View of downtown Geneva and the iconic 'Jet d'Eau' fountain, a huge water jet situated in Geneva.

Basel-Stadt and Geneva: insight into cantonal rent control

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Swiss tenancy law: freedom of contract with protection against abuse, while Basel and Geneva have strict cantonal regulations.

In brief

  • Swiss tenancy law generally allows for free determination of rents, provided that a maximum return is not exceeded.
  • The cantons of Basel-Stadt and Geneva introduced cantonal rent regulations to protect tenants and stabilize rent price development.
  • The Genevan LDTR shows complex effects: stabilization of existing rents, but high asking rents and longer rental periods.

Swiss tenancy law is traditionally governed at federal level (Art. 253 et seq. Swiss Code of Obligations (CO)). It states that rents can be freely negotiated by landlords and tenants. However, to avoid abuse, the Federal Supreme Court has imposed a number of restrictions. In a judgement of 26 October 2020, the court ruled that if the reference mortgage interest rate is 2% or less, the net yield may only exceed this reference rate by a maximum of 200 basis points (Federal Supreme Court ruling 4A-554/2019). Due to rising construction costs and growing population, which are leading to rising rents in urban centres, there is growing political pressure particularly in urban cantons to introduce stricter rent regulation. The stabilising effect of such legislation on rents is disputed, particularly by investors, and often has unintended side effects (Footnote 1).

While political initiatives are still being debated in Zurich, the canton of Basel-Stadt already introduced stricter rent regulation at cantonal level in its 2013 Residential Housing Promotion Act (Wohnraumfördergesetz/WRFG, SG BS 861.500) and the 2022 Ordinance on the Protection of Residential Housing (Verordnung über den Schutz von Wohnraum/WRSchV, SG BS 861.540). Due to a lack of statistics, the longer-term consequences of these regulations are currently difficult to assess for investors and tenants. However, a glance at the situation in the canton of Geneva could be informative, as it has had one of the strictest cantonal rental laws in Switzerland for decades: the Loi sur les démolitions, transformations et rénovations de maisons d’habitation (LDTR, rsGE L 5 20).

1

Geneva has aimed to protect tenants and promote renovation through the LDTR since 1983.

Two laws that regulate rents in different ways

As far back as 1983, and in its current form since 1996, the LDTR was introduced in the canton of Geneva with the main aim of preserving the residential housing stock, living conditions and character of the city of Geneva. The law was also designed to protect tenants and provide financial support to owners through subsidies for renovation. To achieve this, 3- and 5-year rent controls were introduced for apartments which had been renovated, demolished or newly built and therefore had above-average building maintenance costs. The cost of this work can only be partly passed on to the tenant and only up to a legally defined rent cap, which is currently set at CHF 3,528 p.a. per room. This cap is adjusted every two years based on the average gross income of taxpayers in the canton. If the previous rent of a renovated or rebuilt apartment exceeds the cap, the rent is set at this level for the duration of the rent control period. The law also prohibits the conversion of residential into commercial space and makes the sale of apartments and houses that were previously let subject to approval.

The Basel legislation (WRFG and WRSchV) is designed to protect and preserve existing affordable and moderately priced residential rental properties, particularly in times of a housing shortage in the canton, which currently has a vacancy rate of less than 1.5%. The legislation prohibits newbuilds replacing existing buildings that do not create a minimum of 20–40% more living space, which in practice is often tantamount to a prohibition. A permit is required for renovation and transformation plans in periods of a housing shortage. Applications are decided by an ordinary, simplified or full authorisation procedure. While the ordinary procedure does not provide for a rent increase, in the simplified procedure up to 50% of value-enhancing investment costs can be passed through to the rent provided the overall increase in the rent does not exceed CHF 80 per month for 2-room flats, CHF 120 for 3-room flats and CHF 160 for 4-room apartments. The Residential Protection Commission has a discretionary range of +/-20%. The full procedure is launched for larger rent increases and the rent determined in this procedure applies for five years.

Comparing the LDTR with the WRFG shows many similarities (see table 1). However, it is worth noting that Canton Basel-Stadt has learned from some of the experiences of the city of Geneva. For example, there is no fixed rent cap based on the number of rooms for conversions and renovations, but in the simplified procedure the renovation costs can be partly passed on, irrespective of the previous rent. Moreover, the Basel rent control only applies when the cantonal vacancy rate is below 1.5%, unlike in Geneva where controls apply at all times. Moreover, by fixing an annual rental cap per room, the city of Geneva gives landlords an incentive to create as many (and therefore small) rooms per apartment as possible, a situation that is often not in tenants’ interests and was corrected by the city of Basel in the WRFG.

2

The effects of the LDTR are disputed: high rent disparity, but no renovation backlog.

What has Geneva achieved with the LDTR?

How EY can help

There is a vigorous debate about the impact of the LDTR and it is often difficult to establish a direct link between the law and its possible effects. However, there are a number of areas where the city of Geneva differs from comparable Swiss cities that do not regulate rents at cantonal level.

 

A comparison of current and new rents (footnote 2) in 2023 (footnote 3) showed that, at 33.5%, Geneva has a significantly higher rental disparity than Zurich (18.1%), Basel (6.8%) or Lausanne (13.5%). While current rents are “only” CHF 279/m2a, the average new rent in Geneva is the highest of the five biggest Swiss cities at CHF 372/m2a. A direct consequence of this high disparity is the long average rental term of 13.7 years in Geneva. With an average rental term of 8.8 and 8.7 years respectively, Zurich and Basel have much lower rental terms by comparison. To summarise, the LDTR seems to have an effect on existing rents, but at the expense of unusually high new rents, which in turn means that tenants stay in their apartments for longer than they need to (“lock-in” effect).

 

A side-effect of rent regulation that is often mentioned is a reduction in renovation work by owners. This reflects the fact that the regulations mean they are unable, or only partly able, to recoup the cost of renovations from tenants, which harms their financial interests. However, an analysis based on the biggest construction database in Switzerland does not seem to confirm this trend in Geneva unequivocally (footnote 4). Based on renovation projects carried out from 2010 to 2022, there was no significant backlog in renovation activity in Geneva compared to other Swiss cities, but there was a different approach (table 2). To get around rent restrictions for whole buildings, landlords seem to decide to renovate from apartment to apartment, which leads to smaller and more numerous projects than in comparable cities (footnote 5). This alternative renovation approach is often less efficient and profitable from the owner’s perspective than a complete renovation of the building or a replacement newbuild, but does enable a gradual renewal of the building stock in compliance with the applicable legislation. It can be assumed that the rents are raised to market level after the end of the rent control period.

3

Basel could follow in Geneva’s footsteps: rental market forecasts highlight possible scenarios.

Scenarios for Basel-Stadt

Given the similarities between the LDTR and WRFG and the geographic and demographic similarities, future developments in Canton Basel-Stadt could resemble those in Geneva. However, it should be noted that the scenarios below depend on various market-related and political factors, which need to be taken into account as well:

  • The discrepancy between current and new rents increases, putting those looking for rental accommodation at a disadvantage.
  • The average rental term increases and tenants tend to stay longer in their apartments than needed (e.g., parents after their children leave home).
  • Due to the uncertainty about how the rules will be applied and a lack of legal rulings, the canton of Basel-Stadt will continue to have low investment and renovation activity in the coming years. Investors seem to be taking an essentially conservative approach in the current market environment.
  • Due to the practical impossibility of putting up replacement newbuilds and the high risk of complete building renovations, landlords will probably, as in Geneva, decide to carry out renovations at apartment level. However, this does not necessarily lead to lower overall investments in the building stock, as the example of the city of Geneva over the last 15 years has shown.
  • Instead of subjecting themselves to long and drawn-out proceedings, landlords will probably choose simplified procedures that only permit limited rent increases after the renovation. However, as in the canton of Geneva, there is a possibility that rents could be increased drastically after the end of the five-year rent control period.

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4

Profitable renovations in Basel: in spite of rent control, follow what has worked in Geneva.

Conclusion

We advise investors in the canton of Basel-Stadt to carefully weigh up different renovation scenarios before submitting a building application in order to use the regulations to their best advantage. Geneva is an example of how attractive yields can still be achieved in spite of strict cantonal tenancy laws and how the housing stock can be renovated in a targeted way at the same time.

Footnotes:

Footnote 1: Credit Suisse, Immobilienmarkt 2014: Strukturen und Perspektiven.

Footnote 2: Current rents: apartments in existing rental contracts; new rents: apartments with a change of tenancy

Footnote 3: Wuest Partner, Immo-Monitoring 2023|2

Footnote 4: EY/HSLU

Footnote 5: The study divided projects into small (CHF 0-0.5m), medium (CHF 0.5-1m), large (CHF 1-5m) and very large (over CHF 5m)

Summary

Investors in Basel-Stadt should review various renovation and refurbishment options before undertaking building projects to comply with legal requirements and to invest in an efficient way. Geneva is an example of how attractive yields are achievable even in a strictly regulated rental market, while the housing stock is being modernised at a reasonable rate.

Acknowledgements

We thank Simon Schmid for his valuable contribution to this article.

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