UBS office property index shows slight improvement: market remains susceptible to correction

The UBS Swiss Office Space Investment Index currently stands at -0.74. As a result, increased caution continues to be warranted in making direct investments in office space. However, the Index improved slightly compared with the previous year. This is because continued high economic growth of more than 2% and somewhat fewer planned projects for new office space mean that excess supply should not intensify further before 2016. Nevertheless, slightly falling rents should be expected in the coming years.

Unfavorable risk-return profile
Direct investments in office space have once again become more expensive compared with alternative real estate investments. For instance, dividend yields on real estate equities stand at 4.4% and on the more stable real estate funds at 3%, thus exceeding current initial yields of less than 3% on office space at prime locations. In an historical comparison, this situation is highly unusual and suggests that direct investments are over-valued. Moreover, over the medium term, the anticipated gradual normalization of long-term interest rates will put additional pressure on current valuations.

Office space demand dependent on immigration
The adoption of the mass-immigration initiative is creating additional uncertainty. If implementation of the initiative leads to tensions with the EU and a decline in immigration, the demand for office space is likely to become weaker, driving excess supply upward. Because of increased competition between providers, this will likely mean that, above all, prices for office space at B and C locations will come under increasing pressure. If investors demand higher risk premiums for office space for this reason, however, it is likely to trigger price corrections in the current year.

Zurich office market better than its reputation
Restrictive implementation of the mass-immigration initiative would have the greatest impact on Basel-City and Geneva, because they are more highly dependent on cross-border commuters. From a regional perspective, we expect that even without a reduction in immigration, rents will still tend to decline in the four largest cities. Zurich remains the most attractive location for office market investments despite being the undisputed leader in office space growth. It is doubtful that demand in Basel and Bern can compensate for the construction boom experienced in recent years. While Geneva faces only a moderate deterioration in the supply situation, prospects for rent growth remain poor in view of the high vacancy rates there.

Methodology
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 4Q2013.

UBS AG

Media contact

Claudio Saputelli, Head of CIO Swiss & Global Real Estate
Tel. +41 79 513 50 45

Dr. Matthias Holzhey, Economist CIO Swiss & Global Real Estate
Tel. +41 44 234 71 25

The UBS Swiss Office Space Investment Index report is available on the Internet via this link: