UBS launches investment attractiveness index for direct investments in the commercial office market
UBS CIO Wealth Management Research launches the UBS Swiss Office Space Investment Index. Based on the Index level for the first half of 2013, investment attractiveness is negative, and we therefore do not recommend entering the market. In comparison to other Swiss cities, Zurich remains the most attractive location for office-space investments.
Zurich/Basel, 18 September 2013 – Over the past ten years, investments in office properties have achieved average annual yields of 5.8% with low volatility. But because of high price levels, expectations currently need to be lowered when considering a direct investment in office space. Since rental incomes are relatively sluggish, initial yield and thus investment timing are important. As a guide for investors, UBS CIO Wealth Management Research has started publishing the new UBS Swiss Office Space Investment Index, which will appear twice a year.
The UBS Swiss Office Space Investment Index currently stands at -1.19. We therefore consider investment attractiveness to be negative and thus do not recommend entering the market at this time. The Index looks at how current initial yields compare with alternative investments (bonds, equities, alternative real estate investments), as well as in the context of potential lease rate increases.
In comparison to bonds, office investments remain attractive, despite a slight rise in interest rates in the past several months. However, listed real estate investments are clearly the better choice at the moment. This is because dividend yields on real estate equities and funds are currently higher than the initial yield on office space in prime locations, which is unusual in historical terms. At the same time, direct investments in Swiss office space perform poorly in comparison to office markets in major European cities.
A low initial yield can be compensated by strong growth in lease prices. However, lease income is not expected to grow in the near future, particularly in light of the fact that new office space can accommodate about 70,000 people but employment is forecast to grow by only 40,000–50,000 jobs.
From a regional perspective, we expect lease rates to decline in the four largest cities. In this regard, prospects for lease rate increases in Bern, Basel, and Geneva are somewhat worse than for those in Zurich. Bern is expected to have the greatest amount of excess supply through mid-2015. Occupancy rates in Geneva are already experiencing a clear downturn. Although Zurich is the undisputed leader in office space growth, expecting to add about 240,000 m2 by 2015, it still remains the most attractive location for office market investments.
The UBS Swiss Office Space Investment Index is calculated by applying both a valuation and a market outlook. The surveying of the valuation outlook is based on a comparison of initial income yields for direct office investments with yields from alternative investment classes (bonds, equities) and real estate investments. In surveying the market outlook, we have calculated the expected change in vacancy rates through 2015. In the process, prospects for lease rate growth depend on the current situation in terms of supply. All individual indicators have been standardized on the basis of their historical averages. The reference period is 1Q2002 through 1Q2013.
Claudio Saputelli, Head of CIO WM Swiss & Global Real Estate Research
Tel. +41 79 513 50 45
Dr. Matthias Holzhey, Economist CIO WM Swiss & Global Real Estate Research
Tel. +41 44 234 71 25
The UBS Swiss Office Space Investment Index report is available on the Internet via this link: www.ubs.com/swissrealestatebubbleindex-en.
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