The stability of residential properties and their decorrelation from economic fluctuations, especially in good locations, is again evident during the Covid-19 pandemic. While other real estate market sectors are coming under pressure in some respects, the residential market remains attractive. In view of the growing population and steadily rising existing rents, it looks promising for the future.
Location, location, location – real estate investments for security in the crisis
The old adage remains true as ever. The real estate sector has always been about: location, location, location. The crisis resistance of real estate investments in top locations again held true during the Covid-19 pandemic and paid off for investors.
At the same time, however, investors should bear in mind that the various sectors of the Swiss real estate market offer different conditions. The retail sector in particular came under pressure during the coronavirus crisis due to the shift towards more online consumption and further structural changes are foreseeable.
There are also new challenges in terms of office space: the increase in working from home in many sectors plus economic uncertainties have changed companies’ need for floor space. The new form of cooperation requires new room layouts. Demand for office space in attractive and central locations remains high, but the situation in peripheral locations is becoming harder. This exacerbates the polarisation between properties in secondary and prime locations.
Residential remains one of the most attractive sectors
The Swiss residential market remains robust and very attractive. Residential vacancy rates have been low and broadly constant by historical comparison. According to the Swiss Federal Statistical Office (FSO), the vacancy rate for residential property has been between 0.4 and 1.8 percent since 1984. Vacancy rates increased somewhat after the real estate crisis but remained below 2 percent.
The Covid-19 pandemic has failed to shake this stability. Vacancies actually declined in 2021 for the first time in twelve years. The residential market is relatively independent from the economic cycle, but its high tenant ratio of around 60 percent makes it very resilient. This is compounded by annual population growth of around 1 percent according to FSO forecasts. In this environment, Swiss apartment buildings in particular offer reliable security for real estate investments with their intact fundamental data.
Existing rents for residential properties in Switzerland are increasing steadily by historical comparison. They have more than doubled in the last 40 years, with annualised growth of 2.5 percent. This growth is akin to the annual average salary development.1 The stability of existing rents stems from the number of tenants ensuring consistent demand for well-located apartments as well as from tenancy regulations. This stability ensures secure cash flows and makes real estate appraisals particularly stable.
Real estate investments offer solid fundamental data
Real estate investments have an advantage compared to fixed-income investments, mainly due to the persistently low interest rates. The pandemic is in retreat and the economy is almost back to normal. In addition, the labour market is recovering, thus adding impetus to demand for space. The Swiss real estate markets are thus on solid ground for all types of use.
1 FSO, SNB, Wüest and Partner and Swiss Life Asset Managers
Find out more about real estate as an asset class here.
