- Residential real estate: still the favorite of many investors despite high prices – retail sector remains a problem child
- Digitalization still achieving efficiency gains today
- Continued low interest rate environment accepted by the market – but poses major challenges for small and medium-sized investors
The attractiveness of the Swiss real estate market has once again increased slightly in investor favor. It is rated by 96 percent as attractive to very attractive. The proportion of those who consider the location to be very attractive rose to 32 percent, an increase of three percent over the previous year. The current market cycle is already at a high: 83 percent expect transaction volumes to move sideways in 2020.
These are the results of EY Switzerland’s 2020 Real Estate Investment Market Trend Barometer. For this survey, approximately 100 Swiss real estate investors were questioned about their assessments of the real estate year 2020.
"The demand for real estate remains high," says co-author of the study, Claudio Rudolf, Partner and Head Transaction Real Estate at EY in Switzerland. "The Swiss real estate year 2020 will, however, continue to be shaped above all by the low interest rate environment that is now accepted by all market participants.”
The real estate market environment poses numerous challenges. Of those surveyed, 95 percent assume that project developments will have to meet higher requirements for smart, i.e. networked, infrastructure in the future. At the same time, cooperative project development processes are becoming increasingly important from the perspective of 87 percent of real estate investors. In addition, more than half of the survey participants see political and global economic instability as a danger. In contrast, only about one in four fear an economic downturn with an impact on the real estate market in Switzerland – despite current discussions about global recessionary trends. However, 90 percent of those surveyed expect that the demands placed on potential borrowers by banks will increase.
Residential real estate market profiting from urbanization
As in the previous year, the usage type preferred by Swiss investors is residential. For this type, 60 percent of those surveyed expect prices to continue rising in prime and subprime locations. Accordingly, 46 percent of study participants place their investment focus on the residential segment. "Residential real estate is still the clearly preferred segment for real estate investments in 2020," says Daniel Zaugg, Partner and Sector Leader for Real Estate, Hospitality & Construction at EY in Switzerland and co-author of the study. "The urbanization trend is reflected here. The continuing influx into the cities is not matched by an adequate growth in supply, resulting in higher prices." According to investors, other usage categories in growing niche markets are becoming much more important than in previous years. Examples include multiple use, co-living, and co-working. This is the investment focus of approximately one in four respondents. Investors also see potential for logistics properties: Almost half of respondents expect rising prices, both in prime and subprime locations.
Retail sector continues to crash
In contrast, the retail segment continues its downward trend in popularity. Only one percent of those surveyed will focus their investments here in 2020. 45 percent even expect price reductions in prime locations. "The retail segment is causing concern. Despite promising approaches, for example in connection with digital technologies, there is still a lack of ideas on how these spaces can be used economically in the future at the current price level," says Rudolf. In contrast, the largest segment of the investment market – office properties – is stable. 23 percent of respondents see their focus in this area. And 43 and 49 percent of study participants, respectively, expect rising prices in prime and subprime locations due to the increasing demand for space in top locations. Only in peripheral locations are predominantly falling prices assumed.
Retrofitting inventory is the greatest challenge for digitalization
After demographic change, to which 90 percent of investors attribute a high degree of influence on the real estate market, digitalization is next. It is very relevant for 82 percent. The greatest challenge is the retrofitting of existing buildings. Smart buildings are naturally most likely to be realized in new construction. This was agreed upon by 97 percent of participants. In addition, 94 percent believe ground work must still be accomplished, which primarily involves cross-company data standards and structures. The industry is generally optimistic on this topic. 83 percent of study participants expect efficiency gains in digitalization. "Digitalization has arrived in the everyday life of companies. This makes opportunities, such as efficiency gains, more tangible," says Rudolf. Other relevant trends for the property market are climate change (67%), political instability (58%), and currency developments (52%).
Late cycle motivates portfolio adjustments
Investors active in the Swiss real estate market do not expect any further increases in transaction volumes. Accordingly, the investment strategies preferred by 87 percent of investors focus on portfolio streamlining, i.e. the sale of non-strategic investments and selective purchases. Only about half of study participants are limiting themselves to a predominantly passive approach and waiting for a declining price level.
In addition, 67 percent are targeting foreign investments. "Investors are actively confronting the complex environment of a late cycle and persistently low interest rates. This is the only way to generate adequate returns in this challenging market phase," summarizes Zaugg.
Information about the study
For EY Switzerland's 2020 Real Estate Investment Market Trend Barometer, investors who have been active in the Swiss real estate market in recent years were surveyed. The survey has been conducted annually since 2011. 97 Swiss investors took part in the latest survey, in October 2019. The barometer is intended to reflect an annually updated assessment of the Swiss real estate investment market by professional real estate investors and also to provide an outlook on the strategy that investors will pursue in Switzerland over the next twelve months.
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