Swiss Real Snapshot!

Swiss Real SnapShot!

In extra time

Current developments in the Swiss real estate investment market

Autumn 2017

Content

Macroeconomic 04 Overview

Office Property 06 Market

Retail Property 08 Market

Residential Property 10 Market

Direct Property 13 Investments

Indirect Property 15 Investments

New territory for 16 provident institutions – the property share deal

Swiss Real SnapShot! 1 2 Swiss Real SnapShot! Introduction

Dear Sir or Madam

KPMG Swiss Real SnapShot!, published every 6 months, provides you with an overview of the current developments in the Swiss real estate market and its influencing factors.

The Swiss real estate market is a heterogeneous and strictly segmented structure. Thus, KPMG Swiss Real SnapShot! limits itself to global observation, without addressing regional deviations in detail.

KPMG Real Estate has both, Swiss specific and global expertise in the real estate markets. Our extensive data pools in local markets along with competent and in-depth consultation generate added value for our clients in all areas connected to real estate.

Turn to page 18 of KPMG Swiss Real SnapShot! to see what we can do for you and how you can benefit from our services.

We wish you a pleasant and informative reading.

With kind regards,

Ulrich Prien Beat Seger Partner, Head of Real Estate Switzerland Partner, Real Estate M&A

Swiss Real SnapShot! 3 In extra time Macroeconomic Overview In the second half of 2017, the global economic cycle was on an upward path. Impetus from abroad has also led to growth in demand for Swiss products and services. The State Secretariat for Economic Affairs (SECO) expects GDP to grow by 0.9% in 2017.

During the first three quarters of 2017, there has been a positive trend in Swiss exports. In Q3 2017, exports rose by 2.5% (nominal) compared to the same quarter last year. Compared to Q3 2016, the strongest growth was in textiles, clothing and shoes, at 26.9%, and metals, at 12.1%. As in previous years, chemicals and pharmaceutical products accounted for the most significant share of Swiss exports, at 45% of total sales. Whilst the balance of trade lost some momentum in the third quarter when compared with the surplus of CHF 10.5 billion in the first quarter, at CHF 8.5 billion it still recorded a significant surplus. The consensus forecast reflects confidence that economic activity in Switzerland will continue to increase, and projects GDP growth of 1.8% for 2018.

Against this background of economic expansion, but also slower population growth, the situation on the Swiss labor market is easing. The unemployment rate is expected to fall to 3.2% in 2017 (2016: 3.5%). The federal economic experts forecasting group assumes that employment will grow by 0.3% this year and 0.8% in 2018. The unemployment rate could therefore fall further by 2018.

A slight upward movement in the Consumer Prices Index is expected, with an increase of 0.4% for 2017 as a whole. According to the Federal Statistics Office (BFS), the main reasons for this are increases in rents and higher prices for petroleum products.

Macroeconomic indicators1 5% Forecast average 4% 3% 2% 1% 0% -1% -2% and Consumer Prices Index

GDP growth, unemployment rate -3%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017P 2018P GDP growth Unemployment rate Consumer Prices Index

Sources: BAKBasel, Credit Suisse, KOF, SECO, UBS and KPMG

1 P = Consensus forecast based on BAKBasel, UBS, Credit Suisse, KOF and SECO

4 Swiss Real SnapShot! The International Monetary Fund’s economic growth Net migration forecast for industrialised countries, of 2.2% for 2017 and 120,000 2.0% for 2018, is slightly more positive than it was even in 100,000 October 2016. From the mid-point of the year, the strong economic situation in the Eurozone has led to a partial 80,000 correction of the Euro. The ECB doesn’t manage to reach its 60,000 inflation target of just under 2% with its monetary policy. In spite of the economic growth, the EU’s quantitative easing Net migration 40,000 will not be halted just yet. The ECB has extended the 20,000 programme until September 2018, but from January 2018 - the volume of monthly purchases is to be reduced from

EUR 60 billion to EUR 30 billion. In the USA, the -20,000 government is pushing for reductions in business taxes and 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 wants to increase domestic infrastructure spending, which Q3 2017 could lead to a new impetus in that sector. For these Germany France Italy reasons, the IMF anticipates solid GDP growth of 2.2% for Spain Portugal Asia 2017 and 2.3% for 2018 in the USA. This autumn, the Fed Other Countries Africa Total confirmed its intention to continue with the cycle of gradual Source: BFS, SEM and KPMG interest rate increases. Interest rates in the Eurozone and Switzerland are likely to follow this course over the medium At the end of October, the Purchasing Managers’ Index term. closed at 62.0, its highest level since February 2011, and 7.4 points higher than at the end of January 2017. The robust Global GDP growth industrial situation in particular means that the PMI now

Emerging and stands well above the growth threshold of 50 points. This developing countries trend can also be seen from the KOF economic barometer,

Japan which is above its long-term average, at 105.8. Therefore, the outlook for the Swiss economy is promising, and Eurozone positive growth rates can be expected over the short to medium term. UK

USA Purchasing Managers’ Index, KOF economic barometer and EUR/CHF exchange rate Industrialised countries 140 1.8 1.6 Global growth 120

1.4 EUR/CHF exchange rate 100 0% 1% 2% 3% 4% 5% 6% 1.2 80 1 2017 2018 60 0.8 Source: IMF and KPMG 0.6 40 0.4 Due to the economic upturn in the major European PMI and KOF barometer 20 0.2 immigration destinations, a continued fall in immigration figures can be expected in Switzerland over the short to 0 0 medium term. In 2016, net immigration was lower than in the previous year for the third year in a row since 2013 Jan. 2000 Jan. 2001 Jan. 2002 Jan. 2003 Jan. 2004 Jan. 2005 Jan. 2006 Jan. 2007 Jan. 2008 Jan. 2009 Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013 Jan. 2014 Jan. 2015 Jan. 2016 Jan. 2017 when it reached its most recent high point. According to the State Secretariat for Migration (SEM), net immigration for EUR/CHF exchange rate the year to-date (January-September 2017) stands at 37,000. PMI KOF barometer PMI growth threshold KOF barometer 10-year average If immigration remains at this level for the remainder of the year, the net figure will have reached around 49,000 by the Source: Procure, Credit Suisse, SNB, KOF and KPMG end of 2017, a reduction of 11,000 compared to 2016.

Swiss Real SnapShot! 5 unchanged, high vacancy rates must be expected in the Office Property Market office sector in 2018 across the whole of Switzerland.

Capital continues to flood into office developments. Firms establishing themselves in Switzerland In the first half-year (H1) of 2017, the total volume of office 350 1,200 buildings approved over the preceding twelve months 300 1,000 Number of jobs exceeded its long-term average of CHF 2 billion. Figures 250 800 from the Federal Statistics Office show that office 200 600 employment fell by 0.5% over the same period. Demand 150 400 has not grown as much as the projected increase in supply. 100 200 Number of businesses 50 The main reasons for the stagnating office employment 0 0 figures are the headcount reductions in the ICT sector 2012 2013 2014 2015 2016 (-1.4%) and the miscellaneous business services sector Number of businesses Number of jobs (-1.9%). At the start of 2017, the number of full time Source: Conference of Directors of the Cantonal Economies and KPMG equivalent office jobs remained around 1.2 million. According to the analyses in the Swiss Real Estate Vacancy levels remain a challenge in the office market. In Sentiment Index (sresi®), there has been a reduction in fact, in 2017 the vacancy rate increased indeed further political uncertainty in Switzerland. According to the only in Basel (+9.4%), and it fell in Zurich (-9.7%), Geneva cantonal promotion agencies, positive indicators can be (-12.9%) and Bern (-7.1%). However, with total office detected mainly in the Basel economic region and Greater space supply of around 460,000 sq. m in these four cities, Zurich. The upturn has yet to reach western Switzerland. vacancy is still high in absolute terms. The stable overall performance of the Swiss economy can In recent years, Switzerland as a business location has be explained by the stable political situation (by international faced numerous challenges because of the exchange rate standards) and also by favourable infrastructure conditions situation as well as political and regulatory developments. and the high levels of education. One example of the Whilst the Swiss Franc has recently weakened again successful arrival of a foreign company is Google. It already following the abolition of the minimum Euro exchange rate employs 2,000 people in Zurich and wishes to set up a in 2015, it is still seen as overvalued. Nonetheless, in 2016 further 3,000 jobs by 2021. The reason given by Google for around 265 businesses were set up in Switzerland as a its expansion in Zurich is a better environment compared to result of the federal inward investment programme (2015: other European locations. Zurich offers the company a 264 businesses), resulting in 1,005 new jobs (2015: 1,082). central location and ideal infrastructure, and the proximity to Despite the political and economic uncertainties, the the Federal Institute of Technology (ETH) promises them Conference of Directors of the Cantonal Economies is networking with a highly qualified workforce. Tax talking of a solid year. Despite some reductions in vacancy considerations are likely to be important too. However, in the major cities, with demand remaining relatively some American companies are hesitant about setting up

Changes in typical office employment by sector

6% 160 Index of changes

4% in employment 140 2% 120 0% 100 -2%

Employment growth YoY -4% 80 Q1 2000 Q3 2000 Q1 2001 Q3 2001 Q1 2002 Q3 2002 Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017

Other services Public Administration Annual growth Other business services Professional, scientific and technical services Employment Index Property and housing Financial and insurance services IT and telecommunications

Source: BFS and KPMG

6 Swiss Real SnapShot! abroad, partly because of recent tax reforms and the Asking rents for office space in the principal centres domestic focus of US economic policy, which could lead 180 them to rethink their strategic position. 170 160 Firms establishing themselves in Switzerland: 150 breakdown by sector 140 130

9% 120 Rental Prices Index 23% 6% 110 Trade and raw materials 100 7% Head office functions 90 Financial services ICT 19% Clean/green technology H1 2000 H1 2001 H1 2002 H1 2003 H1 2004 H1 2005 H1 2006 H1 2007 H1 2008 H1 2009 H1 2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1 2016 H1 2017 23% Light engineering; electrical and metalworking industry Basel Bern Geneva Zurich 4% 9% Life sciences Source: WP and KPMG Other

Source: Conference of Directors of the Cantonal Economies and KPMG Demand in the office market will continue to be largely characterised by this dynamic environment. The structural The office market is being affected by an advancing transformation means that there may be changes in the way structural transformation. As well as new workplace models people think about using office space. A greater weight such as co-working space, new demands will be placed on might be attached to possible interim uses and vacancy workspaces and workplace models as part of the continuing management. The market remains open and expansive, and digitisation of the economy. In the analysis in KPMG’s 2017 thus subject to a lot of competitive pressure. Generating Swiss Real Estate Sentiment Index, 58% of respondents added value through flexibility and the provision of services expect a reduction in demand for office space as a result of is increasingly becoming a factor for success. technological developments. This also suggests that the pressure on premises in older buildings is likely to increase further, in favor of better-quality and more flexible space in new buildings. The market situation continues to favour tenants, making it possible for many tenants to negotiate better terms for their existing leases. Asking rents are increasingly reflecting this trend. In the first half-year of 2017, they fell by 1.1% in Zurich, whilst they stagnated in Bern (-0.4%), Geneva (-0.3%) and Basel (-0.2%).

Swiss Real SnapShot! 7 Overall B2C online and mail order market by product area Retail Property Market 7

6 The transformation in Swiss retailing also continues to forge 5 ahead. In August 2017 alone, retail sales, seasonally adjusted and in real terms, decreased by 0.3% compared to 4 July. Things currently look better on the consumer side. 3

CHF billion Since Q2 2017, consumer sentiment has risen by 5 points to 2 Share by value in -3 points. The index is therefore above its long-term average 1 of -9 points. The anticipated recovery of the Swiss economy 0 and the improved labor market situation are having a 2012 2013 2014 2015 2016 positive impact on consumer sentiment. Media Home Fashion and footwear Multimedia, HiFi and Electrical Retail sales and consumer sentiment index Other Food 115 30 Source: GfK and KPMG Consumer Sentiment Index 110 20 The major players in retailing are also ahead in Swiss online 105 10 sales. In 2016, Migros again enjoyed the highest turnover,

100 0 with sales of CHF 1.6 billion. The most significant share of these sales was generated by its subsidiary Digitec/Galaxus, 95 -10 at around CHF 700 million. The e-commerce sales of the Retail Sales Index 90 -20 Coop group (including Siroop) stand at around CHF 1.4 billion. Both companies again recorded growth in the 2016 reporting 85 -30 year (Coop: +5.2%, Migros: +1.2%), and there is potential for more. Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013 Jan. 2014 Jan. 2015 Jan. 2016 Jan. 2017

Consumer Sentiment Index In contrast to the falling sales elsewhere in bricks and Nominal seasonally-adjusted retail sales mortar retailing, filling stations and convenience shops are Real seasonally-adjusted retail sales increasingly enjoying a growth in popularity. These outlets Source: GfK and KPMG are characterised by their central locations and ease of access. The trend towards a denser, more quickly accessible Whilst according to GfK retail sales fell again by 1.5% in 2016, sales network with smaller store formats is continuing. GfK online and mail order retailing again grew significantly last Switzerland estimates that turnover in small-format retailing year by 8.3%. Faster growth has been seen only in 2012/2013 reached CHF 5.25 billion in 2016 (+1% compared to 2015), (9.7%), when it started from a lower base. This takes online across 1,794 filling stations and convenience shops and mail order retailing to a share of 6.9% of the overall nationwide. Swiss retail market, with a volume of CHF 8.1 billion2. As before, online retailing is experiencing growth primarily in the In 2016, the food/near-food sector achieved marginal growth non-food sector. Where in the non-food sector online and of 0.3%, whereas the non-food sector was faced with a mail order retailing made up 15.3% of total sales in 2016, the drop in sales of 2.7%. equivalent figure in the food sector was just 1.9%.

2 Including CHF 1.3 billion of Swiss purchases from foreign retailers

8 Swiss Real SnapShot! Changes in retail sales Asking rents for retail space in the principal centres 110 220 100 200 90 80 180 70 60 160 50 140 40

30 Rental Prices Index 120 Retail sales in CHF billion 20 100 10 0 80 2000 2005 2010 2014 2015 2016 60 Non-Food Food/Near-Food Total retail sales

Source: BFS, GfK and KPMG H1 2000 H1 2001 H1 2002 H1 2003 H1 2004 H1 2005 H1 2006 H1 2007 H1 2008 H1 2009 H1 2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1 2016 H1 2017

The challenging retail environment is also reflected in the Basel Bern Geneva Zurich retail premises market. Existing anchor tenants are Source: WP and KPMG undergoing a strategic reorientation and withdrawing from some regional markets. This in turn is leading to less Since the shock caused by the rise in the Franc, consumer passing trade and lower sales for neighbouring retail sentiment seems to be recovering because of the improving premises. Apart from lower rental income, for property labor market. It remains to be seen how far retail sales will owners it also means higher tenant turnover and increased benefit from the anticipated economic upturn. Competitor demands in terms of property management. pressure remains strong in retailing in any case, and it is reflected in the pressure on margins to which many sellers According to the cities’ statistics offices, retail vacancy rates in bricks and mortar retailing are subject. The increased rose in 2017 in all four of the principal centres. The most product transparency means that selling goods on the sales marked increase was recorded in Zurich, with a rise of floor contributes less to premises costs. Sellers are around 7,000 sq. m to 10,000 sq. m. Moreover, according to therefore increasingly pursuing hybrid marketing strategies. the City of Zurich, this striking increase was attributable not This gives rise to increased flexibility in demand for space to one large property but to various small to medium-sized and, overall, to a reduction in space requirements. Property properties across large parts of the city area. But vacancy owners must come to terms with these far-reaching has also increased significantly in Basel (+13%), Bern (+4%) structural changes and make the space on offer more and Geneva (+13%). The market for retail tenants is also dynamic. putting pressure on asking rents and existing rents in relation to new lettings and lease extensions. Falling margins mean that increasingly, lease negotiations are also being started whilst existing leases are still running. In the first half-year of 2017, asking rents for retail space in the principal centres recorded another fall compared to the previous half year (Basel: -4.5%, Bern: -2.4%). In Zurich and Geneva, asking rents for advertised retail space are almost unchanged, at +0.1% and +1.0% respectively.

Swiss Real SnapShot! 9 After reaching a high point in 2016, with planning consents Residential Property Market for 29,000 rental homes, the number of planning consents for the twelve months ending in Q3 2017 has dropped to In the current low interest rate environment, real estate 26,600 homes. However, over the same period, the number investment is largely focused on the residential sector. of planning applications submitted for rental homes was However, in various regions the continuing development of 31,400, above the 2016 level. This means that availability, new properties is now exceeding demand, resulting in and therefore also vacancy rates, are not expected to increased vacancy rates. As at 1st June 2017, the empty reduce over the short term. Moreover, net immigration has dwellings rate across Switzerland rose for the sixth time in a been falling consistently since 2014 (see: net migration row, to 1.47%. This means that around 65,000 homes are p. 5). In recent years, immigration has been an important vacant, representing an increase of 15% year-on-year prop underpinning housing demand. Around half of the total (8,400 homes). The greatest increase is seen in relation to growth in the number of households in 2016 was made up rental homes. Over the last four years, the number of of foreign households. From January to September 2017, net empty rental homes has grown by an average of 14.3%. The immigration stood at 37,000. For the same period in 2016, average rise in the number of empty homes for sale stood the net migration figure published by SEM was 44,000. at 6.5%. Vacancies have been rising first and foremost in Therefore, year-on-year the figure has fallen by 17%. the rental sector. Since the start of 2017, rents in Switzerland have been on a Empty dwellings rate, 1st June downward trend. Across Switzerland as a whole, the 70,000 1.75 homegate.ch rental index fell by 0.3% (October 2016 – October 2017). In Zurich, the index remained steady at +0.2% 60,000 1.50

Empty dwellings rate (August 2016 – August 2017). Conversely, after a downward 50,000 1.25 phase from November 2015 to April 2017, quality-adjusted

40,000 1.00 asking rents in the Cantons Geneva and Vaud are now rising again. In October, the index climbed by 2.0% (October 2016 – 30,000 0.75 October 2017). Elsewhere, asking rents recorded a slight Vacant homes 20,000 0.50 increase only in Lucerne, of +0.1% (October 2016 – October 2017). The most marked fall in rents was in Canton 10,000 0.25 Ticino, where they dropped by 2.0% compared to 2016 0 0.00 (October 2016 – October 2017). Falling immigration and 2014 2015 2016 2017 continuing housing construction have together resulted in a To let For sale Empty dwellings rate loosening of the rental market across Switzerland. Source: BFS and KPMG

Quality-adjusted asking rents 130 3.5%

125 3.0% Change YoY – Switzerland 120 2.5% 2.0% 115 1.5% 110 1.0% 105 0.5% 100 0.0% 95 -0.5% Indexed changes in rental prices 90 -1.0% Jan. 2009 Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013 Jan. 2014 Jan. 2015 Jan. 2016 Jan. 2017 May 2009 May 2010 May 2011 May 2012 May 2013 May 2014 May 2015 May 2016 May 2017 Sep. 2009 Sep. 2010 Sep. 2011 Sep. 2012 Sep. 2013 Sep. 2014 Sep. 2015 Sep. 2016 Sep. 2017

Change YoY – Rental Price Index Rental Price Index Rental Price Index for the Switzerland for Switzerland for the Canton of Zurich Cantons of Geneva and Vaud

Quelle: homegate.ch und KPMG

10 Swiss Real SnapShot! In June 2017, the reference mortgage interest rate was reduced to 1.5%. A reduction of 0.25 percentage points in the reference interest rate entitles tenants to a 2.91% reduction in rent. However, according to the Federal Housing Office only around 20% to 25% of households are requesting a reduced rent. Financial market analysts assume that initially mortgage interest rates will remain low, even if they rise slightly, over the short to medium term. According to SNB data, in July 2017 the average interest rate for fixed-interest mortgages with terms between seven and ten years reached its highest level for the year so far, of 1.38%.

Changes in reference interest rate 1.8% 2.00

1.7% 1.50 1.00 1.6% 0.50 1.5% 0.00 1.4% -0.50

1.3% -1.00

1.2% -1.50

02.03.2016 02.04.2016 02.05.2016 02.06.2016 02.07.2016 02.08.2016 02.09.2016 02.10.2016 02.11.2016 02.12.2016 02.01.2017 02.02.2017 02.03.2017 02.04.2017 02.05.2017 02.06.2017 02.07.2017 02.08.2017 02.09.2017 02.10.2017 SNB target range (right axis) Mortgages 10-year fixed rate (left axis) Mortgage reference interest rate (left axis) Yield on 10-year federal bonds (right axis) 3-month Libor (right axis)

Source: SNB and KPMG

Swiss Real SnapShot! 11 Midway through 2017, it was announced that Libor (the Indexed changes in current and asking rents London Interbank Offered Rate) will be phased out in 2021. 160 Not only does the SNB use Libor to set its target range for 150 its monetary reference interest rate, Libor also determines the interest rate for financial products such as mortgages. 140 The SNB is promoting SARON (Swiss Average Rate 130 Overnight), which is based on actual market transactions and prices, as a possible successor to Libor as a benchmark 120 for secured loans. With SARON, counterparty and liquidity Indexed changes 110 risks are negligible. Moreover, SARON is based on data from the secured money markets and, according to the 100 SNB, is less volatile in times of turbulence. It is not yet clear what effect a possible switch to SARON will have on the 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Existing rents Asking rents calculation of the reference interest rate for leases. However, while the practice of using bands to set the Source: WP, BFS and KPMG reference interest rate is retained, SARON’s lower volatility should be reflected in the reference interest rate. The saturation of parts of the residential property market is intensifying. Developers and investors need to take care. At Factors such as changes in the reference interest rate or present, there are absorption risks only in peripheral areas. low-cost new-build housing could lead to rents for existing A continued high level of construction activity and changes leases stagnating or even falling. In terms of asking rents, in migration may mean that rents in the conurbations of the the downward trend will persist because of the continuing principal centres also come under pressure. expansion of supply and net immigration. Thus, prospects both for rents under existing leases and for asking rents are generally negative. It can be assumed that the dynamics of the market will lead to a closing of the gap between the two indices.

Comparison between SARON and Libor -0.68% 0.08%

-0.70% 0.06%

-0.72% 0.04% Variance -0.74% 0.02% -0.76% 0.00% -0.78%

-0.80% -0.02%

-0.82% -0.04% 02.03.2016 02.04.2016 02.05.2016 02.06.2016 02.07.2016 02.08.2016 02.09.2016 02.10.2016 02.11.2016 02.12.2016 02.01.2017 02.02.2017 02.03.2017 02.04.2017 02.05.2017 02.06.2017 02.07.2017 02.08.2017 02.09.2017 02.10.2017

Variance SARON (left axis) 3-month Libor (left axis)

Source: SNB and KPMG

12 Swiss Real SnapShot! Changes in average yields achieved by provident institutions by Direct Property Investments segment 7% In recent years, developments in the Swiss property market 6% have been determined largely by the low interest rate 5% environment. Low yields on the capital markets have led 4% many investors to look to property as an alternative to fixed- 3% interest investments. Other alternative investments such as 2% private equity, hedge funds or even commodities have a less 1% favorable risk-reward profile and a different allocation profile 0% for long term investors, such as provident institutions. Mixed/ Mixed/ Overall Overall As well as quoted funds, the largest property investors also Residential Residential commercial include provident institutions. Over 23% of the invested commercial assets of Swiss pension funds is held in property Gross yield Net yield investments (direct: 10%; indirect: 13%). Most pension funds 2013 2014 2015 2016 limit their activities to the domestic market. At 0.3% of total invested assets, direct investments in foreign property are Source: KPMG comparatively rare. An evaluation of pension fund book values forming part of the 2017 KPMG Real Estate Pension The strong demand for property as an asset class is Fund Benchmark reveals an average gross yield of 5.4% reflected in rising transaction prices and thereby in falling across all properties in the pool of properties under review. initial yields in certain segments. Between 2016 and 2017, the median net initial yield fell from 4.0% to 3.1% for Weighted average net yields achieved by provident institutions residential properties and from 4.5% to 3.4% for mixed/ by segment and location commercial properties. There was less of a reduction in the 5.6% case of office premises, where net initial yields fell from 4.6% to 4.5% over the same period. 5.1%

Initial yields by use category 4.6% 70th percentile

Median 4.1% 30th percentile 7%

3.6% 6%

5% Cities Cities Minor Minor centres centres centres centres Secondary Secondary 4%

3% Residential Mixed/commercial 2% Net yields Net yields by segment Overall net yields 1%

Source: KPMG 0%

The strong demand for property investments is reflected in the further fall in gross and net yields for residential and Net yields Net yields Net yields Gross yields Gross yields Gross yields mixed/commercial properties. In 2013, net yields for the property pool under review for the residential segment still Residential Office Mixed use stood at 4.7%; in 2016 they fell to 4.3%. For mixed/ commercial properties returns fell from 4.9% to 4.5% Source: REIDA, SIV and KPMG between 2013 and 2016. Because of the present macroeconomic situation, direct property investments remain attractive. In view of the low yields on fixed-interest loans, property investments are still generating an attractive yield differential compared to bonds, despite the drop in net yields. However, the rise in vacancy (residential vacancy rate +15% between 2016 and 2017), combined with falling gross yields, point to an increase in risk in this asset class.

Swiss Real SnapShot! 13 Selected Property Transactions January to October 20173

Property transactions 2017 by use category 7 17 14 12 10 16 20 13 11% 8 2 12% 11 asel 5% Zurich 16% 9 13% 6

18 43%

3 Office Retail Residential 19 1 4 Industry 5 15 Hotel Special enea

1 Les Roches Campus 6 Kanton Bern Apt. 11 Beri-Märt 16 Frauenfelderstr. 20 Type: Office Type: Residential Type: Retail Type: Residential Price: CHF 149m Price: CHF 61m Price: CHF 33m Price: CHF 23m Purchaser: n/a Purchaser: Swiss Estates Purchaser: SF Ret. Fund. Purchaser: Novavest Seller: Colony Capital Seller: SPS Seller: n/a Seller: Girsb. & Rüt.

2 KIM Apartments 7 Walzwerk 12 Max-Högger-Str. 6 17 Johanitterstr. 5 Type: Retail Type: Industry Type: Office Type: Residential Price: CHF 120m Price: CHF 54m Price: CHF 29m Price: CHF 23m Purchaser: MobiFonds Purchaser: SFP Purchaser: Helvetica Pro. Purchaser: Novavest Seller: Implenia AG Seller: Sefer Found. Seller: n/a Seller: n/a

3 Glion Campus 8 Apollo 13 Lerzenstrasse 20 18 Rue du Lac 8 Type: Office Type: Office Type: Industry Type: Retail Price: CHF 101m Price: CHF 50m Price: CHF 29m Price: CHF 19m Purchaser: n/a Purchaser: n/a Purchaser: Procimmo Purchaser: Loreda Seller: Colony Capital Seller: Mobimo AG Seller: n/a Seller: Leasinvest

4 Mistral 9 Park Hotel Weggis 14 Salmenpark II 19 Rue de Berne 29-39 Type: Office Type: Hotel Type: Residential Type: Industry Price: CHF 86m Price: CHF 45m Price: CHF 28m Price: CHF 18m Purchaser: CSAM Immo Purchaser: Dogus Holding Purchaser: n/a Purchaser: Solufonds Seller: Suva Seller: Martin Denz Seller: PSP Seller: Jacques Gebr.

5 Cube 10 Grütpark 15 Av. de Chatelaine 20 Rosentalstr. 71 Type: Office Type: Retail Type: Residential Type: Retail Price: CHF 78m Price: CHF 41m Price: CHF 25m Price: CHF 18m Purchaser: J. Safra Sara. Purchaser: SF Ret. Fund. Purchaser: Parloca Genf Purchaser: Raiffeisen Seller: BNP Paribas Seller: CSA RE Switz. Seller: n/a Seller: n/a

Sources: RCA and KPMG

3 The overview is limited to the data source of Real Capital Analytics (RCA). The data from RCA provides a good indicator of the most important transactions on the property investment market but it does not claim to be complete.

14 Swiss Real SnapShot! CHF 3.3 billion, an increase of 31% compared to the same Indirect Property Investments period of the previous year (CHF 2.5 billion). A comparatively high level of issues by property funds was seen, with a total In the middle of 2017, prices for quoted property vehicles volume of CHF 1.8 billion. Property companies were also reached a record high. At the end of the third quarter, the very active, with issues of around CHF 1.5 billion. total return on property funds and property company shares had fallen by around 5 index points (base index: 2016) Flow of capital into listed property investments in Switzerland Cumulative capital flow, in CHF million compared to their highs in July and August 2017. As well as 800 4,000 expectations in relation to future interest rate trends, a 700 3,500 possible reason for the negative movement in prices is also a 600 3,000 revised assessment of risk by market players due to trends in 500 2,500 the direct property investment market. However, because of 400 2,000 the persistent low interest rate environment, indirect 300 1,500

property investments remain attractive to investors even after In CHF million 200 1,000 the correction in the second half of the year. 100 500 - 0 Even after the price correction which started in August 2017, Juli May April property funds remain highly valued, with an average June March August January October premium of 26% as at the end of October. La Foncière and February November December Streetbox Real Estate trade at the highest premiums, of September Property fund issues Cumulative capital inflows in 2016 49% in each case. Nonetheless, at the start of August 2017, Property company issues Cumulative capital inflows in 2017 the average property fund premium still stood at 37%. It will Property company borrowings soon become clear whether the reduction in premiums is Property company IPOs due to a market correction or whether it is the start of a Source: Bank J. Safra Sarasin and KPMG new trend. Their ability to attract capital shows that investors still see There is a strong variation in the premiums over the net indirect property investments as a viable alternative to asset values of the major Swiss property companies. While investing in the bond market. As at the end of October, PSP traded at a premium of 3% as at 1st November 2017, for Swiss property funds had recorded a performance of about Intershop the figure at the same date stood at 64%. At the 3%. 10-year Federal bonds continue to fluctuate between other extreme, Plazza is trading at a discount of 11%. -0.2% and 0%. However, the first indicators of possible changes in headline rates abroad had already affected the The current year shows that there is still strong demand for performance of property company shares and property indirect property investments. Their great popularity with funds. Therefore, the future attractiveness of indirect investors is reflected in the high levels of capital flowing into property investments must be viewed with an eye on the property investment vehicles. By the end of October changes in interest rates. 2017, they had achieved a cumulative capital inflow of

Performance of listed property investments 140 1.3% Change in 10-year federal bonds 130

0.8% 120

110 0.3%

100 Change in Index -0.2% 90

80 -0.7% Jul. 2016 Jul. 2017 Jan. 2016 Jan. 2017 Apr. 2016 Apr. 2017 Jun. 2016 Jun. 2017 May 2016 May 2017 Feb. 2016 Feb. 2017 Mar. 2016 Mar. 2017 Nov. 2016 Aug. 2016 Aug. 2017 Oct. 2016 Sep. 2016 Sep. 2017 Dec. 2016 Yield of 10-year Indexed change in overall return Indexed change in overall return Indexed change in Federal bonds for property funds for property shares Swiss Market Index

Source: SWX, SNB and KPMG

Swiss Real SnapShot! 15 Transaction-related tax issues New territory for provident When shares in a property company are sold, the tax consequences of the change in beneficial ownership vary institutions – the property between cantons. A comparison of the Cantons Geneva (GE), Grisons (GR), Lucerne (LU), Vaud (VD) and Zurich (ZH) share deal shows how much practice can differ: Transaction-related tax issues Property investments, even by private investors, are often Required Property gains tax? Step up Property structured by way of property companies. A sale of shares share acquisition transfer tax? holding Seller: Seller: costs in a property company has many advantages for the seller natural legal person person (including in terms of tax). GE <50% Ye s No *) No No ****)

It is not surprising that, in a seller’s market with attractive GR >50% Ye s No No Ye s income-generating properties, provident institutions find LU >50% Ye s Ye s No **) Ye s themselves considering whether they want to or can VD 2 or more Ye s Ye s Property No shares gains tax acquire a property indirectly by way of a share deal (i.e. by ***) purchasing shares in a property company). If there are ZH >50% Ye s Ye s Property None several potential purchasers, being prepared to conclude a gains tax share deal can be a decisive advantage for the purchasing *) Subject to retention period **) Check whether property gains tax can be offset against tax on profits party. ***) Only in the event of a future sale by way of a share deal ****) Unless a purchase contract is notarised

Share deal: tax considerations Source: KPMG From a tax perspective, it does not take long to analyse the purchase of a property (sale of a property) by way of an The purchaser needs to be aware of these different tax asset deal. Apart from identifying the allowable acquisition consequences, in order to be able to evaluate the case for costs and the value added tax considerations, generally the investment precisely and to have the best possible there are no particular issues. In the case of a share deal, arguments for the negotiations with the purchaser. the tax questions are more complex. In the case of a company, its tax history and therefore any possible tax risks Foreign sellers must also be taken on, and also the transaction itself and a If the seller is resident or registered abroad, e.g. a holding later transfer of the property into direct ownership can company in Luxembourg, the range of tax issues requiring trigger unexpected tax consequences. analysis widens further. Whilst the due diligence will centre on a review of the substance of the foreign seller’s Due Diligence business, property gains tax and withholding tax Tax risks need to be analysed as part of the due diligence considerations need to be investigated in relation to the exercise ahead of the purchase of the company. Any risks transaction (share deal). uncovered will affect the purchase price and appropriate provision for them must also be made in the warranties and Property gains tax guarantees in the purchase contract. If the foreign seller’s business is sufficiently substantial, a tax benefit may arise in Switzerland as a result, depending on the country. Certain double tax treaties (e.g. with Austria, Germany and Luxembourg) provide that gains from the sale of shares (in a Swiss property company) are taxable only in the seller’s country of domicile. Therefore, the property gains tax triggered in Switzerland by the change in beneficial ownership cannot be levied. However, depending on the canton, in such cases acquisition costs (so-called step-up costs) can be allowed, so that – even though no property gains tax is levied on the transaction – the profit resulting from the increase in value is never taxed. Accordingly, the purchaser no longer needs to consider deferred taxes on this portion; this will have a positive effect on the investment case.

16 Swiss Real SnapShot! Withholding tax However, a foreign seller can also present potential withholding tax risks for the purchaser. Firstly, there is the Conclusion well-known issue of existing reserves. If there are so-called “distributable reserves not required for business A property share deal is a more complex transaction operations” when the property company is sold, they will for the purchaser, but as well as holding risks, it remain subject to the old withholding tax rate under the holds opportunities. Viewed holistically, it can be new owner. more financially advantageous than an asset deal.

Example: until now, dividends from a Swiss property Just being prepared in principle to enter into a share company to its French shareholder have been subject to deal can be sufficient to allow the interested 15% withholding tax. If the new owner, a Swiss investment provident institution to make it to the seller’s fund, distributes a dividend to itself from funds which are negotiating table. Compared to an asset deal, the not required for business operations, it will still be subject to necessary investigations and the subsequent 15% withholding tax. restructuring are more complex. In the case of foreign sellers in particular, tax headaches may arise. Another special issue to consider is that of “vicarious However, because these issues can be solved in liquidation”, a tax evasion measure under which the Federal principle, viewed holistically, the case for the tax authorities consider not only the tax treatment of the investment can nonetheless be worthwhile. disclosed reserves (existing reserves) but also the hidden reserves. Put simply, and as an example, it is assumed that an investment fund which purchases a property company and later transfers the properties into its direct ownership is liquidating the company on behalf of the seller, in order to Table of abbreviations avoid withholding tax which would be payable by the seller. The Federal Court has already on several occasions defined the conditions in which there is tax evasion. However, in a BAK Basel BAK Basel Economics AG seller’s market it can be difficult to identify, particularly when BFS Federal Statistical Office a share deal amounts to an unusual legal structure. ECB European Central Bank GfK Institute for Consumer Research, Transfer into direct ownership Market Research Institute of Switzerland When properties are transferred into the direct ownership of a provident institution, there are further tax issues to be ICT Information and Communications considered. Whilst a merger between a company and a fund Technology is not possible under the Mergers Act, depending on the IMF International Monetary Fund canton, a “false merger” is acceptable for tax purposes. IPO Initial Public Offering Here, all assets and liabilities are transferred to the KOF The Swiss economic research institute provident institution and the company is liquidated soon of the Federal Institute of Technology afterwards. Whilst in principle the tax on profits will be Libor London Interbank Offered Rate accounted for (realisation as provided for under the tax system), normally the transfer will be tax-neutral in terms of MSCI Morgan Stanley Capital International property gains and transfer tax (with exceptions in certain PMI Purchasing Managers’ Index cantons). REIDA Real Estate Data Association SARON Swiss Average Rate Overnight Seco State Secretariat for Economic Affairs SEM State Secretariat for Migration SIV Swiss Association of Real Estate Appraisers SNB Swiss National Bank SWX SWX Swiss Exchange WP Wüest Partner AG

Swiss Real SnapShot! 17 All-encompassing Real Estate Advisory from one Source

M&A/Capital Market • Structuring and execution of transactions (Lead Advisory) – Asset deals: Acquisition and disposal of properties and portfolios – Share deals: Mergers, spin-offs, IPOs, private placements • Arrangement of indirect investments, such as funds or trusts • Fund raising for specific projects • Debt & Capital Market Advisory

Investment Advisory • Investment advisory for national or international indirect real estate investments • Structuring of real estate investments within portfolios • Qualitative and quantitative analysis of investment products • Monitoring and investment controlling, portfolio performance measurement

Strategy/Organization • Strategy development and implementation – Business planning/business modelling – Corporate/public real estate management – Asset and portfolio management • Analysis of organization and processes; organizational development, internal control system • Performance management/MIS/investment monitoring • Risk management and financial modelling • Turnaround and financial restructuring • Support in digital transformation

Valuation/Due Diligence • DCF -valuations of properties and real estate portfolios or companies • Independent valuation reports for financial statements • Valuations for acquisitions or disposals • Feasibility studies and valuation of real estate developments • Transaction-focused due diligence and process management • Major Project Advisory

We are also pleased to answer your tax-related, legal and regulatory questions regarding real estate and we support you in process and cost optimization as well as solutions for your technological infrastructure.

18 Swiss Real SnapShot! Please contact us

KPMG AG Ulrich Prien Philipp Schelbert Advisory, Real Estate Partner Director Badenerstrasse 172 Head of Real Estate Switzerland Real Estate PO Box +41 58 249 62 72 +41 58 249 77 59 8036 Zurich [email protected] [email protected]

KPMG SA Beat Seger Oliver Specker Rue de Lyon 111 Partner Director PO Box 347 Real Estate M&A Real Estate St. Gallen 1211 Genève 13 +41 58 249 29 46 +41 58 249 41 74 [email protected] [email protected] KPMG AG Bogenstrasse 7 Kilian Schwendimann PO Box 1142 Senior Manager 9001 St. Gallen Real Estate +41 58 249 36 27 [email protected]

Laurent Aillard Manager Real Estate Suisse Romande +41 58 249 28 15 [email protected]

Christoph Frey Director Tax Corporate +41 58 249 29 71 [email protected]

René Büchi Senior Consultant Real Estate Research +41 58 249 57 96 Editorial deadline [email protected] 9th November 2017

Swiss Real SnapShot! 19 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received, or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The scope of any potential collaboration with audit clients is defined by regulatory requirements governing auditor independence.

© 2017 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.