Swiss Real SnapShot!

In a quandary

Current developments in the Swiss real estate investment market

Spring 2017

Content

Macro-economic 04 overview

06 Office market

08 Retail market

11 Residential market

Direct real estate 12 investments

Indirect real estate 13 investments

High investment 16 activity founded on low interest rates

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

The KPMG Real Snapshot! is also available for Europe, Asia and the Americas. Contact us if you would like to learn more about the global real estate markets. Download publications: www.kpmg.com/Global/en/industry/real-estate

Swiss Real SnapShot! 3 In a quandary Macroeconomic Overview After slowing down in 2015, the Swiss economy developed better than expected in 2016, despite a disappointing final quarter. This relatively stable growth in Switzerland is seen as a positive signal against a backdrop of unsettling international developments including the Brexit vote, the Trump election in the USA, China’s weak growth, a fall in the oil price and the continuing strength of the Swiss Franc. The State Secretariat for Economic Affairs (Seco) continues to expect GDP growth of 1.5% in 2016.

Swiss exports also grew in 2016, reaching a new record high of CHF 210.7 billion according to the Federal Customs Administration (EFSA). Although this growth is mainly due to the excellent performance of the pharmaceutical industry, many industries would appear to have adjusted to the abolition of the exchange rate mechanism to stay competitive. How painful this process was is reflected in the unemployment figures. Last year, employment in the industrial sector declined significantly. Nonetheless, with an unemployment rate of 3.5% in December 2016, the labour market as a whole has developed well, although the number of people in part-time employment has grown, which means that disposable income for private consumption has grown disproportionately. According to the Seco Consumer Sentiment report, job insecurity remains higher than before the exchange rate shock in early 2015 and as a result, people are more cautious in their spending.

The Consumer Price Index is expected to decrease again by 0.4%, a change of +70 %-points from the previous year. The main reason for this negative outlook is low commodity prices. However, there are also other trends which are leading to a lower inflation rate and which may cushion the effect of any future rise in commodity prices. For example, demographic change with a higher life expectancy will lead to a higher savings ratio. In addition, technological progress is gaining momentum, reducing costs on the production side. Combined with the growing networking of markets, these trends are pushing prices down. Moreover, imports are still inexpensive due to the strong Swiss Franc and because of increasing competitive pressure, this is having a direct, as well as indirect effect on consumer prices. However, the slight rise in crude oil prices in 2016 should reduce the negative effect of commodity prices on the 2017 index. Accordingly, economic forecasting institutes expect the index to increase slightly by 0.55% in the current year.

4 Swiss Real SnapShot! Macroeconomic indicators1 Global GDP growth Emerging and Forecast average developing countries 5% Japan 4% Eurozone 3% 2% UK 1% USA

0% Industrialised countries -1% Consumer Price Index Global growth -2% Switzerland -3% GDP growth, unemployment rate and 0% 1% 2% 3% 4% 5% 6% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2018P 2016E 2017P 2017 2018 GDP growth Unemployment rate Consumer Price Index Sources: IWF and KPMG

Sources: BAKBasel, Credit Suisse, KOF, Seco, UBS and KPMG In view of the improved economic trends in the countries The International Monetary Fund anticipates economic which are major contributors to inward migration into growth for industrialised countries of 1.9% in 2017 and 2.0% Switzerland and the implementation of the mass migration in 2018, which is slightly more positive than in October last initiative, a further reduction in migration can be expected in year. In Europe, Brexit and its implementation remain an the short- to medium-term. Since reaching a record high in issue. The UK’s withdrawal from the EU will significantly 2013, net migration reduced in 2016 for the third successive reduce contributions to EU funding and new trade year. At 60,000, inward migration in 2016 was once again agreements will have to be negotiated. The elections in below the 10-year average of 72,000. Moreover, the origins France are also regarded as significant to the further and qualifications of immigrants have changed in recent development of the EU. A shift to the right in France is likely years. According to the State Secretariat for Migration, there to lead to additional turmoil in the EU, alongside the are clearly more immigrants from the Asian and African departure of the UK. When introducing her manifesto, the regions, with the net migration of citizens from the EU and presidential candidate for the National Front voiced her EFTA countries declining. This has led to a reduction in the support for a withdrawal from the EU, and for the average incomes of new buyers in the real estate market, introduction of strict controls on immigration and which is particularly noticeable in the residential sector. The protectionist measures for the French economy. We will also average rental income paid by people coming from EU and have to deal with the impact of policies introduced by the EFTA countries is significantly higher than the rental income government of the new US president. The announcement of which people coming from Asia and Africa can pay. protectionist measures in foreign trade could have a significant impact on the Swiss export industry, and on the Net migration recently successful pharmaceutical sector in particular. 120,000 However, growth in the US could also surpass current 100,000 expectations by means of a fiscal stimulus, thereby generating positive impetus for Europe and Switzerland. 80,000 60,000 40,000 Net migration 20,000

0

-20,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Germany France Italy Spain Portugal Asia Africa Other Countries Total

Sources: BFS, BFM and KPMG

1 E = Expected Value, P = Consensus Forecast

Swiss Real SnapShot! 5 In February 2017, the Purchasing Managers’ Index (PMI) was 3.2 points higher than at the end of January at 57.8 points, Office Property Market which means that the PMI is at its highest level since April 2011 and is far in excess of the growth threshold of 50 Despite the oversupply of office space, investment in points. Two years since the Swiss National Bank (SNB) construction continued in 2016. The volume of office abolished the EUR / CHF minimum exchange rate building projects with planning approval in 2016 was on par mechanism, the economic condition of the industrial sector with the long-term average of just under CHF 2 billion p.a. appears to be stable again. The stabilisation of the EUR / and has therefore not changed year-on-year since 2013. CHF exchange rate and improvement of the PMI as an early Planning volumes reduced significantly in the principal cities indicator suggest a healthy year for the Swiss economy as a of Zurich (-31%) and Geneva (-67%). Around half of the whole. office space is planned for owner occupation. In the large cities in particular, the volume of new-build space Purchasing Managers’ Index (PMI) constructed for rent is expected to reduce. However, the

60 1.25 supply of existing space is likely to increase again, partly as

58 CHF/EUR exchange rate 1.2 the result of companies relocating to owner-occupied space. 56 With the exception of Zurich and Geneva, the supply of 54 1.15 new-build space is expected to increase. 52 1.1 50 48 1.05 A significant increase in demand is not expected this year. PMI Index 46 1 According to the Federal Statistical Office, office 44 0.95 42 employment has been practically stagnating since 2013 and 40 0.9 currently stands (2016) at 1.35 million (1.19 million full-time equivalents). In addition to the generally low level of growth, Jul 14 Jul 15 Jul 16 Jan 14 Jan 15 Jan 16 Jan 17 Sep 14 Sep 15 Sep 16 Mar 14 Mar 15 Mar 16 Nov 14 Nov 15 Nov 16 the decline in employment in the financial and insurance May 14 May 15 May 16 sector (-0.8% since last year) also contributed to this PMI Growth threshold CHF/EUR exchange rate stagnation. The negative pressure on margins, regulatory Sources: Procure, Credit Suisse, SNB and KPMG costs and technological progress continue to shape the tense financial sector environment.

Vacancy continues to play a key role in the market for office space. In 2016, the vacancy rate grew again in Bern (+10%), but reduced in Zurich (-7%), Geneva (-1%) and Basel (-10%). However, based on a total availability of ca. 500,000 sq.m of

Changes in typical office employment by sector

6% 160 Index of changes in employment 5% 150 4% 140 3% 130 2% 120 1% 110 0% -1% 100 Employment growth y-o-y -2% 90 -3% 80 H1 2000 H3 2000 H1 2001 H3 2001 H1 2002 H3 2002 H1 2003 H3 2003 H1 2004 H3 2004 H1 2005 H3 2005 H1 2006 H3 2006 H1 2007 H3 2007 H1 2008 H3 2008 H1 2009 H3 2009 H1 2010 H3 2010 H1 2011 H3 2011 H1 2012 H3 2012 H1 2013 H3 2013 H1 2014 H3 2014 H1 2015 H3 2015 H1 2016 H3 2016

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

Sources: BFS and KPMG

6 Swiss Real SnapShot! office space in these four cities2, the figures are still high. encouraging several companies to relocate. This will affect Despite the renewed rise in the vacancy rate in Bern (the the spread of asking rents within the various city districts. city excluding its conurbation), the trend is slightly positive, At the same time, the expansion of available space along with the office market appearing to gradually stabilise again the route of the CEVA will increase competition between since Swisscom relocated to the municipality of Ittigen in properties and put pressure on existing space. The various 2014 and the PostParc was completed in 2015 (change in incentives granted to encourage tenants to conclude leases vacancy - 2016: +10.3%; 2015: +119.3%; 2014: +33.2%). are not shown in the statistics and therefore asking rents which are published without information on incentives (such The length of time office space is advertised in Switzerland as tenant improvement contributions or discounts) are doubled to an average of 150 days in the three years overly optimistic. between early 2014 and the end of 2016. There was little registered demand, especially for available office space with Asking rents for office space in the principal centres poor public transport links. A property with the highest quality of public transport links was advertised for half as 180 170 long as a comparable property with just average-quality 160 connections. Larger office units and properties with above- 150 average comparable rents are still difficult to let. 140 130 120 Office vacancies in the principal centres 110 Rental Prices Index 100 600,000 90

500,000

400,000 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 Basel Bern Geneva Zurich 300,000

200,000 Sources: WP and KPMG

100,000

Vacant office space in sq.m The office market will continue to face uncertainties and 0 structural challenges in the near future. Hot-desking, co-working and even home offices are now more widely 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 accepted and this is affecting traditional tenant space Basel Bern Geneva Zurich planning. The office segment will undergo a period of Sources: City statistical offices and KPMG structural change in the medium-term, driven by increasing digitaliziation which will also characterise office work. The continued tenant-friendly market is encouraging many However, this will also create opportunities4 for Switzerland tenants to negotiate better conditions for their existing as a location, which must be exploited. premises. This is impacting increasingly on asking rents. In Zurich, these are not moving much (-0.61%), and they are With new, more diverse and specific requirements for office also stagnating in the city of Bern following a period of space, marketing efforts will continue to grow in this slight increase (+0.01%). In Basel, asking rents have been sustained tenant-driven market. Public transport links and falling since 2013 (-1.52% in 2016). With asking rents now bespoke solutions are likely to remain key success factors. lower in the city centres, this office space will start to Due to the moderate economic outlook, growth in demand become interesting again for price-sensitive companies. In for office space is expected to remain modest this year. Zurich for example, Swica (Zurich HB) and Adecco (Zurich Seefeld) have announced their moves to the city centre. In Geneva, asking rents increased in the second half of 2016 (+1.0%), however they have been unable to match the record levels registered in the first half of 2013. With the completion of the CEVA3, more movement is expected in the Geneva office market in the next few years. Improved travel times and accessibility by public transport are

2 According to the city statistical offices 3 Cornavin - Eaux-vives – Annemasse railway line; ceva.ch 4 See “Shaping Switzerland’s digital future”: kpmg.ch/digital.

Swiss Real SnapShot! 7 convenience stores in highly accessible locations recorded Retail Property Market good sales figures. The trend towards a denser, easily accessible retail network with smaller store formats The Swiss retail trade is in a state of transition. Retail sales continues. For example, the Coop Group was able to expand fell sharply again by 4.8% in 2016 (2015: -3.2%). The its sales in its new store formats. Media Markt is also growing importance of online retail and the continued changing its strategy, announcing new, smaller formats. strength of the Swiss Franc are putting pressure on the Although traditional stores continue to face difficulties in the industry. Nonetheless, according to the Federal Statistical intense competition with online retail, e-commerce also Office, consumer spending rose significantly by 10 index requires agility, as seen in the examples of Coop and Media points to -3 points between the final quarter of 2016 and Markt. Retailers are relying increasingly on high-quality first quarter of 2017; however, due to inflation, the space with a high customer frequency and are thereby purchasing power of Swiss households will not grow endeavouring to transform on-site shopping into an overall significantly over the coming year. In addition, shopping experience. tourism is still attractive for Swiss consumers. Credit Suisse forecasts a slight decline in retail sales of 0.2% for 2017. Shares of online retail5

180 12% Retail sales and consumer sentiment index 170 10% 115 30 160 % of online retail 8%

Consumer Sentiment Index 150 110 20 140 6% 130 4% 105 10 120 2% Sales (2008 Index) 100 0 110 100 0% 95 -10 90 -2% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Indexed retail sales

90 -20 2020P

85 -30 Online retail as a % of total sales (right axis) Total sales excluding fuels (left axis) Online retail (left axis) Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013 Jan. 2014 Jan. 2015 Jan. 2016 Jan. 2017 Sources: BFS, GfK and KPMG Seasonally-adjusted retail sales in nominal terms Seasonally-adjusted retail sales in real terms In view of this, the ca. 8,600 sq.m reduction in the volume Consumer Sentiment Index (right hand scale) of vacancies6 in the cities of Basel (-39.9%, to 10,600 sq.m), Sources: BFS, Seco and KPMG Bern (+17.1%, to 3,200 sq.m), Geneva (+5.2%, to 18,200 sq.m) and Zurich (-48.7%, to 3,000 sq.m) appears Traditional retail lost further market share to online retail surprising. The most significant decrease of 7,000 sq.m was over the past year. According to data from the Federal recorded in Basel, which is unexpected given its proximity Statistical Office and the GfK, online retail’s market share to the Swiss border. The reduction in vacancies is due, inter had already risen to 8.3% of total retail in 2016 (excluding alia, to lower asking rents, increased concessions being fuels). This corresponds to an increase of 10.6%, based on a made to secure contracts and greater marketing activities. 7.5% market share in 2015. Even conservative estimates This positive trend is likely to continue over the coming year. expect online retail’s share to reach ca. 10% by 2020. In the A major redevelopment was announced with the analysis of the 2016 Swiss Real Estate Sentiment Index repositioning of the Stücki Center. 14,000 sq.m of the (sresi®) by KPMG, 70% of the survey respondents expect original sales area of 33,000 sq.m is to be used for a online retail’s market share of total retail to increase to over Megaplex cinema. As a result, this space will not be 25% by 2020. After initial hesitation, the big market players included in the sales space statistics for the following year. in the retail trade have now definitely entered the online In addition to the pressure on prices, competitive pressure business. This enabled Coop to expand its sales in online in the retail trade is encouraging retailers to hold onto their retail (including Siroop and Microspot) by 14.6% between existing retail space where possible, thereby encouraging 2015 and 2016. In the case of the Migros Group, their total them to seek out any available new space to expand their e-commerce sales (including Digitec Galaxus, LeShop.ch) sales network. On the one hand, the low vacancy rates can grew by 21.6%. Despite the overall rather dull prospects for traditional retail, there has been some positive momentum 5 P = Consensus Forecast in the market for retail space over the past year. Food and 6 Data from the city statistical offices

8 Swiss Real SnapShot! explain the successful letting performance and the concessions made to tenants.

Retail vacancies

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 Vacant retail space in sq.m 5,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016

Basel Bern Geneva Zurich

Sources: City statistical offices and KPMG

On the other hand, there is more caution evident in terms of investment. Outside the prime locations, investors are often only willing to invest in mixed-uses with residential space and, typically, with relatively small retail units on the ground floor. As a result, the construction of new retail space has reduced significantly. In Zurich, for example, there has been a reduction in the volume of construction of retail and commercial properties following a period of volatility. The investment volume in construction decreased by 22% to CHF 433 million between 2012 and 2016.

Realized construction costs in department stores and office buildings in Zürich

600,000 550,000 500,000 450,000 400,000 350,000 300,000 250,000

(in CHF 1,000) 200,000 150,000 100,000

Volume invested in construction 50,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2 015 2 016

Department stores / high street shops

Sources: City of Zürich Statistical Office and KPMG

Swiss Real SnapShot! 9 The effects of the downturn in sales in traditional retail are noticeable in the market for retail space. According to REIDA, the median rent for newly concluded leases in Switzerland fell by 6.3% to CHF 320 per sq.m p.a. in 2016. However, despite the reduction in vacancies, the space available in the four principal centres is still high at 35,000 sq.m. Retail tenants have been exploiting their strong negotiating position for new contracts and lease extensions. This is reflected in the fall in asking rents, which was most pronounced in Basel at -8.9% compared to the previous year. In Zurich and Geneva, asking rents for retail space are unchanged at -0.1% and 0.0% since last year. They have risen only slightly by 2.8% in Bern7, which is mainly due to a basic rate effect caused by the fall in asking rents since 2013.

Asking rents for retail space in the principal centres 200

180

160

140

120

Rental Prices Index 100

80 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

Basel Bern Geneva Zurich

Sources: WP and KPMG

The market for retail space remains competitive this year, although the retail trade is unlikely to grow in 2017. However, online retail will continue to grow and if purchasing power remains unchanged, it will assume further market share from the traditional retail trade. Location and footfall remain the key success factors in the highly competitive retail business. Demand will remain high for retail space in high-frequency locations in major cities, although rents may now have reached their peak. In the case of larger retail units outside the high footfall locations, the securing of an anchor tenant is essential for the overall marketing success. Major tenants are aware of their central role and of the negotiating position accompanying this. Despite the moderate level of construction activity, the industry expects to see rise in vacancies and fall in rental incomes outside the top locations over this year.

7 According to the Wüest Partner Asking Rental Price Index

10 Swiss Real SnapShot! existing rents have tended to fall over the past few years as Residential Property Market a result of reductions in interest rates. Since 2008, the reference interest rate has been adjusted downwards from The high level of new construction activity in recent years 3.5% to 1.75%, which entitles tenants to demand a and the reduction in net migration have led to a rise in cumulative rent reduction of 17.4%. According to the SNB, vacancies in all regions. In Switzerland as a whole, the the average mortgage rate (based on a 10-year fixed term) vacancy rate has risen for the fifth successive year, to 1.3%. was 1.67% at the end of 2016. This figure fell to 1.64% at The higher volume of vacancies in the major cities have the beginning of March 2017. As the average mortgage rate slightly reduced tensions in the housing market. In a survey is rounded to a quarter per cent to determine the reference conducted by the Zurich City Development and Population interest rate, the reference interest rate would reduce to Office, 43% of respondents said they were finding it difficult 1.5% if the mortgage interest rate is lower than 1.63%. If to find a place to live. This is a significant fall from 56% in the reference interest rate is once again lowered, this could 2012. The most frequently mentioned reason for inward entitle tenants to demand a further rent reduction of 2.91%. migration to Zurich in 2016 was the deliberate move to the This means that the residential sector is faced with a further city (71%), followed by further education / training (48%), potential fall in rental income. shortening the distance to the workplace (48%) and the residential environment (56%). Housing supply was named Changes in the benchmark interest rate the main reason for outward migration. One-third of 1.80% 2.00 respondents said they had not found a suitable or affordable 1.75% 1.50 apartment. 1.00 1.70% 0.50 Vacancy Index 1.65% 0.00 2.0% 1.60% 1.8% -0.50 1.6% 1.55% -1.00 1.4% 1.50% -1.50 1.2% 1.0% 0.8% 0.6% 0.4% 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 0.2% SNB target range (right axis) 0.0% Mortgages 10-year fixed rate (left axis) Mortgage reference interest rate (left axis) East Ticino

Zurich Yield on 10-year federal bonds (right axis) Region Central Espace 3-month libor (right axis) Mittelland Northwest Switzerland Switzerland Switzerland Switzerland Lake Geneva Sources: SNB and KPMG 2012 2013 2014 2015 2016

Sources: BFS and KPMG The proportion of the elderly population in Switzerland is growing steadily. According to the Federal Statistical Office’s In the fourth quarter of 2016, the number of building permits forecast8, the 40 to 49-year age group will account for the granted for rental apartments was 1.9% lower than at its largest share of the total population at 14.8% in 2045. The peak in July of the same year but remains very high at 13% trend clearly points towards an ageing population in compared to the previous year. Current forecasts do not Switzerland. While age groups under 40 years old are suggest a fundamental change in the interest rate structure stagnating or declining, those aged over 40 years old are for 2017. Accordingly, a large inflow of capital is expected in growing. the real estate market in 2017 and given the lack of investment opportunities in existing properties, a higher level of construction activity in rented accommodation is expected. At +0.1%, quality-adjusted asking rents barely increased in December 2016 compared to the previous year. While the supply of properties in Zurich remained virtually unchanged at ca. +0.1% compared to the previous year, they have been falling in the cantons of Geneva and Vaud since February. As at 1st December 2016, they were -1.4% 8 Federal Statistical Office, population trends 2015-2045. Source: https://www.bfs.admin. compared to the previous year. In contrast to asking rents, ch/bfs/de/home/statistiken/bevoelkerung/zukuenftige-entwicklung.html

Swiss Real SnapShot! 11 Age structure in the Swiss population Indexed changes in current and asking rents

160 16%

14% 150

12% 140 10% 130 8%

6% 120 population in % Indexed changes Swiss residential 4% 110 2% 100 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 Existing rents Asking rents 0-9 years 10-19 years 20-29 years 30-39 years 40-49 years 50-59 years 60-69 years 70-79 years Sources: WP, BFS and KPMG 80-89 years 90-99 years 101 years or older

Sources: BFS and KPMG The downturn and structural change in inward migration, as well as the moderate economic outlook, would suggest that For the first time in more than 7 years, asking rents have rents will continue to stagnate in 2017. In the short- to been falling. For example, the Rental Price Index in medium-term, the inward migration of people from lower Switzerland dropped by 0.6% (02.2016 / 02.2017) and in the income backgrounds will demand smaller, cheaper housing. cantons of Geneva and Vaud by 2.6% (02.2016 / 02.2017). This trend is likely to be reinforced by demographic changes over the long-term. After years of high construction activity, The gap between market and existing rent, which has the residential market is also partially saturated. steadily widened over the past few years, is slowly beginning to close. Where the indexed difference was 30 points in 2015, it was just 27 points in 2016.

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 Sept. 2009 Sept. 2010 Sept. 2011 Sept. 2012 Sept. 2013 Sept. 2014 Sept. 2015 Sept. 2016

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

Sources: homegate.ch and KPMG

12 Swiss Real SnapShot! Net yields according to use (transaction-based)10

Direct Property Investments th 7% 70 percentile

6% Median According to the MSCI9, direct real estate investments were unable to reach the levels of the previous year (6.6%) with a 5% 30th percentile total return of 6.4% over all property categories. Whilst the 4% MSCI cashflow yield reduced slightly to 3.9% in 2016, the 3% capital growth return increased to 2.5%. 2%

1% Multi-asset investors such as insurance companies and pension funds are still looking for alternatives to very low- 0%

yield fixed-income investments. There is a focus on Core 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 assets with strong location factors, long-term or well- Residential Mixed uses Commercial uses diversified tenancies and high tenant covenant strengths, and therefore the transaction yields for these properties are Sources: REIDA and KPMG falling. According to REIDA, the median net transaction yield for the residential sector has reached an all-time low of The performance of Swiss direct real estate investments, 3.6%. The net transaction yield for commercial uses has which is still good compared to equities and bonds, is driven declined from 4.9% to 4.5%. The declining transaction yield once again by the positive change in the capital growth is probably attributable to, next to higher transaction prices return due to low interest rates. An increase in interest rates for core locations, a lower trading volume for peripheral will only affect the positive contribution made by the capital locations. growth return on the overall return later. The cashflow yield has declined gradually over the past few years in response to positive capital growth. In a climate of increasing vacancies and stagnating or declining rents, cashflows will come under pressure. Whilst asset management has been key to the success of the commercial segments for several years, its significance is also likely to increase in the residential sector.

9 Previously IPD Index 10 Net yield before transaction divided by transaction price.

Performance of Swiss real estate investments (valuation-based)

12%

10%

8%

6%

4%

2%

0%

-2% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 All Uses Residential Offices Retail

Cashflow yield Value change return Total return

Sources: MSCI and KPMG

Swiss Real SnapShot! 13 commercial real estate funds, they range from 10% to 25%. Indirect Property Investments The preference for residential properties observed in the direct real estate investment market is therefore also largely Real estate investments listed on the stock market reflected in the indirect investment market. An exception is remained comparatively stable in 2016 despite the volatility Streetbox Real Estate, with a premium of 67.5%. Higher following the abolition of the Euro-Franc minimum exchange surcharges are also paid on net asset values in the case of rate mechanism. In this climate of low interest rates and listed real estate companies. Shares in Intershop have the limited availability of suitable direct real estate investment highest premium at 77.5%, which even exceeds the rate opportunities, indirect real estate investments are still very applicable in August 2016 after a fall in the second half of the popular. However, towards the end of last year, prices of year. The second highest premium of 39.0% will be paid at property shares were considered by some market the end of March 2017 for Investis, which has only been participants to be too high, leading to price drops in the listed since last June. By contrast, four companies are being second half of the year. traded at a discount.

At 7% for listed real estate funds and 13% for real estate The strong demand for indirect real estate investments is shares at the end of December 2016, the indices were also reflected in the capital raised for closed-ended significantly higher than in 2015. investment funds. Most placements of established investment products in the past year were exaggerated. At Lying at between 10% and 50% and with a capital-weighted CHF 3.5 billion, the cumulative inflow of capital is slightly average premium of 32.5% as at the end of March 2017, lower than in the previous year (CHF 4.1 billion); however, premiums of listed real estate funds are still high. The there is still considerable activity in the indirect investment correction in the second half of 2016 from 2.8% (end of market. In addition to Investis, Varia US Properties also August - end of November) had little significant impact. A completed its IPO in 2016, whereby two real estate considerably higher surcharge is paid for funds in the companies were newly listed on the SIX last year. This year, residential sector, with premiums at 25% - 50%. The several real estate investment funds have already started premiums of three funds, La Foncière, Immofonds and Fonds raising capital again. At the end of February, the total sum of Immobilier Romand (FIR), are even above the 50% mark. For funds raised was CHF 374 million (previous year CHF 85 million).

Performance of listed real estate investments 140 1.3%

130 Change in 10-year federal bonds

0.8% 120

110 0.3%

Change in Index 100 -0.2% 90

80 -0.7% Jul 16 Jan 16 Apr 16 Jan 17 Oct 16 Jun 16 Feb 16 Dec 16 Sep 16 Mar 16 Nov 16 Aug 16 May 16

Indexed change in overall return for real estate funds Indexed change in overall return for real estate shares Indexed change in SMI Yield of 10-year federal bonds

Sources: SWX, SNB and KPMG

14 Swiss Real SnapShot! Flow of capital into listed real estate investments in Switzerland

800 4,500 700 4,000 capital in CHF million Cumulative flow of 600 3,500 3,000 500 2,500 400 2,000 300 1,500 In CHF million 200 1,000 100 500 0 0 July May April June March August January October February November December September Real estate funds share issue Cumulative flow of capital 2015 Real estate companies Cumulative flow of capital 2016 Real estate companies share FK Real estate companies share IPO

Sources: Bank J. Safra Sarasin and KPMG

There was little reaction by indirect real estate investments to the rise in long-term interest rates towards the end of last year. Although interest rates have already fallen below their minimum level, a high proportion of investors seem to expect them to fall further.

Swiss Real SnapShot! 15 difficult for investors to acquire existing properties without High investment activity diluting the return on the portfolio. This lack of adequate investment opportunity has resulted from the tendency of founded on low interest rates investors to develop real estate projects themselves or to enter into a development partnership at an early stage of a Over the past year, real estate investments were very project. Another means of easing investment pressure on popular with many investors. The sustained high real estate is to purchase portfolios or companies at home construction activity, increasing real estate allocation in the or abroad. In January, Baloise announced the expansion of portfolios of institutional investors and record high its real estate portfolio by up to CHF 288 million through the performance of real estate funds and real estate shares are acquisition of a majority stake in Pax Anlagen AG, with the due to the higher relative attractiveness of the asset class. intention of acquiring shares in a free float. Another example According to the Credit Suisse Pension Fund Index, pension is Vaudoise Insurance Holding Ltd acquisition of the entire funds’ real estate quotas increased to 23.0% by the end of share capital of Dr. Meyer Asset Management AG and 2016. Investments in indirect investments (+2.1%-points) Berninvest AG announced at the end of March, which have seen higher growth than direct investments included more than CHF 1.4 billion worth of assets under (+0.4%-points). Some of this is attributable to valuation- management. based capital growth, particularly for direct investments, which is why the trend tends to be overstated by the The fundamental data for commercial space has been statistics. negative for some time and the housing market has been showing initial signs of saturation for over a year. However, Real estate investments held by pension funds as a percentage due to the low interest rates and continued attractive yield of their total investments gap between real estate investments and fixed-interest, 24% considered secure bonds, investors are unlikely to turn their 23% backs on real estate as a sought-after investment class. 22% 21% Although the interest rate forecasts for medium- to long- 20% term maturities are expected to rise slightly in the coming 19% months, investment and construction activity in both the 18% residential and commercial sectors are likely to remain high. 17% H1 H2 H3 H4 H1 H2 H3 H4 H1 H2 H3 H4 H1 H2 H3 H4 H1 H2 H3 H4 Against a backdrop of rather subdued economic trends and 12 12 12 12 13 13 13 13 14 14 14 14 15 15 15 15 16 16 16 16 reduced migration, the supply quota is expected to Sources: PK Index by Credit Suisse and KPMG increase, which will affect cashflows and therefore net yields. Increasingly, real estate investors are appreciating Insurers also remain very active in the real estate market. the benefits of asset management in their efforts to The value of the real estate assets of the ten leading Swiss minimise shortfalls in income. insurance companies increased by 35% between 2010 and 2015 according to CS. In addition to acquisitions, other contributions to this rise came from positive capital growth, particularly in 2012, and demand-driven purchase prices. This compression of transaction yields made it increasingly

16 Swiss Real SnapShot! Indexed yields for bonds and real estate investments

300 5.0% 4.5% 250 4.0% 200 3.5%

150 3.0% 2.5% 100 2.0% 50 1.5% 1.0% 0 0.5% -50 0.0% 01.01.2009 01.04.2009 01.07.2009 01.10.2009 01.01.2010 01.04.2010 01.07.2010 01.10.2010 01.01.2011 01.04.2011 01.07.2011 01.10.2011 01.01.2012 01.04.2012 01.07.2012 01.10.2012 01.01.2013 01.04.2013 01.07.2013 01.10.2013 01.01.2014 01.04.2014 01.07.2014 01.10.2014 01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

10-year federal bonds SXI Real estate companies Real estate funds Swiss Real Estate Index Difference in yield for direct real estate investments

Sources: Thomson Reuters and KPMG

Index of abbreviations

BAK Basel BAK Basel Economics AG BFM Bundesamt für Migration Schweiz (State Secretariat for Migration) BFS Bundesamt für Statistik Schweiz (Federal Statistical Office) GfK Gesellschaft für Konsumforschung, Marktforschungsinstitut der Schweiz (Institute for Consumer Research, Market Research Institute for Switzerland) IWF Internationaler Währungsfonds (International Monetary Fund) KOF Konjunkturforschungsstelle, Schweizer Wirtschaftsforschungsinstitut der ETH (Swiss Economic Institute) MSCI Morgan Stanley Capital International PMI Purchasing Managers’ Index REIDA Real Estate Investment Data Association Seco Staatssekretariat für Wirtschaft Schweiz (State Secretariat for Economic Affairs) SIX SIX Swiss Exchange SNB Schweizerische Nationalbank (Swiss National Bank) 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 • Analysis of digital readiness

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 IT 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 Arnaud de Montmollin PO Box 1142 Senior Manager 9001 St. Gallen Real Estate Suisse Romande +41 58 249 28 17 [email protected]

Kilian Schwendimann Senior Manager Real Estate +41 58 249 36 27 [email protected]

René Büchi Senior Consultant Real Estate Research +41 58 249 57 96 [email protected]

Editorial deadline 1 April 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.

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