Talking Points Passing effect or lasting change?

In our view, the room for policy rate hikes is likely to remain constrained in Europe, both in terms of timing and interest rate level. This is true for Switzerland, too. First, the inflation dynamic is expected to peak soon, as important base effects will start to fade away. In addition, elevated costs that go into producing a goods or services (input prices) will progressively put a drag on the level of global economic activity. Keeping this in mind, central banks are likely to normalize their respective interest rate policies very cautiously in order to avoid a scenario coupling simultaneous elevated price dynamic and subdued levels of economic growth (so called stagflation).

The current macroeconomic environment is challenging for the real estate industry, in particular for the construction sector. In fact, the long-lasting disruption of global supply chains is leading to increasing scarcity and prices for building materials. This situation may slow down certain construction projects and put a drag on the pipeline of new real estate projects. Higher mortgage rates are reinforcing this trend, as the benefits of third-party financing for property investment returns decreases. In the case of listed Swiss real estate funds and investment foundations, this aspect is marginal as these investment structures typically show very low levels of leverage.

Overall, Swiss real estate seems well positioned to navigate this period of elevated inflation levels, as rental growth prospects appear to be robust in the residential sector and in future-proofed segments of the commercial property markets. In addition, many residential and commercial rent contracts offer mechanisms to pass through part or all of the inflation dynamic by adapting the level of existing rents during annual reviews. Finally, the real asset nature of property investments offers an additional long-term hedge against consumer price increase through the gradual increase of land and property value over time.