Players on Switzerland’s real estate investment market anticipate a difficult market environment in the next twelve months. This is one of the insights offered by the latest Swiss Real Estate Sentiment Index, which virtually collapsed compared to the previous year. After hitting an all-time high last year, this year saw it fall to the lowest level measured since the index was first compiled in 2012. Market players expect declining prices, particularly for spaces with commercial uses and peripheral locations.
KPMG Switzerland surveyed real estate investors and appraisers about the Swiss real estate investment market for the ninth 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).
The overall index hit an all-time low of -13.1 points in 2020 compared to +32.8 points last year, mainly due to market participants’ negative assessment of current economic trends. The assessment of economic performance, which plunged 60.7 index points this year to -73.8 points, accounts for 20% of the aggregated Sentiment Index. The second component of the Swiss Real Estate Sentiment Index, expectations of price trends, is just barely above the stability axis at +2.1 points compared to +43.5 points a year ago.
The Price Expectation Index for residential properties is close to its all-time high from 2015. This sub-index has been oscillating between +18.7 and +74.3 points throughout the years of the survey; the fact that it has come in at +68.0 points in 2020 reveals that market participants still consider the residential segment to be a preferred Swiss real estate investment. This view is also reflected in the supply index, which at -108.0 points reveals a stark scarcity of adequate opportunities for investing in residential properties. It was even lower from 2012-2017, however. The current results represent a break in the trend observed since then, which had indicated that the situation was relaxing to a small degree.
Retail properties suffered yet another slump with respect to price expectations. This index has been negative ever since the very first survey and has now reached an all-time low of -146.8 points. The Price Expectation Index is nearly on a par with its all-time low from 2013 for all other commercial uses and clearly falls short of last year’s assessments. Market participants’ concerns regarding the absorption of space prompted negative assessments of price trends both in 2013 and in the current year. Whereas sentiment seven years ago was shaped by production expansions and overheating trends, it is the repercussions of the coronavirus crisis that are leaving their mark in 2020.
It was assumed during the lockdown phase that the pandemic might cause demand to shift to locations outside city centers. Players on the real estate investment market see it differently, however. At -92.1 points, the Price Expectation Index for peripheral locations currently suggests that prices are expected to decline sharply, thus putting the index for peripheral locations 20% below its previous all-time low from 2013. After being clearly positive in 2019, the price index for medium-sized centers dropped back into negative territory yet remained close to the stability axis. While moderately strong upside potential is still being attributed to prices for central locations, which came in at +75.2 points, the index nevertheless saw a slight year-on-year decline of -15.8 points.
This general assessment is also reflected in the negative price trend expected for the Espace Mittelland, Eastern Switzerland and Ticino regions. The figures for those regions came in even lower than last year, at around -45.0 points for both the Espace Mittelland and Eastern Switzerland regions and -85.5 points for Ticino. The assessment for Northwestern Switzerland put it right on the price stability axis. After peaking last year, the figures indicating expected price trends for the Zurich metro area and Lake Geneva region declined by just 12 and 26 points, respectively. The price index for Central Switzerland has relaxed compared to past surveys and is now in the moderately positive range with +17.6 points.
The fact that the coronavirus crisis is influencing market participants’ specific assessments is particularly evident with respect to commercial uses. Some 76% of those surveyed anticipate declining demand for office space in the expanded business zone as a result of the crisis. This is connected to the fact that 89% of the survey’s participants believe that the importance of remote working will rise; 43% of those surveyed expect user demand for office space in business centers to drop.
With respect to prime retail space, 55% of respondents anticipate declining demand whereas a whopping 74% actually offered the same negative assessment for retail spaces in metropolitan areas. Their outlook for space in shopping centers is even gloomier, with 88% anticipating a drop in demand. Responses indicated an equally bleak expectation that user demand will decline in the hotel business as well (83%). Demand is expected to increase for logistics space, with 71% stating that they foresee a slight to strong uptick in demand for this type of space. More than half of those surveyed also expect increasing user demand in the health and care sector.
The pandemic year of 2020 has undoubtedly dampened market sentiment for certain uses and regions. “Given how this is expected to impact future demand, however, market participants also see opportunities for investors’ focus to shift to new user segments,” says Beat Seger, Partner and Real Estate Expert at KPMG. And last but not least, both residential properties as well as central, urban locations help safeguard the stability of the asset class.
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.