Swiss real estate market remains attractive for investors AI and demographics as market-relevant factors

• 98% of investors believe the Swiss real estate market will remain attractive in 2024 - Switzerland will remain lucrative thanks to a stable economy
  
  
• 96% of investors surveyed expect inflation to remain below 3% over the course of the year
  
  
• 53% of respondents forecast that artificial intelligence will play a significant role in shaping future business models, yet only 5% of investors actively use AI.
  
  
• ESG criteria increasingly important: 85% of respondents state that the price differentiation between "green" and "brown" real estate will continue to increase.
  
  
• 96% of real estate investors now see demographic change as the most important megatrend for the coming years, followed by climate change and ESG.

Zurich, 24 January 2024 - The latest edition of EY's trend barometer for the real estate investment market in Switzerland shows that The majority of real estate investors in Switzerland (98%) continue to view the local market as an attractive or very attractive location for real estate investments in 2024. Compared to the previous year, a slight increase in attractiveness is generally expected (2023: 92%). "According to investors, the high attractiveness can be attributed to the stable economy, the continued high demand and the fact that Switzerland remains a lucrative location despite the geopolitical changes. According to those surveyed, the Swiss National Bank's interest rate hikes have also had no substantial short-term impact on the market value of investment properties," says Daniel Zaugg, Sector Leader Real Estate at EY in Switzerland.

When asked about the development of the investment volume, 66% of respondents expect a sideways movement at a high level in 2024. According to the survey participants, this assessment can primarily be explained by a certain degree of caution due to the interest rate situation and regulatory restrictions. Only 18% of the investors surveyed agree with the statement that the investment volume will decline in 2024. The previous year's figure was significantly higher at 35%.

Positive view of inflation and real estate banks and the promotion of construction activity

96% of the investors surveyed believe that inflation will remain below 3% in the course of 2024. This demonstrates a remarkable consensus regarding the assessment of future macroeconomic dynamics and reveals the collective confidence placed in the stability of the economic environment. Around 78% of respondents forecast that the trend of devaluations will continue in 2024, as real estate portfolios have so far only experienced moderate balance sheet devaluations. This assessment indicates continued caution with regard to future market developments and underlines the need for continuous valuations to accurately determine asset value.

The vast majority of respondents (79% and 76% respectively) agree or somewhat agree with the statements that real estate banks have made sufficient risk provisions and that capital requirements will tend to increase further. A significant majority of respondents (75%) agreed with the assessment that new client business in 2024 will mainly focus on smaller loan volumes (under CHF 50 million). Compared to the previous year, when 87% still expected interest rates to rise, only 73% of respondents expect interest rates to rise in 2024. 64% of the investors surveyed consider financing via the capital market to be unattractive due to the rise in refinancing costs.

When asked how new construction activity in Switzerland can be promoted, 63% of the investors surveyed rely primarily on legislative measures to create reliable framework conditions. Around 57% of respondents also believe that standardizing and simplifying building regulations at a federal level would boost new construction activity. Only 18% of those surveyed expect the increased promotion of serial and modular construction or the creation of tax breaks to have a positive effect on new construction activity.

Development of property purchase prices by type of use and location

As in the previous year, the picture is again characterized by falling prices. The retail and hotel sectors in 1-b locations and the periphery in particular are confronted with negative development prospects and thus falling prices. However, according to the respondents, a negative price correction is also to be expected for office and residential properties (90%/87%) in the periphery. Respondents see a predominantly stable price level, particularly in 1a locations for business hotels (91%), office properties (58%) and food retailers and DIY stores (57%). Prices are also expected to remain the same in 1-b locations and the periphery for logistics properties. An increase in prices in 1a locations can be expected above all in the vacation hotel sector (31%) and for logistics space (51%). In the periphery, on the other hand, growth expectations are rather low. Overall, according to the respondents' assessment, the logistics use type is ahead, similar to last year.

The attractiveness of residential real estate as an investment opportunity is further underlined by an increase in interest in real estate investments in this sector to 96% compared to previous years (2022: 93% and 2023: 93%). The survey shows: 84% of investors are of the opinion that the current housing subsidy is not sufficient to cope with the excess demand for residential real estate. "However, investors are confident about the conversion of vacant office space into modern residential concepts: 78% believe that this measure can help ease the situation on the residential market," says Daniel Zaugg.

Compared to the previous year, there is a slightly reduced investment trend in the office, logistics and healthcare real estate sectors (39%, 42%, 45%), as well as in the food retail and specialist store segment (16%). Although the hotel industry and shopping centers recorded a slight increase, these are only marginally in the focus of investors overall.

Artificial intelligence, sustainability and upcoming megatrends

Artificial intelligence is expected to play an important role in shaping future business models. Around a third of investors are already looking at integrating artificial intelligence into their business model. Only a few believe that AI will have little impact on their future business model. 53% of respondents forecast that artificial intelligence will play a significant role in the design of future business models. Investors are currently still carefully monitoring progress in this area. Only a minority (12%) believe that AI will have little impact on their future business model and is therefore not a key issue for them. "With regard to possible areas of application for AI, real estate investors are now being asked to think about simplifying or partially automating processes in order to continue to operate successfully in a challenging market environment. This applies both to transactions and to the optimal management of real estate portfolios. However, proven experts are necessary when implementing AI, as the potential risks should not be underestimated," says Karl Frank Meinzer, Head Real Estate Switzerland at EY in Switzerland.

ESG criteria are becoming increasingly important for real estate investments. The defined minimum standards for energy efficiency in residential buildings provide clear guidelines for modernization measures and create planning security. 85% of respondents state that the price difference between "green" and "brown" properties will continue to increase. 79% of respondents agree or somewhat agree with the statement that the introduction of binding minimum standards for energy efficiency in residential buildings creates planning security for modernization measures, in line with the Energy Strategy 2050. Around 66% of respondents are convinced that the taxonomy conformity of a property paves the way for more cost-effective financing.

The majority of respondents (96%) predict that demographic changes will have a significant impact on the Swiss real estate market in the coming years, surpassing climate change and ESG as the dominant megatrend, which was cited by 91% of respondents. The development of interest rates and advancing digitalization continue to be identified as decisive trends (83%, 77%) and have gained in relevance compared to the previous year. Around 67% of respondents believe that political instability and uncertainty will affect the Swiss real estate market in the next 5-10 years, which represents a slight increase on the previous year (61%).

About the Barometer

These are the results of the latest edition of the real estate investment market trend barometer of the auditing and consulting firm EY in Switzerland. The results of the study are based on our survey conducted in October 2023. A total of 96 investors who have been active in the Swiss real estate market in recent years took part. The companies surveyed form a representative cross-section of the Swiss real estate investment market. EY Real Estate Switzerland has published the Real Estate Investment Market Trend Ba-rometer annually since 2011.

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EY’s organization is represented in Switzerland by Ernst & Young Ltd, Basel, with 10 offices across Switzerland, and in Liechtenstein by Ernst & Young AG, Vaduz. In this publication, “EY” and “we” refer to Ernst & Young Ltd, Basel, a member firm of Ernst & Young Global Limited.