Players on Switzerland’s real estate investment market are expecting real estate prices to rise in the next 12 months. These price expectations have grown significantly over the previous year and the Swiss Real Estate Sentiment Index has reached an all-time high despite an increasingly gloomy economic outlook.
KPMG Switzerland surveyed real estate investors and appraisers about the Swiss investment property market for the eighth year in a row. Their assessments are portrayed in the annual Swiss Real Estate Sentiment Index (sresi®), which serves as an indicator for anticipated developments in the real estate investment market. This aggregated index provides insights into market players’ opinions on price trends (Price Expectation Index) and the economic outlook (Economic Performance Index).
This year saw the aggregated Sentiment Index reach its highest level since the survey was first conducted in 2012. After coming in at just 0.8 points last year, it surged to 31.0 points this year due to the significantly higher price expectations expressed by the more than 300 real estate investors and appraisers surveyed. The Price Expectation Index rose substantially as a result to 41.3 index points (previous year: -3.1 points).
“Players on the real estate investment market expect higher price levels because alternative investment targets are scarce at the moment,” explains Beat Seger, Partner and Real Estate Expert at KPMG. Particularly representatives of real estate funds, insurance companies and pension funds expect real estate prices to continue trending upward.
For the first time since 2016, market players are expecting the economic situation to deteriorate. Whereas the Economic Performance Index came in at 16.5 points in 2018, it was in negative territory this year (-10.4 points). According to Beat Seger, “market players’ view of the economic outlook is more negative than in the previous year, with current global trade frictions and Brexit being two of the main factors contributing to market unease”. Concerns regarding the growing regulatory burden are also putting a damper on respondents’ outlooks.
With the exception of real estate developers (11.1 points), all groups of respondents indicated that they expect economic performance to be stable or somewhat negative. Insurance companies, in particular, viewed economic performance critically (-30.4 points). Although the Economic Performance Index is in negative territory, the aggregated index was still able to increase due to the fact that significantly higher price expectations outweighed the negative effect.
The Price Expectation Index for all location categories has risen year over year with price expectations for central locations particularly high at 91.0 points (2018: 61.7 points).
The index for medium-sized centers rose by 37.3 points over the previous year, the index’s largest gain with respect to price expectations. At 25.0 points, the index for medium-sized centers moved back into positive territory following two years of expected price declines. This is likely attributable to strong yield compression in central locations and the expanded geographic investment horizon triggered as a result.
The index remains negative (-69.8 points) for peripheral locations despite a gain of 31.0 points, meaning that the survey’s respondents still anticipate declining prices in this category, albeit not to the same extent as in the previous year.
Since real estate investments in the economic centers are particularly interesting for the market players, respondents to the survey forecast rising real estate prices for six of the country’s eight economic centers. Prices are expected to increase most in Zurich (84.8 points). Respondents also expect prices to continue growing in the cities of Geneva (59.6 points), Basel (57.3 points), Lausanne (49.8 points), Bern (31.4 points) and Lucerne/Zug (41.8 points).
The indices for the cities of St. Gallen (-45.7 points) and Lugano (-41.6 points) remain in negative territory, as in the previous year. The same applies to the corresponding regions: respondents generally expect further declines in both Eastern Switzerland (-35.6 points) and Ticino (-60.5 points). This stands in contrast to the Zurich region (78.9 points) and the Lake Geneva region (58.6 points), where prices are expected to rise.
Higher price expectations can be observed for all use categories. As in previous years, investors and appraisers are expecting higher prices for residential real estate 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.
At 2.1 points, prices for office space are expected to remain stable for the first time since the survey began. The index for office space exhibited the largest positive change in terms of price expectations, with a year-over-year increase of 53.3 points. While price expectations also rose in the commercial use categories, the index remains slightly negative at -21.8 points (previous year: -54.4 points).
Not only do real estate investors and appraisers expect prices for commercial property to decline, but also for retail property in particular. The Price Expectation Index for retail property has been negative throughout the study’s history. At -99.0 points, the index is clearly negative for 2019 despite a slight year-over-year increase (+16.5 points).
Although over 90 percent of the survey’s participants plan to make acquisitions in the next 12 months, identifying adequate investment opportunities is likely to be a challenge. Respondents rate the supply of residential properties, in particular, as scarce: At -97.8 points, however, this segment has fallen into the “moderate scarcity” range for the first time in the history of the index; previous years saw results of under -100 points, which reflect “significant scarcity”. The barely perceptible easing is probably attributable to institutional investors’ ongoing efforts to hone their investment strategies as well as the fact that the investor universe is consolidating somewhat in response to increased financing restrictions.
Special-purpose properties (-48.1 points), followed by commercial properties (-28.7 points) and office properties (-15.1 points) are also considered relatively scarce. Only the availability of retail property is described as reasonably sufficient at 24.7 points due in part to extremely low demand for investments in the retail segment. Only four percent of investors’ preferred investment targets for the next 12 months will relate to retail properties. Residential properties remain by far the most popular investment segment and account for 59 percent of the planned acquisition volume, followed by office properties (17 percent), commercial properties (11 percent) and special-purpose properties (10 percent).
Compared to the previous year, the average risk perception decreased slightly in 2019. When asked about risks for the investment property market, 46 percent of respondents expected market risk to rise over the next 12 months (previous year: 50 percent) while 48 percent expect the risk situation to remain stable and six percent anticipate decreasing risk.
Interest rate risk, in particular, was viewed as lower. Overall, however, risks are considered to be higher due to stricter regulation and the influence of the European environment. Nevertheless, confidence in real estate investments – in part due to a lack of adequate investment alternatives and despite negative assumptions regarding economic performance – remains high.
The KPMG Swiss Real Estate Sentiment Index (sresi®) serves as a leading indicator for anticipated developments in the Swiss real estate investment market. The main index is generated based on assessments of economic developments and price trends in the real estate investment market. 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). The sub-indices express the opinions of market players with respect to individual market and use categories. This data was first collected in 2012, and the survey is repeated every year to generate an index which permits a comparison of market assessments over time. Real estate investors and appraisers from the Swiss real estate investment market participate in the survey. It is also used to collect additional information on one topical area of focus that is currently of interest to the industry. This year, KPMG Switzerland took a closer look at how professional real estate investors manage their portfolios and compared their responses against the results of the 2015 survey.