Swiss Real SnapShot!

Builder Interest Rate

Current developments in the Swiss real estate investment market

Autumn/Winter 2018

Content

Macroeconomic 04 Overview

Office Property 06 Market

Retail Property 07 Market

Residential Property 09 Market

Direct Property 11 Investments

Indirect Property 12 Investments

Residential Property 14 in the Canton of Vaud

Swiss Real SnapShot! 1 2 Swiss Real SnapShot! Introduction

Dear Sir or Madam

KPMG Swiss Real SnapShot!, published twice a year, 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! concentrates on a global observation. Regional deviations are commented occasionally in a focus article.

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

Turn to page 16 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 Builder Macroeconomic Overview At the end of Q3 2018, the Swiss economy is looking at a bright future. The State Secretariat for Economic Affairs (SECO) is anticipating further positive momentum in both Interest foreign trade and the domestic economy, and by October 2018 it again increased its forecast for GDP growth to 2.9% for the year.

After the spring of 2018, when Credit Suisse and UBS had Rate assessed economic growth to be even lower, namely at 1.7% and 1.8%, both banks now agree with SECO’s forecast thus increasing their estimates to 2.7% and 2.9% respectively. At 2.88%, the average evaluated by the forecasting institutes in the consensus forecast practically matches SECO’s expectations, after standing at 2.1% in H1 2018.

With strong economic prospects – and with population growth also slowing – the situation in the Swiss labor market continues to tighten. In H2 2018, the Swiss forecasting institutes are revising their assessments of the unemployment rate downwards once more. As a result, the consensus unemployment forecast for the unemployment rate as at the end of October 2018 has been lowered again to an average of 2.6% (Spring 2018: 2.9%). For 2019, a further reduction in unemployment (to 2.4%) is expected, despite economic growth weakening to 1.7%.

Over the course of the year, anticipated inflation for 2018 has been revised significantly upwards. Whilst the consensus forecast for the consumer price index in the spring still stood at 0.5%, in October the forecasting institutes unanimously adopted an inflation rate of 1.0% for the current year. Inflation of 0.9% is expected for 2019. Thus, the forecasting institutes agree that the inflation which has prevailed over the past year (0.5%) – after a phase of stagnating consumer prices since 2009 – will continue.

Macroeconomic indicators1 5% Forecast average 4% 3% 2% 1% 0% -1%

and Consumer Prices Index -2%

GDP growth, unemployment rate -3% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018P 2019P

GDP growth Unemployment rate Consumer Prices Index

Source: 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! Global economic prospects remain positive. The Net migration International Monetary Fund expects global GDP to grow by 100,000 3.9% for both the next two years. After an initial increase at 80,000 the start of the year, the 2018 forecast for industrialized countries increased once again to 2.4%in the second half. 60,000 Positive growth rates are also forecast in all regions for 40,000

2019. However, the IMF expects a slowdown to 2.2% in the Net migration growth rate in the advanced economies next year, whilst 20,000 growth forecasts in emerging and developing countries 0 predict an increase, from 4.9% this year to 5.1% in 2019. -20,000

The reasons given for the lower forecasts are the higher 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018L risks resulting from the planned exit from an expansionary Germany France Italy monetary policy, rising oil prices worldwide, the Spain Portugal Asia implementation of Brexit and budget deficits in some Other Countries Africa Total European countries. Overall, and despite the political Source: BFS, SEM and KPMG tensions in world trade, the global economic outlook is optimistic for Switzerland as an exporting nation. In December 2017, the Purchasing Managers’ Index (PMI) peaked at 65.6, its highest level since February 2011. At an Global GDP growth average of 62.9 in H1 2018, this level could no longer be reached. The index fell in the third quarter and by October Emerging and developing countries 2018 it stood at 57.4, which still is well above the growth Japan threshold. The KOF economic barometer has been

Eurozone fluctuating around its long-term average of 100 since May 2018 and, at 100.1 at the end of October, it is predicting UK slower growth than the PMI. According to KOF, it is very USA striking that the slowdown is evident across different Industrialised indicators. Besides a marked decline in the manufacturing countries sector, the indicators for the construction industry and Global growth banking and insurance institutions, as well as the consumer 0% 1% 2% 3% 4% 5% 6% and export indicators have all dropped. 2018 2019

Source: IMF and KPMG Purchasing Managers’ Index, KOF economic barometer and EUR – CHF exchange rate According to the State Secretariat for Migration (SEM), with 140 1.8 net immigration of 53,000, net migration fell in 2017 for the EUR – CHF exchange rate 1.6 fourth time in a row to its lowest level for the past ten years. 120 1.4 100 In its reference model, the Federal Statistics Office (BFS) 1.2 expects annual immigration to remain static at around 80 1 60,000 until 2030 and to stabilize at 30,000 until 2040. In 60 0.8 0.6 2018, net immigration up to the end of September had 40 0.4 reached 37,100. Therefore immigration to the end of the year PMI and KOF barometer 20 0.2 should once again turn out lower than in the previous year. 0 0 200 1 200 2 200 3 200 4 200 5 200 6 200 7 200 8 200 9 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8

...... n n n n n n n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a J J J J J J J J J J J J J J J J J J

EUR – CHF exchange rate PMI KOF barometer PMI growth threshold KOF barometer 10-year average

Source: Procure, Credit Suisse, SNB, KOF and KPMG

Overall, the outlook for the Swiss economy is promising, and – despite minor corrections in 2019 – positive growth rates can be expected over the short to medium term.

Swiss Real SnapShot! 5 major Swiss cities in 2018: Basel (-2.8%), Bern (-13.1%) and Office Market Zurich (-20.7%). In Geneva, in contrast, office space vacancy increased significantly again in 2018, after declining by In the Swiss office space market, despite the strong 43.7% last year. Due to the situation in Geneva, total vacant economic environment, the marketing situation remains office space in the four cities has increased again, to around quite difficult. The decline in immigration, the ageing 480,000 sq. m. Nevertheless, even in Basel, Berne and population and the sluggish employment rate continue to Zurich, despite the renewed fall and the positive economic exert pressure on the demand side. However, the office outlook, there is no talk yet of a significant relaxation. In employment figures are underpinning the office market in many locations, the vacant office space gives prospective 2018. and current tenants plenty of room to manoeuvre and a negotiating margin, so that asking and contractual rents will According to the Federal Statistics Office, office remain under pressure. employment has been more or less static at around 1.13 million full-time equivalent (seasonally adjusted) between Office space vacancy in the principal centres 2014 and 2017. This year, the good economic prospects seem to be manifesting themselves in office employment. 600,000

In both Q1 and Q2 2018, employment grew by around 500,000 2.65% compared to last year in each case. The miscellaneous economic services sector (Q2: +1.03% 400,000 compared to last year), the independent professional, 300,000 scientific and technical services sector (+0.82%) and the information technology and communications (+0.52%) 200,000 sector have contributed particularly to the growth of full- 100,000 time equivalent employment. Only the financial and Vacant office space in sq.m insurance services experienced negative growth figures, 0 dropping by -0.40% in the first quarter and -0.32% in the second quarter. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Basel Bern Geneva Zurich

Compared to last year, the office space market has Source: City statistical offices and KPMG somewhat recovered as regards vacancy figures in the

Changes in typical office employment by sector (seasonally adjusted)

7% 150

6% 140 5%

130 Index of changes 4% in employment

3% 120 2% 110 1%

Employment growth YoY 0% 100 -1% 90 -2%

-3% 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 Q3 2017 Q1 2018

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! Accordingly, the downward trend in asking rents for office space continued in H1 2018. The most obvious decline Retail Market compared to last year was seen in Geneva, at -7.5%. But asking rents also fell significantly in Basel (-3%) and Berne Retail sales lost their momentum in H2 2018 after an (-2.7%). It was only in Zurich that the change in asking rents unexpectedly positive outcome last year (+1.5%). According was only just negative, at -0.5%. to the Federal Statistics Office, since the beginning of the year nominal retail sales have fallen by around 2.2%, and at Asking rents for office space in the principal Swiss cities the end of September 2018 they were at their lowest nominal level for ten years. 180 170 In January 2018, the quarterly consumer sentiment index 160 stood at 5, putting it in positive territory for the first time 150 since July 2014. The positive trend of the Swiss economy 140 and the improved labor market situation have impacted 130 consumer sentiment. However, the recovery was of only 120 short duration. Dropping back to -7 after only two positive Rental Prices Index 110 quarters, consumer sentiment was back in negative territory 100 as early as July 2018; in October it stood at -6. Despite the 90 positive economic trends, the strongest pressure on consumer sentiment is still coming from insecurity in the

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 H1 2018 job market, with a balance of -44. Basel Bern Geneva Zurich

Source: WP and KPMG Retail sales and consumer sentiment index 110 50

Besides the existing vacancy rates and the declining trend in 40 Consumer Sentiment Index 105 asking rents, despite the positive impetus from the growth 30 20 in employment, the office space rental market still faces 100 10 structural challenges. Often, older premises no longer meet 95 0 modern requirements. They are coming under pressure -10 90 from higher quality or more flexible new premises, so fierce -20 Indexed retail sales competition and intensive marketing can be expected in -30 85 future when tenants change. -40 80 -50 Jan. 2008 Jan. 2009 Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013 Jan. 2014 Jan. 2015 Jan. 2016 Jan. 2017 Jan. 2018

Consumer Sentiment Index Seasonally-adjusted retail sales in nominal terms Seasonally-adjusted retail sales in real terms

Source: BFS, SECO and KPMG

According to the city statistics offices, in 2018 retail space vacancy in Basel, Berne, Geneva and Zurich fell overall by 6%, or 2,500 sq. m, compared to last year. This puts last year’s marked increase (+28%) back into perspective to some extent. Considerable differences can once again be seen between the four major cities. In Zurich22, vacancy has declined by -47%, after a significant increase last year, of +228% (+7,000 sq. m). In Berne, at -11% the trend was also positive. Since 2015, vacancy trends in Basel have been relatively stable, and in 2018 vacancy there was around 1% above last year’s level.

2 In Zurich, only shops larger than 500 sq. m are included in the survey and so the recorded vacancy levels are automatically too low.

Swiss Real SnapShot! 7 Retail space vacancy in the principal centres Asking rents for office space in the principal Swiss cities

50,000 220 45,000 200 40,000 180 35,000 160 30,000 140 25,000 120 20,000

Rental Prices Index 100 15,000 80

Vacant retail space in sq.m 10,000 60 5,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Basel Bern Geneva Zurich Basel Bern Geneva Zurich

Source: City statistical offices and KPMG Source: WP and KPMG

Despite lower vacancy rates in some locations, retail space With domestic and foreign online trade taking a growing remains under pressure, in particular because of the market share, and weak consumer sentiment, there is no continued growth in online trade. In H1 2018, asking rents prospect of a trend reversal in the retail space market. The fell again compared to last year in Geneva (-4.2%), Zurich shift to online retailing or hybrid formats and the decline in (-2.8%) and Berne (-1.2%). An increase in asking rents was sales in bricks-and-mortar retail spaces mean that retailers seen only in Basel, at +2.0%. Therefore, H1 2018 asking are closing poorly frequented locations or reducing their rents for retail space in Basel stood at almost exactly the shop surfaces. There is continued demand for retail formats same level as in 1998. There are signs of continued pressure which complement online retailing, convenience stores and on retail rents when leases are extended or renegotiated. A flexible sales space in prime locations with high levels of similar downward trend in both asking rents and agreed footfall. For property owners in many locations, this results rents is likely to continue in many locations. in lower rental income, higher tenant fluctuation and an increased need for active property management.

8 Swiss Real SnapShot! (2.02%) and Espace Mittelland (1.99%) are above the overall Residential Market Swiss average. Vacancy rates are lower in the more urban major regions of Zurich (0.99%) and Lake Geneva (1.30%), Prospects have also deteriorated in the market for but here too, as in all regions, vacancies have risen again residential space. Because the yield differential compared to compared to last year. Comparing the cantons, at 2.98% fixed-income investments remains attractive, residential Solothurn recorded the highest vacancy rate, as it did last property remains in favor with investors despite the year, followed by Aargau (2.65%) and Jura (2.56%). Again slowdown in net immigration, and so supply is constantly just like last year, vacancy rates were lowest in Zug canton expanding. In the current environment, it is unlikely that the (0.44%), followed by Geneva (0.53%) and Obwalden (0.70). Swiss National Bank will increase interest rates quickly. Consequently, construction investments remain high. Vacancy Rates

2.5% After a slight decline in construction permits granted for new rental homes, to 27,000 units in 2017, the number of 2.0% construction permits granted for homes in 2018 is back at 1.5% the peak level of 2016, at 29,000 units. According to Credit Suisse, compared to the average since 2007, significantly 1.0% more rental homes were approved by local authorities in the 0.5% conurbations (+67%) and other municipalities (+68%) than in the city centers (+38%). Still no significant increase in 0.0% interest rates (which are the strongest driver of the East Ticino Zurich Region Central investment crisis and the high level of construction Espace Mittelland Northwest Switzerland Switzerland Switzerland investment) is expected. Pressure on rents and vacancies Switzerland concerning residential properties is therefore likely to Lake Geneva remain high, particularly outside the city centers. 2014 2015 2016 2017 2018 Source: BFS and KPMG In 2018, at 1.62%, residential vacancies in Switzerland reached a new high point since the end of the 1990s. Since January 2017, rents in Switzerland have been on a Besides the decline in immigration, this is largely due to the downward trend. For Switzerland as a whole, as at the end high level of construction activity. Supply has grown faster of September 2018 the index of asking rents published by than demand, particularly on the peripheries of secondary homegate.ch had again fallen by 0.2% year-on-year. In centers and in rural regions. Accordingly, vacancies in the Zurich, asking rents have increased slightly, by +0.5% major rural regions of Eastern Switzerland (2.08%), Ticino compared to last year. However, at 117.2 (2009=100), last

Asking rents index, quality-adjusted

130 4.0%

125 3.0% 120 Change YoY – Switzerland

115 2.0%

110

1.0% 105

100

Indexed changes in rental prices 0.0% 95

90 -1.0% Sep 09 Sep 10 Sep 11 Sep 16 Sep 17 Sep 18 Sep 12 Sep 13 Sep 14 Sep 15 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Rental Price Index for Switzerland Rental Price Index for the canton of Zurich Rental Price Index for the canton of Bern Rental Price Index for the cantons of Geneva and Vaud Rental Price Index for the canton of Basel Change YoY – Switzerland

Source: homegate.ch and KPMG

Swiss Real SnapShot! 9 year’s index was at the lower end of the levels of 117 to 118 The Federal Office for Migration assumes that immigration seen in recent months, so that the trend in Zurich appears will decline further and the high level of construction activity to be stable. is expected to continue for a while. In the case of new constructions and major renovations, success still depends In the cantons of Geneva and Vaud, after an upward phase on meeting tenants’ needs. This requires careful analysis of from May 2017 to April 2017, quality-adjusted asking rents markets and locations in terms of macro- and micro- are now falling again. In September 2018, the index was location, housing mix and price segment. 2.9% lower than last year. The strongest growth in asking rents was seen in Zug, at +3.2%.

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. According to the Federal Housing Office, only 20% to 25% of households requested a reduction in rent, suggesting that changes in the reference mortgage rate have not been passed on in full to landlords. At the end of September, the average mortgage interest rate, on which the reference rate is based, was at a new low of 1.49%. For the reference interest rate to rise, the average rate would need to reach a threshold of 1.625%. Such a slight increase in interest rates cannot not be expected to initially result in a positive impetus for existing rent income.

Changes in reference interest rate

1.8% 2.0%

1.7% 1.5% 1.0% 1.6% 0.5% 1.5% 0.0% 1.4% -0.5% 1.3% -1.0% 1.2% -1.5% 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 02.11.2017 02.12.2017 02.01.2018 02.02.2018 02.03.2018 02.04.2018 02.05.2018 02.06.2018 02.07.2018 02.08.2018 02.09.2018 02.10.2018

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

10 Swiss Real SnapShot! Net initial yields by use category3 Direct Property Investments 70th percentile Median In recent years, developments in the Swiss property 6% 30th percentile investment market have been determined largely by yield 5% compression. Whilst trends in transaction-based initial yields 4% for direct property investments were relatively stable in the second quarter compared to last year, valuation-based yields 3% for existing investments fell again. 2%

In Q2 2018, net yields for existing direct property 1% 2016 2017 2018 2016 2017 2018 2016 2017 2018 investments declined across all sectors. In the residential Residential Office Mixed use segment, the trend of previous years continued, and according to data from SIV/REIDA the median return fell Source: SIV/REIDA and KPMG from 4.0% in the same quarter last year to 3.8%. The lower yields for mixed/commercial use properties was less With exhausted rental potential and increasing vacancy pronounced, dropping from 4.1% last year to 4.0%. For risks, sound market knowledge, targeted portfolio office properties, the previous trend reversal (from 4.4% in diversification and risk management are becoming more 2016 to 4.7% last year) was again overturned. In Q1 2018, important. With the positive economic prospects in the net yields for existing investments in office properties were United States, Europe and Switzerland, a normalization of back at 2016 levels, at 4.4%. However, differences between interest rates – albeit slow – is expected. This will reduce the 30% and 70% quantiles have increased again in this the relative attractiveness of real estate investments as segment in particular. This suggests that property appraisers returns stagnate or even fall. The specific individual have placed greater weight on the differences between characteristics of individual properties will then become individual office properties. Whilst high-quality office more important. properties in urban locations continued to be held at decreasing yields, yields in peripheral locations remained virtually unchanged. 3 The median and the 70% quantile of net initial yields for mixed use properties in 2018 stands at 3.6% Net yields for existing investments by use category

70th percentile

6% Median 30th percentile 5%

4%

3%

2%

1% 2016 2017 2018 2016 2017 2018 2016 2017 2018 Residential Office Mixed use

Source: SIV/REIDA and KPMG

With a median of 3.0% in the residential segment and 3.6% in the mixed-used segment, an evaluation of initial yields shows that net yields are lower compared to yields for existing investments. For office properties, initial yields at 3.5% are significantly closer to yields for existing investments (4.4%). The difference between the two yields indicates that investors in the commercial segment are less prepared to pay a premium for acquisitions than is sometimes the case for residential properties.

Swiss Real SnapShot! 11 Thus, the premium on quoted Swiss property funds fell Indirect Property Investments markedly, from 25% at the end of March 2018 to 16% at the end of October 2018. Premiums have actually fallen by The yield on 10-year federal bonds has returned to positive 21 percentage points from last year›s peak at the end of territory, at 0.19% in February and 0.16% in April. However, February 2017 (37%) and thus decreased by more than in the third quarter of the year the yield was again mainly 50%. Mark-ups of 46% and 38% are being paid for negative, falling as far as -0.13% in August. At the end of Streetbox Real Estate (62% at the end of March 2018) and October 2018, at -0.01%, the yield for Swiss federal bonds La Foncière (56% at the end of March 2018), as was already was practically zero. After a negative performance in 2016, the case in March of this year. in 2017 the SMI surged upwards, and at the end of December 2017 it was almost 13% above the level at the At an average of 12% at the end of October 2018, beginning of the year. But by H1 2018 the SMI once again premiums over the net asset values of the large Swiss lost considerable momentum, and in mid-July it was back at property companies are still below investment fund the same level as at the beginning of 2017. After major premiums. However, the price corrections experienced by fluctuations, by the end of October the Swiss stock market the property companies were much more moderate had dropped almost 2% below its level at the beginning of compared to those of property funds, averaging 21% by the the year. end of March 2018. Accordingly, the difference in premiums between the funds and the companies had reduced to 4 Exchange-listed property companies in particular followed percentage points by the end of October 2018. Premiums/ the turbulent movements in the SMI. At the end of August discounts of individual property companies vary greatly. At 2018, they were still showing a YTD total return of 3.43%, the end of October 2018, SPS, the largest Swiss property but by the end of October the overall yield had fallen to company, was trading at a premium of 20%. The highest -0.97% (YTD). Whilst property funds were less volatile over mark-up over net asset value, of 54%, was paid for the same period, in return investors downgraded them Intershop, while Züblin lies at the other end of the scale further, with an overall yield of -3.93%. with a discount of 30%.

Movements in quoted property investments

140 1.3%

130

0.8% Change in 10-year

120 federal bonds

110 0.3%

Change in Index 100 -0.2% 90

80 -0.7% Jul 17 Jul 18 Jan 17 Apr 17 Jan 18 Apr 18 Oct 17 Oct 18 Jun 17 Jun 18 Feb 17 Feb 18 Sep 17 Sep 18 Mar 17 Mar 18 Nov 17 Dec 17 Aug 17 Aug 18 May 17 May 18

Indexed change in overall return for property funds Indexed change in overall return for property shares Indexed change in Swiss Market Index Yield of 10-year Federal bonds

Source: SWX, SNB and KPMG

12 Swiss Real SnapShot! In 2016, the volume of new capital raised by exchange-listed Like the yields on direct property investments, in recent property vehicles was already high, but in 2017 it was years indirect property investments also feature low level exceeded by 27%, with a total of around CHF 4.5 billion. At interest rates. Because of the positive economic outlook, the end of October 2018, exchange-listed Swiss property the prospect that the SNB will normalize interest rates is vehicles had raised a cumulative total of around CHF 2.4 increasing. Because the interest rate differential is so billion. This means that, after a record year in 2017, capital important for currency stability, however, it seems likely that inflows are at 2016 levels. With the planned issues of CHF for the time being SNB will wait for the first interest rate 500 million by Swiss Life, CHF 388 million by ZIF increases in the Euro zone. With the mounting reports of Immobilien Direkt Schweiz, CHF 197.1 by Akara Diversity PK increasing vacancy rates and falling rents, there is and CHF 93.6 million by UBS Direct Residential, several increasing nervousness on property markets. Even if initially major capital uptakes are planned for the remaining two there is no decisive change in the interest rates, investors months. seem to be differentiating increasingly in their assessment of individual investment vehicles.

Flow of capital into listed property investments in Switzerland

700 5,000 4,500 600 4,000 capital in CHF million Cumulative flow of 500 3,500 3,000 400 2,500 300 In CHF million 2,000

200 1,500 1,000 100 500 0 0 Jul. Apr. Jan. Oct. Jun. May Feb. Sep. Mar. Nov. Aug. Dec .

Property company IPOs Property company issues Property company borrowings Property fund issues Cumulative capital inflows in 2016 Cumulative capital inflows in 2017 Cumulative capital inflows in 2018

Source: Bank J. Safra Sarasin and KPMG

Table of abbreviations

BAK Basel BAK Economics AG REIDA Real Estate Data Association BFS Federal Statistics Office SBB Swiss Federal Railways CREA Center for Research in Applied Seco State Secretariat for Economic Affairs Economics of the University of Lausanne SEM State Secretariat for Migration ECB European Central Bank SIV Swiss Association of Real Estate GfK Institute for Consumer Research, Appraisers market research institute of Switzerland SMI Swiss Market Index IPO Initial Public Offering SNB Swiss National Bank IWF International Monetary Fund SWX SWX Swiss Exchange KOF The Swiss economic research institute WP Wüest Partner AG of the Federal Institute of Technology YTD TR year-to-date total return PMI Purchasing Managers’ Index

Swiss Real SnapShot! 13 Residential Property Indexed asking rents in canton of Vaud, major regions 135 Region of Lausanne Region of Nyon 130 Region of Morges in the Canton of Vaud Region of Vevey 125 Region of Yverdon Region of La Broye Region of Gros-de-Vaud With GDP growth of 19.4% over the past two years, the 120

Canton of Vaud has one of the highest growth rates of any 115 canton in Switzerland. Between 2008 and 2017, the canton 110 has enjoyed average GDP growth of 1.9% per year, well above the Swiss average of around 1.1%. Over the past ten 105 years, Vaud’s share of Swiss GDP has risen from 7.5% to 100 8.1%. According to CREA (Centre de Recherche en

Économie Appliquée), the trend of recent years will 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 continue this year. Growth forecasts for the Canton of Vaud Source: immodatacockpit.ch and KPMG have once again been revised upwards in the second half of the year, to 3.3% (Centre de Recherche en Économie All in all, given the sustained high level of construction Appliquée) for 2018 and 2.1% for 2019. activity for new apartments, it is unlikely that the trend towards rising rents will continue in the short term – Over the same period, the population of Vaud has risen by particularly in view of the already high housing costs borne almost 16%, or 1.6% per annum. In view of this demographic by households. growth, there has been a very high requirement for new residential space over the past few years. As a result, in spite Implementation of the LPPPL of the 53,071 residential units built in the last ten years (an After the Law on the Demolition, Transformation and increase of 15% in housing stock), with a vacancy rate of Renovation of Residential Buildings (LDTR5) in Geneva, the 1.1% at 1 June 2018 the canton remains undersupplied. The Canton of Vaud has also passed a law to regulate the vacancy rate was only lower in the Cantons of Zug, Geneva, housing market (the LPPPL). In many cases, the LDTR did Obwalden, Zurich and the two Basel cantons. According to not allow investors to increase rents in proportion to the “Perspectives de population 2015–2040” study by the renovation costs – which frequently impeded renovations. government of the Canton of Vaud, in the median scenario Moreover, the complexity of the LDTR unnerved investors, (annual growth of around 1.1%) the population will reach causing them to be hesitant about entering the Geneva around 980,000 by 2040, an increase of over 185,000 within residential property market. This raises the question of the next twenty years. As a result, demand should remain whether the implementation of the LPPPL in Vaud will lead strong in the long term. Based on the current ratio of 1.96 to the same disadvantages. persons per unit, over the next 22 years almost 95,000 new homes will be required, or 4,300 each year. In comparison, The primary goal of the LPPPL is the preservation and over the past ten years housing stock has increased by promotion of residential space to meet the needs of the 5,649 units per year. majority of the population (particularly in quantitative terms). Accordingly, the law affects only municipalities with a In 2016, the cantonal authorities passed the Law on the housing shortage, whose vacancy rate at district level is Preservation and Promotion of Rental Properties (LPPPL4), persistently below 1.5% according to the Federal Statistics which came into force on 1 January 2018. This law aims to Office. The LPPPL provides for further measures for reduce the housing shortage through the preservation of municipality with an acute housing shortage (vacancy rate existing rental housing and to promote the construction of below 1.0%). Also, not all housing is affected by the LPPPL new public housing. To this end, the law provides for, among (see Art. 3)6. other things, granting additional building permits for the construction of social housing.

The lack of housing has led to a strong increase in rents, particularly between 2004 and 2012. In regions where supply is short, rents stabilized at a high level. In 5 LDTR - Loi sur les démolitions, transformations et rénovations de maisons d’habitation economically weaker regions, the impetus to build, together 6 The LPPPL applies to rented homes with more than two, and freehold homes with more than three rooms, which have an area of less than 150 sq. m and an insured reconstruction with the decline in immigration, has recently led to a slight value of less than CHF 750 / sq. m. If the sale of a building is planned, the nature of the relaxation in asking rents. sale is also taken into account. In the case of a sale of an entire residential property with several rental units and a single purchaser who will continue to let them (investment properties), the transaction does not come under the LPPPL. Nor do previously owner- occupied homes or forced sales come under the law. So the law makes it harder to sell condominium apartments. 4 LPPPL – Loi sur la préservation et la promotion du parc locatif

14 Swiss Real SnapShot! Specifically, the law focuses on three main areas: only for the purpose of creating LUPs in a densely populated urban district and if the property has an area of 1. Measures to preserve the rental housing stock: at least 1,500 sq. m. Properties located in a dense urban Owners of residential properties need a permit for area, a cantonal center recognized in a cantonal master demolition, alterations with accompanying change of use or plan or parcels adjoining a property belonging to the renovations leading to an increase in rent. Provided that no municipality are exempted from this practice. In addition, structural alterations are made to the building, renovation the first right of refusal cannot be exercised in the case of works costing less than 20% of the insured value of the a sale within the family8. As regards a transfer between building can be carried out without a permit. For the related companies, there is no indication that it would not renovation of an individual home, an estimate of the share be concerned by a potential expropriation, insofar as there of the building’s insured value attributable to the home in would be a change of ownership in the land register. question is performed. The calculation basis is the surface area of the building attributable to this home compared to Overall, this is a law with numerous measures and a fairly the building’s total surface area. Renovations or changes of restrictive field of application – for the moment at least. On use will be permitted if the affected property is not in a the one hand, a bonus of 10% can be granted if the region for which there is a shortage, if renovations or proportion of LUPs is 15%. On the other, the complexity changes of use appear essential for reasons of safety or and administrative burden involved in renovations and health or if these are in the public interest or make it conversions may increase. In future, whether construction possible to save energy. The relevant department can also costs can be passed on to tenants will depend on a restrict rental increases after demolition, alterations – other theoretical calculation mostly based on the property’s than refurbishments to save energy – or renovations. The insured rebuilding cost. Going forward, if residential impact of the LPPPL on a specific construction project property is subject to the LPPPL it may be difficult to pass depends on the difference between the actual rental on renovation costs to the same extent as before. income and the objective rental income – calculated on the basis of the insured reconstruction value and the site value. Official vacancy rate by district in the Canton of Vaud A yield of 3.5% is applied to this target value in order to Average Districts 2015 2016 2017 2015–2017 determine the building’s objective rental income. If there is a housing shortage, the rent control period lasts for up to Aigle 1. 7 1. 9 2.2 1.91 five years from commencement of the letting of the Broye-Vully 1. 0 1. 5 1. 3 1.23 premises used for demolition, conversion, renovation or Gros-de-Vaud 0.3 0.7 1. 0 0.67 purposes other than housing. If there is a pronounced Jura Nord vaudoise 0.6 0.7 1. 1 0.78 shortfall (less than 1.00% vacant homes), this control can Lausanne 0.2 0.4 0.4 0.35

be extended to a maximum of ten years. Lavaux-Oron 0.7 0.7 0.8 0.74

Morges 0.7 0.7 0.7 0.74 2. The promotion of rental housing stock: Nyon 0.9 0.9 1. 0 0.94 The promotion of rental housing stock is aimed at the creation of not-for-profit homes (LUP77), and so relates to Ouest lausannois 0.3 0.5 0.7 0.50 subsidized housing, homes for the elderly, student Riviera-Pays-d’Enhaut 1. 0 1. 0 0.9 0.97

housing and affordable rental homes recognized as not- Source: LPPPL for-profit. In order to promote the creation of LUPs, local authorities can grant higher utilization rates or set LUP quotas. If at least 15% of the total gross floor space of a building is designated for LUPs, the builder can add an extra 10% of floor space.

3. Purchase and first right of refusal: If a municipality intends to allocate new land to a building zone, it can agree to award the owners of the affected property the first right of refusal by way of an administrative contract if no LUPs are constructed on the property within a prescribed time. Moreover, the municipality has a first right of refusal that allows it to purchase a property which is for sale in an approved building zone. This pre-emptive right can be exercised

8 Descendants, relatives in the ascending line, brothers, sisters, half-brothers, half-sisters, 7 LUP - Logements d’utilité publique spouse, registered partner or cohabitee.

Swiss Real SnapShot! 15 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

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16 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 Postfach +41 58 249 62 72 +41 58 249 77 59 8036 Zürich [email protected] [email protected]

KPMG SA Beat Seger Oliver Specker Rue de Lyon 111 Partner Director Postfach 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 Postfach 1142 Director 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]

René Büchi Assistant Manager Real Estate Research +41 58 249 57 96 [email protected]

Editorial deadline: 9th November 2018

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