Multi-Family Houses in Switzerland as an Investment

Apartment buildings are a popular form of investment in Switzerland. However, investors should carefully examine the regional market and real estate. Engel & Völkers Commercial's market report provides initial indications and provides data on the development of housing supply and rental demand. The focus is on apartment sizes and the contemporary energetic state of rental apartments as well as aspects for your own investment strategy in the real estate sector on several spatial levels: This includes the consideration of the market development of the overall Swiss market, important key data on major regions as well as the regional and local analysis of individual cities and towns small regions.

In Switzerland there is an unbroken high demand for investments in apartment buildings (MFH). Low capital market interest rates and economic uncertainties are fueling the demand for residential investments. This led to a short-term compression of returns, which, however, security-oriented investors continue to accept. The record high number of vacant apartments mentioned in the press is also quickly put into perspective with a national average of just under 3%. This order of magnitude is within the natural fluctuation reserve of a functioning rental market. The vacancy rate is also the result of a high level of new construction activity in the residential sector in recent years. However, in 2019 almost 10% fewer apartments than were built in 2018. A decline in new apartments is also expected in the future, as the volume of new building applications in 2020 was CHF 11.2 billion, 6.4% lower than the three-year average before. At the same time, an increase in the number of households is forecast in almost all of the regions examined in the coming years. Therefore, the demand for rental apartments will remain high.

In the “Yields of apartment buildings versus capital market loans graph”, it can be seen that apartment buildings in Switzerland have generated an average total return of 8.5% over the last 10 years. The cash flow yield is falling slightly, but at 3.0% in 2020 it is still well above the yield on the bonds of the Swiss Confederation. The return on value change and total return fluctuate more, but in retrospect they are always clearly positive. The introduction of negative interest rates by the Swiss National Bank in 2015 led to a sustained run by investors on MFA and further price increases. In 2020, the total return for apartment buildings averaged 4.8% in Switzerland. In 2020, apartment buildings generated the highest total returns in the Zurich region with 7.1%, the Basel region with 4.4% and the Lake Geneva and Eastern Switzerland regions with 3.5% each. The top prices for very good locations are recorded in the cities of Zurich 22,500 CHF / m², Winterthur and Lugano with 13,000 CHF / m² each and the canton of Zug with 14,000 CHF / m². In the cities and canteens examined in detail, the entry-level prices in Eastern Switzerland are still relatively affordable at up to 7,600 CHF / m² in St. Gallen and 7,500 CHF / m² in Chur and in the canton of Thurgau at 7,200 CHF / m² .

The market values ​​of multi-family houses in Switzerland have not increased steadily over the past five years - for better comparability, the increases in value according to mobility regions (MS region = Mobility Spatiale, see glossary ) are shown on the Swiss map . In seven MS regions, including Zurich, Basel, Winterthur and Zug, the value of the MFH increased by more than 45%. But increases of 30% and more can also be seen in the other urban regions such as Lucerne, Chur and St. Gallen. Property owners in regions that have not seen market value growth in the last five years still generated cash flow returns from rental income. A detailed analysis of the cities and small-scale regions shows the most significant price increases for apartment buildings compared to previous years in the city of Zurich and the canton of Lucerne. Increases are also registered in Bern, Schaffhausen and Winterthur. Prices in the cities of Aarau, Chur and Solothurn as well as in the cantons of Basel-Landschaft, Basel-Stadt and Schwyz remained stable in the first half of 2021. There were price drops in St. Gallen and in the canton of Thurgau. In St. Gallen, rising prices for medium and simple locations are expected in the future. Aarau, Solothurn and Lugano (each (5.0%), Ascona (4.7%) and the canton Schwyz (4.4%) achieved the highest gross returns of the cities and cantons examined in good locations.

Due to the pandemic, many companies and employees were temporarily forced to relocate all or some of their jobs to the home office. Even if the majority have recently returned to the office, this has led to new location preferences for some employers and employees. Working comfortably in the home office requires more space, ideally in a home office within your own four walls. In addition, many employees are willing to travel long distances to work if they do not have to come to the office every weekday. If rents are high and supply is scarce, some home office employees will also switch to regions a little further away from the company located in the medium term. For some employees, easily accessible places from which it is easy to work in the home office are also becoming interesting. Since not only the rents but also the purchase prices are more affordable in these regions than in the core cities, the condominium market is likely to benefit more than the rental apartment sector. The home office trend is unlikely to lead to lower demand or falling rents intense rental markets. On the other hand, the trend will not lead to significant demand for rental apartments in locations with an oversupply.

The vacancy rate for rental apartments in Switzerland has risen to 2.7% in recent years (as of 2020). Does this pose a lasting risk for investors in MFH in Switzerland? Investors should take a closer look at three points: Where exactly is the vacancy? The vacancy rate is very unevenly distributed in Switzerland. In recent years, a disproportionately large number of apartment buildings have been built in regions where land and building rights are available but demand has been low. In the canton of Zurich, for example, the vacancy rate has fallen in recent years and not increased. Accordingly, the average vacancy rate across Switzerland says nothing about local rental markets. Second: How does the vacancy look in relation to the inventory? Even if the vacancy rate has almost doubled in the last 10 years, the increase was at an extremely low level and is still a low percentage by international standards. Vacancies are only seen as problematic from values ​​above 5%. But such a value is not to be expected in the future. And third: How will demand develop in the future? The supply of new rental apartments can be estimated in the short to medium term by submitting new building applications. Here, the 2020 volume of CHF 11.2 billion was 6.4% lower than the three-year average. Even more important, however, is the demand for rental apartments. The population of Switzerland has increased in recent years and forecasts by the Federal Statistical Office (FSO) assume further growth in the coming decades. The extremely low homeownership rate of less than 40% in an international comparison suggests that a large part of the growth relates to the rental housing market. In addition, growth comes from outside immigration and newcomers are more likely to ask for rental apartments than for owner-occupied properties. The increase in households is forecast to be even higher. This will affect all of Switzerland by 2030.

An increase in the number of households is expected throughout Switzerland by 2030. The MS regions around Zurich, Aarau and Lake Geneva are expected to have particularly strong household incomes in the next 10 years (over 15%). But the number of households will also increase by over 5% in almost all other regions. The only exception is the MS region Tre Valli in the Alpine region, where no increase in households is to be expected. Conclusion: Future increases in the number of households are likely to guarantee the good potential for rental apartments. Since this is mainly due to the population growth and the decreasing size of households, the demand for apartments for one to two-person households will increase in the coming years.