• Beat Seger, Partner |

The low interest rate policy of recent years fuelled investments in the real estate market. Other asset classes found it hard to compete in this environment. Inflation and rising interest rates have led to a change in sentiment.

When value is created without effort, investors should be alert. Real estate investors have been aware of this for some time. Nevertheless, capital has been pumped into the real estate investment market for years. The trigger was the zero-interest rate policy. Drivers were option-based activity (TINA: There Is No Alternative) and behavioural economic factors. No one wanted to miss anything and anyway, who knew when the change was coming?

And then it came: the change - in the form of inflation which we are still trying to understand. In typical fashion, key interest rates were raised to combat this, thereby resolving the TINA effect. 

In a very short time, more liquid investments (risk-adjusted) were available as alternatives to real estate. Simultaneously, the market values of companies fell, driven by interest rates and expectations. This increased the real estate ratio in multi-asset portfolios.

Shift in sentiment due to interest rate turnaround

The change in sentiment among real estate investors began with the turnaround in interest rates in June 2022. As a result, the Swiss Real Estate Sentiment Index plummeted by a staggering -96.2 pts year-on-year to reach its all-time low of -32.5 pts.

But the mood becomes even gloomier. Whilst expectations for economic growth are a little more optimistic than last year, rising to -32.4 pts compared to -51.4 pts in 2022, the assessments of price trends are distinctly negative across all real estate segments at -88.6 pts (2022: -27.7 pts), dragging the sresi to an all-time low of -77.4 pts.

All real estate segments, locations and regions are affected

For the first time ever, price expectations are negative for all real estate segments. Price trends in the different location criteria are also assessed negatively overall. This has now spread to central locations for the first time.

Price rises are no longer forecast in the major regions or economic centres. Last year, respondents were still optimistic in their price expectations for the Lake Geneva region, Zurich and part of central Switzerland. 

Impact on values?

The question of whether the values of portfolios are now also sinking cannot be answered by the sresi survey.

The performance and stability of value depends on various factors. This makes investment portfolios difficult to compare in terms of the portfolio expansion period, utilisation, users, contractual relationships, geographical distribution, location and real estate quality, potential and, of course, the implicit diversification and investment strategy. Moreover, the adopting of different appraisal parameters and approaches within the regulatory framework makes a comparison even more difficult.

Nevertheless, the sentiment of investors and appraisers is an indicator of possible future value developments. This is because if, for reasons of sentiment, there is a turn in the transaction market from which market values can (also) be derived, this has an indirect impact on portfolio values.

The challenge of sustainability

The spectre of interest rates and inflation is joined by another elephant in the room: sustainability (ESG). Just 18% of those surveyed believe that the 2050 net zero target can be achieved by following the defined reduction routes and associated measures. 

Just 3% of respondents are convinced that the real estate values consider all forthcoming ESG measures, while 86% believe that this is not, or is only partially the case. The need for investment due to sustainability requirements must be weighted higher in many appraisals than was previously the case, which will negatively influence values according to the survey participants. A quantification of the effects on value is not yet possible at this point.

Just 6% of respondents have found that the currently published ESG key performance indicators allow market participants to make a meaningful comparison. 

85% of respondents agree, wholly or in part, that social aspects (S) of sustainability will play an increasingly important role in real estate valuation, in addition to the environmental aspects (E).

The Swiss Real Estate Sentiment Index (sresi®) is a leading advance indicator for developments in the real estate investment market. It reflects the expectations of market participants in terms of economic and price trends.

Visit our interactive dashboards and analyse how the sentiment in the Swiss real estate investment market is developing. 

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