Zurich, 18 January 2018 – Competition in the rental market is heating up even more. Since the vacancy rate in rental apartments in 2019 will probably reach an all-time-high of almost 3%, the decline in asking rents looks likely to gather pace. The overall Swiss index for asking rents is currently only 3% under the peak registered in mid-2015. To avoid losses, landlords are delaying lowering rents and trying to attract tenants with incentives like shopping vouchers or rent-free months. But this involves the risk of negative selection – the shorter the planned rental duration, the more such offers make a difference.

Asking rents will adjust to the existing stock

In the coming years, existing rents will probably not correct by much since they are not excessive in a historical context. By contrast, offered rents currently exceed existing rents by approximately 20%. When vacancies rise as sharply as they have today (as they did, for example, in the early 1970s and 1990s), such a difference has typically eroded. "Without a clear change in construction activity trends or a new 'immigration wave,' asking rents will probably plunge up to 10% by 2020," Claudio Saputelli, Head of Global Real Estate in UBS CIO WM, forecasts. "Against this background and slightly rising interest rates this year, prices in residential income properties have probably crested," he concludes.

Owner-occupied home prices remain stable

Low mortgage rates are the main pillar of the owner-occupied home market. At the moment, savings can be achieved by buying an owner-occupied home as opposed to renting an equivalent apartment, which (given an 80% loan-to-value ratio) corresponds to a return on equity of about 4%. No similar situation has been observed in the current real estate cycle. Because absolute purchase prices still limit affordability, small apartments are in demand, and the relative willingness of buyers to pay for properties of lower quality remains high. So UBS CIO WM expects another slight price rise in single-family homes (+0.5%) while condominiums, exposed to greater competition as a result of falling rental prices, stagnate.

Value corrections in commercial real estate

The willingness of investors to pay for office properties in top locations has waned since early 2016: while prices for residential properties have increased since then by 10%, those for office properties have declined by about the same rate. Vacant office properties are still being offered with substantial discounts. But the excess supply has stabilized and ought to decline somewhat this year. Competitive pressure remains, however, because of continuing large-scale development projects. As a result, the renewal of expiring leases still involves lower rents. In view of the tenant-friendly market situation, (further) corrections are likely inevitable in many real estate portfolios.

Risky bets on new forms of mobility

Accessibility thanks to traffic infrastructure projects has improved in Switzerland in recent years and has led to regional real estate revaluations. But with increasing traffic congestion in and around the major centers, this trend is reversing. New forms of mobility such as self-driving cars, which could revolutionize the real estate market, are supposed to counter this development. Yet – even if fully autonomous driving on the normal road network becomes reality in the not-too-distant future – most of the potential efficiency gains would be eliminated by the additional traffic. Moreover, the average daily travel time budget of commuters has remained constant for decades. Because new forms of mobility will likely not cause regions outside of this time budget to gain in value, the real estate price structure between city and country will not radically change. So orienting a real estate portfolio today to fully autonomous vehicles is risky.

Correction potential for asking rents

Ratio of asking and existing rents to income (index 2000 = 100)

Source: FSO, Wüest Partner, UBS

The real estate study "UBS Real Estate Focus 2018" can be viewed via the following link: www.ubs.com/realestatefocus-en

UBS Switzerland AG

Media contact

Claudio Saputelli, Head Global Real Estate, Chief Investment Office WM, 
Tel. +41 44 234 39 08 or +41 79 513 50 45, claudio.saputelli@ubs.com

Elias Hafner, Head Swiss Listed & Regional Real Estate, Chief Investment Office WM,
Tel. +41 44 234 48 03, elias.hafner@ubs.com

Dr. Matthias Holzhey, Head Swiss Real Estate Investments, Chief Investment Office WM,
Tel. +41 44 234 71 25, matthias.holzhey@ubs.com