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Swiss Real Estate Focus 2017: Vacancy rates rising at the end of the real estate cycle

Zurich, 19 January 2017 – Switzerland’s major cities saw net prime yields for multi-family homes drop to 2.6% in 2016 from an average of 2.8%. This is equivalent to a 6% increase in net present value. These low yields are creating additional incentives for investors to seek out higher returns in less central locations. Yet the number of vacant rental apartments – which has already doubled since 2009 – is likely to increase further still over the course of this year. At first glance, the projected loss of income appears moderate given a vacancy rate for rental apartments of 2% across Switzerland as a whole. However, one in four communities already has a vacancy rate higher than 5% for rental apartments.

Vacancy rate inadequate for measuring risk

Vacancy rates are not an exact measure of the risk of rent defaults. First, payment defaults by tenants and loss of rent due to renovation work are not recorded as vacancies. Second, vacant apartments are often found in properties at bad microlocations, in subsegments such as luxury apartments or vacation rentals, and in new buildings. For example, the vacancy rate for new builds stands at around 10%. Especially in relatively illiquid submarkets (infrequent changes of tenants), investors should therefore be prepared for a drawn-out and thus costly marketing process. Third, the current vacancy rate means that one in 10 properties already generates an annual loss of rent of more than 10%. For small-scale real estate investors and those that have not sufficiently diversified, this can lead to liquidity bottlenecks.

Rents expected to fall

Ongoing vacancy leads to lower rents. Communities with a vacancy rate of over two percentage points above average have 10% lower rents than communities with an average vacancy rate. For the first time since 2000, asking rents fell 1.3% year on year in 2016, while rents in new buildings even fell an impressive 3.4 %. UBS CIO WM predicts a further 1% drop in asking rents in 2017.

House prices likely to stagnate

After 17 years of rising house prices, it is not clear where the current real estate cycle is headed. The major economic hubs and their closest metropolitan areas were the winners in the housing boom until 2012, but since then high price increases have primarily been observed in peripheral communities. However, the rally in house prices in the periphery is now starting to lose steam.

The end of falling interest rates, stable area occupancy pro capita and stagnating incomes are likely to impede future performance. Given the stable economic situation and the open central bank floodgates, it does, however, seem unlikely that there will be a Switzerland-wide correction in the near future. UBS CIO WM expects to see zero nominal growth in condominium prices and marginal price growth for single-family homes of 0.5% in 2017.

Downturn in demand clouds outlook on the commercial real estate market

The vacancy risk for office space appears manageable, particularly in good microlocations. Last year, vacancy rates in major cities decreased and the portfolios of key listed real estate firms revealed a reduction in vacant space. Yet achieving full occupancy in a property now demands active space management and, increasingly, has to be bought by way of significant rent discounts. Improvements in investment prospects on the office space market are being slowed by the demand side. Office employment grew by just 0.2% in 2016 – its lowest value since the financial crisis. There are no signs of a reduction in the excess supply this year. UBS CIO WM expects rental prices for office space to fall by 2% in 2017.

The retail property market is struggling as the previously fierce competition intensifies further. Declining retail sales are driving down rents for retail space and driving up vacancies. That hasn’t stopped new shopping centers from opening their doors, though. As many as 10 additional malls with around 100,000 square meters of available retail space will follow suit by 2020. The losers in this process: malls that fall short of current clients’ expectations of a special shopping experience. UBS CIO WM expects to see rental prices for retail space decrease by 3% this year.


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UBS Switzerland AG
UBS AG is a Swiss global financial services company, incorporated in the Canton of Zurich, and co-headquartered in Zurich and Basel. The company provides wealth management, asset management, and investment banking services for private, corporate, and institutional clients worldwide, and is generally considered to be a bulge bracket bank. In Switzerland, these services are also offered to retail clients. The name UBS was originally an abbreviation for the Union Bank of Switzerland, but it ceased to be a representational abbreviation after the bank's merger with Swiss Bank Corporation in 1998. The company traces its origins to 1856, when the earliest of its predecessor banks was founded.
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