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.