The Swiss real estate investment market is changing The Swiss real estate investment market is changing The Swiss real estate investment market is changing

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. 

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.

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.).

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.

The respondents identified the interest rate situation as the highest risk, followed by the risk of contagion from the economic environment in Europe and inflation risks. Striking here is: valuers as well as investors or developers using  debt capital have a higher risk perception compared to other market participants.

It seems that the inflation-driven increase in commodity or construction prices has little influence on the respondents’ assessment. According to our understanding, market participants still anticipate that inflation-related adjustments can be passed on to tenants. Otherwise, the risk assessment of falling real estate values would be higher. That is, unless there is yet undiscovered value potential hidden in the portfolios. The question remains whether the increased uncertainties will lead to a lower demand for commercial and then residential space or to financial constraints.

Already in the last year’s sresi survey, it was confirmed that ESG topics are gaining importance in investment decisions. At present, almost two-thirds of respondents believe that investments aimed at implementing sustainability measures are not fully reflected in all portfolio values. That will impact acquisition yields and subject existing portfolios to scrutiny. 

Shifting circumstances are influencing market sentiment and investment behavior. As market players are aware of the challenges, they will take the new reality into account when making their decisions.

Time will tell whether the squaring of the circle will succeed, that is realizing high sustainability targets while at the same time managing a turnaround in the performance indicators despite increased yield requirements for the asset class.