As part of the Swiss Real Estate Sentiment Index (sresi®), KPMG surveyed investors and valuers on their views on the developments in the Swiss real estate investment market over the next twelve months. Market participants are expecting a turnaround.
Confidence has faded
Prior-year optimism has given way to disillusionment: Inflation, interest rate risks, the economic environment and increased uncertainty all dampen investors’ sentiment.
At -32.5 points, the overall index reaches an all-time low. The fall of 96.2 points within a year is unique in the history of the sresi index. At the same time, market participants’ perception of the risks is at its peak.
Market participants are expecting real estate prices to fall
Already viewed negatively in earlier surveys, the economic development hit a low point in 2020 (-73.8 pts.) amid uncertainties caused by the Covid-19 pandemic. Also, for the upcoming twelve months, respondents expect negative economic impulses (-51.4 pts.).
The rather clear expectation of falling real estate prices across the entire market is unprecedented in the history of the sresi. While market participants still clearly expected rising prices in 2021, the price expectation index for this year is down significantly for the first time at -27.7 points (previous year: +63.7 pts.). Of all survey participants, respondents from real estate companies have the most clearly negative views on price developments (-46.0 pts.).
Impact of interest rates
The respondents’ pessimistic assessment is not surprising. The value of an investment property – and ultimately its pricing – reflects the discounted future cash flows. On top of that, alternative investments with a similar risk/return profile have hardly been available in the past years.
In times of low interest rates, this has resulted in a steady increase in real estate values and prices ("asset inflation"). Higher interest rates lead to lower values. In addition, real estate investments are no longer an alternative in a changed interest rate environment. Considering this background, 95% of those surveyed partially agree that properties purchased for under 2.2% net initial yield can be expected to depreciate in value.
Given the current trends and uncertainties, 90% of the respondents at least partially agree that the end of the super cycle for real estate investments in Switzerland has been reached.
Simultaneously, market participants believe that risks have increased: The average assessment of risk factors is at an all-time high of 1.86 index points (previous year: 1.51 pts.). The risk index is therefore 15% higher than the average for all years surveyed.