth year in a row, KPMG surveyed real estate investors and appraisal companies about the Swiss investment property market to compile data for its Swiss Real Estate Sentiment Index (sresi ®). Beat Seger summarizes the key findings.
The aggregated Sentiment Index rose to an all-time high of 31.0 points in 2019 due to significantly higher price expectations expressed by real estate investors and appraisers. The Price Expectation Index rose substantially from -3.1 to 41.3 index points. Expected price developments outweighed negative expectations regarding economic performance, which came in at -10.4 points1.
With a score of 91.0 points, expectations regarding price trends remain especially high for central locations. The index for medium-sized centers was up 37.3 points, taking it back into positive territory following two years of expected price declines. At 25.0 points, however, price expectations for medium-sized centers still trail significantly behind those for large economic centers. The index remains negative for peripheral locations despite a gain of 31 points and both investors and appraisers still don’t expect these locations to have any upside price potential, even in light of the considerable year-over-year improvement. What’s striking is that the Price Expectation Index has risen year over year across all location categories, probably as a result of sustained pressure to invest.
We’re seeing higher price expectations for all real estate segments. As in previous years, respondents are expecting higher prices for residential properties in particular: While the previous year’s Price Expectation Index came in at 18.7 points, its lowest level since the survey was first conducted, it rose well into positive territory this year at 56.4 points even despite the fact that the vacancy situation for rental apartments deteriorated even further in 2019.
At 2.1 points, prices for office space are expected to remain stable for the first time in the history of the sresi. Of the various sub-indices, the office space index experienced the largest gain in terms of price expectations, with a year-over-year increase of 53.3 points. Real estate investors and appraisers expect prices for commercial/industrial and retail properties to decline.
Successful rental activities and a reduction in vacancies have brought more positive reporting and that, in turn, has put this real estate segment back onto the Swiss investment radar. Systematic efforts to realign the supply to better satisfy users’ changing demands have prompted investors to shift their focus back to office spaces and consider them suitable portfolio-balancing investments.
Over 90 percent of the survey’s participants plan to make acquisitions in the next 12 months but adequate investment opportunities are scarce. The supply of residential properties, in particular, is considered insufficient at a Supply Index of -97.8 points.
Respondents also consider the supply of special-purpose properties, commercial properties and office properties to be scarce, with retail properties – coming in at 24.7 points – being the only segment of property in reasonably sufficient supply. This is partly due to the fact that investment preferences aren’t currently focused on the retail sector. Just four percent of investors expressed a preference for investing in retail properties in the next 12 months.
Since real estate investments in the economic centers are especially interesting to market players, participants in the survey forecast rising real estate prices for six of the country’s eight economic centers. Zurich was named by 25 percent of respondents and is clearly still the most favored investment location with Basel in second place again, just ahead of Lucerne/Zug. In French-speaking Switzerland, Lausanne was cited by 13 percent, just slightly more often than Geneva at 12 percent. Only a few participants intend to expand their investment activities in St. Gallen and Lugano. This assessment lines up with the moderately negative price expectations for these cities.
Although the participants of the survey have negative assumptions about economic trends, the average risk perception for the Swiss investment property market has decreased slightly compared to the previous year. 46 percent of the respondents expect average market risk to increase over the coming 12 months, while 48 percent of those surveyed anticipate a stable risk situation and six percent expect market risk to decline.
Interest rate risk, in particular, was viewed as lower year over year. Overall, though, risks are considered to be higher due to stricter regulation and the influence of the European environment. Confidence in real estate investments – in part due to a lack of adequate investment alternatives and despite negative assumptions regarding economic performance – remains high nevertheless.
The last time we asked real estate investors and appraisers about their asset and portfolio management activities was back in 2015. Now as then, respondents cited reducing vacancies as their most important asset and portfolio management activity, with the current figure standing at 87 percent. The importance of setting up a data management system and a risk management process has grown. On the other hand, making adjustments to investment strategies is considered less important, probably due to the fact that the 2015 survey took place just after the franc’s sudden appreciation and the new market conditions have since been taken into account. One thing that stands out is that, like in 2015, respondents weight development projects and investment in holdings higher than portfolio growth.
Not only do investors and appraisers consider current transaction prices as high and/or the acquisition yield as too low, but there’s also a dearth of adequate investment opportunities. That makes fully realizing a property’s intrinsic value potential all the more important.
1 The aggregated index reflects respondents’ assessments of the general economic situation (weighted at 20 percent) and the real estate price trend (weighted at 80 percent).