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UBS CIO Wealth Management Research publishes study UBS Real Estate Focus 2014
Super-compensation a possible scenario for residential real estate
Despite slower momentum, valuations in the Swiss owner-occupied housing market have reached a high. This has further increased the risk of a correction. Prices for commercial real estate are about to reverse direction in the near future as well. Listed real estate has already dipped into negative territory.
Zurich/Basel, 21 January 2014 – Average price growth for residential real estate declined slightly in 2013 as condominiums grew only 3.5% – less than the 10-year average. Prices for single-family homes, on the other hand, rose 4.5% in 2013, slightly more than the year before. Price growth was slowed by the doubling of long-term interest rates, the introduction of the anti-cyclical capital buffer and tougher minimum standards in mortgage lending.
Prices expected to climb slowly
Momentum may be slowing, but that cannot hide the fact that risks have continued to rise. Inflation-adjusted real estate prices are only roughly 5% lower than in 1989, when the last real estate bubble burst in Switzerland. Furthermore, prices are still climbing faster than rents, household incomes, and consumer prices. On top of that, the mortgage debt of Swiss private households is almost 110% of gross domestic product (GDP). Switzerland, in other words, appears poised to experience a decline in prices. Nevertheless, we do not expect an across-the-board correction in home prices this year despite the weaker impetus from key market drivers (population growth, economic growth and interest rates). We merely expect a weak price growth of 2% for single-family homes and condominiums in 2014. Regionally, prices in Switzerland should develop at very different rates, however. They will remain under pressure, especially in the most expensive municipalities and the high-end segment.
Super-compensation thanks to growth surge?
Political decisions on immigration, interest rates and the potential tightening of lending conditions will determine whether the market's current calm will degenerate into a correction phase in 2015. If everything stays on an even keel and the Swiss economy once again grows faster than expected, then it is less likely that prices would experience a significant correction throughout Switzerland over the medium term. Growing optimism among market players would restart the positive price spiral. Today's slight weakness – in retrospect to be viewed as a temporary dip – would be immediately followed by a super-compensation phase in which prices rise to a markedly higher level. In the long term, however, this would substantially raise the potential for correction.
Easing in commercial real estate
Office valuations have also climbed to lofty heights in recent years, which pushed net initial yields for prime locations to a historic low of 3%. This trend is driven by strong growth in lease prices. However, rental revenue is not expected to grow in the near future because of the large number of construction projects, which will likely reduce occupancy. We anticipate the vacancy rate to increase 1.2 percentage points by 2015. For that reason, the high valuations for office space should normalize somewhat in the course of the year. We expect retail properties to develop along similar lines. Swiss retailers are struggling to increase nominal revenues due to steep price reductions for consumer goods, and are thus less willing to pay for retail space.
Negative price performance of real estate equities and funds
This was the second consecutive year in which listed real estate significantly underperformed the broader stock market. Unlike 2012, real estate equities closed out the previous year down 6.9%, while real estate funds fell 2.8%. Investors will likely continue focusing on the overall stock market in 2014 since more cyclical investments promise greater returns when interest rates are expected to rise. Listed real estate securities, in other words, are facing another challenging year.
Claudio Saputelli, Head Global Real Estate Research, CIO Wealth Management Research
Tel. +41 44 234 39 08 or +41 79 513 50 45
Daniel Kalt, UBS Chief Economist Switzerland, CIO Wealth Management Research
Tel. +41 44 234 25 60
UBS Real Estate Focus 2014 can be downloaded from: www.ubs.com/realestatefocus-en