Real estate even more appealing

Transcription

1 INVESTMENT STRATEGY & RESEARCH Economic Research Real Estate Monitor Switzerland Q Real estate even more appealing Construction industry Housing in old age Direct real estate investments Positive signals at year-end An oasis of growth Low liquidity, but high returns Page 6 Page 7 Page 9

2 Impressum Publisher Loris Centola Global Head of PB Research Tel Fredy Hasenmaile Head Real Estate & Regional Research Tel Contact Tel Publication deadline December 3, 2015 Publication series Swiss Issues Immobilien Visit our website at Copyright The publication may be quoted providing the source is indicated. Copyright 2015 Credit Suisse Group AG and/or affiliated companies. All rights reserved. Authors Stephan Boppart Denise Fries Fredy Hasenmaile Fabian Hürzeler Philippe Kaufmann Monika Lüthi Thomas Rieder Dr. Fabian Waltert 2

3 Editorial Dear readers For those who own or invest in real estate, another quite successful year is drawing to a close. However, before we can lower the curtain on 2015, some important monetary policy matters remain to be concluded. For one thing, the US Federal Reserve looks set to raise interest rates for the first time in over ten years. History teaches that when the USA raises or lowers interest rates, it has an inescapable impact on the rest of the world. Nonetheless, we believe the effects will be manageable this time around. First, the US central bank will make every effort to convince the market that the upcoming lift-off in interest rates will be slow and gradual. Second, the tentative recovery of the global economy keeps inflation in check, making the idea of a slowly rising interest-rate trend credible. Third, the European Central Bank is doing all in its power to resist an increase in the global, and especially European, interest-rate level by opting to extend its asset purchase program and lowering its key deposit rate. The Swiss National Bank (SNB) will find itself under pressure to take similar measures to avoid narrowing the interest-rate differential to the euro zone. The smaller the spread, the greater the appreciative pressure on the Swiss franc. We believe that the SNB will follow suit with a further cut in its deposit rate, which is already negative, at its next meeting on December 10 (page 5). This would be an early Christmas present for real estate investors. The negative interest rates introduced in January 2015 have widened the yield spread between real estate investments and alternative investments in government bonds, and in so doing lent support to prices of commercial investment properties and given a further boost to prices of residential investment properties. An even lower level of negative interest rates would have an effect in the same direction. However, every factor that pushes prices to a higher level also increases the challenges. After all, the rise in valuations is not based on increasing rental income or signs of growing demand, but merely on low bond yields. Opportunities to increase income in a way that would support higher valuations are extremely limited, given the environment of rising vacancies, a flood of regulatory interventions and a tendency towards weakening demand. This knowledge has given rise to a search for potential growth drivers. Demographic aging is certain to open up new growth aspects, whether in terms of nursing homes or housing in old age that is tailored to the needs of the elderly (page 7). Besides rising prices, negative interest rates are also driving a high output of rental apartments. This is providing plenty of work for the construction industry, at least for the time being. Pundits who foretold a collapse in the building business last summer apparently spoke too soon. The sales trend in construction should stabilize by year-end (page 6). Longer-term, however, a high output of apartments dilutes rental income via growing vacancies, making it increasingly unlikely that the real estate sector will retain its position in the sweet spot that ensured one successful year after another. On behalf of our authors, I hope you find our publication informative and inspiring. Fredy Hasenmaile Head Real Estate & Regional Research 3

4 Contents Monetary policy: Real estate even more appealing 5 With its renewed easing of monetary policy, the ECB is increasing the pressure on the SNB to cut the base rate further. The rise in the yield differential would make investments in Swiss real estate appear even more appealing. The interest rate hike by the US Fed, however, will only have marginal effects on the Swiss real estate market. Construction industry: Positive signals at year-end 6 The construction business has visibly weakened from a very high level. However, an uptick in project submissions and the general economic outlook suggest that the sales trend will gradually stabilize. Housing in old age: An oasis of growth 7 The sharp rise in births after the Second World War produced the numerically dominant baby boomer generation. As the baby boomers reach old age, they are boosting demand for goods that the elderly value, such as housing adapted to their needs. Owner-occupied housing 8 Direct real estate investments: Low liquidity, but high returns 9 Direct real-estate investments tend to be illiquid due to their heterogeneity and their high transaction costs. Nonetheless, investors with a long investment horizon can accept these risks and profit from high returns in the long term. Rental apartments 10 Commercial real estate 11 4

5 Monetary policy Real estate even more appealing With its renewed easing of monetary policy, the ECB is increasing the pressure on the SNB to cut the base rate further. The rise in the yield differential would make investments in Swiss real estate appear even more appealing. The interest rate hike by the US Fed, however, will only have marginal effects on the Swiss real estate market. SNB set to follow suit following ECB decision Yield differential expanding even further Fed interest rate hike less important The late fall of 2015 features several important monetary policy decisions. The European Central Bank (ECB) has set the ball rolling with the announcement of its intention to extend its bond purchase program by six months (until March 2017). Furthermore, the negative interest rates for banks have been lowered by 10 basis points to 0.3%. In order to prevent an appreciation of the Swiss franc against the weakening euro, the Swiss National Bank (SNB) is likely to take additional measures. We expect the SNB to announce a cut in the interest rate on deposits of 0.25 percentage points to 1.00% by 10 December The capital markets have already started to anticipate this move, with the returns on ten-year Swiss sovereign bonds and the LIBOR rates pointing downward. Lower negative interest rates would have two effects on the Swiss real estate market: First of all, the hedging costs for mortgages would increase for banks. However, mortgage interest rates would only be adjusted marginally owing to the opposing effects of hedging costs and base rates (cf. fig. 2). The demand for residential property should therefore not change significantly. Secondly, the yield differentials between real estate investments and fixed rate bonds would rise, thus boosting the incentives for investments in investment properties (cf. fig. 1). Particularly the construction of rental apartments could gain even more impetus from the interest rate decision and this in an already saturated market in which demand is unable to keep pace with the expansion of supply and vacancies are not only increasing in peripheral locations. The first interest rate hike of the American central bank (Fed) in almost ten years is also being awaited eagerly. The positive labor market report for October and the latest comments by the Fed suggest that an interest rate hike of 0.25 percentage points is likely to be carried out in December. We expect a further hike in US base rates of around 0.75 percentage points in the course of Direct effects outside the US are primarily to be anticipated in emerging markets that tie their currencies to the US dollar. In Switzerland the export economy should benefit from a further strengthening of the US dollar. However, the decisions of the ECB (and the reactions to these by the SNB) are of greater significance for the Swiss real estate market than interest rate hikes in the US. Fig. 1: Yield premium and rental apartment construction Yield differential of dividend yields of real estate funds and sovereign bonds Fig. 2: Development of mortgage interest rates Development and forecast of mortgage interest rates, interest on new mortgages, in % 6% 5% 4% Yield premium of real estate funds Swiss 10-year benchmark bond Planning applications for rental apartments (moving 12-month average, right-hand scale) 35'000 30'000 25' % 3.5% 3.0% Fix mortgage, 3y Fix mortgage, 5y Fix mortgage, 10y Fix mortgage, 15y Flex rollover mortgage (3-month LIBOR) 3% 20' % 2% 15' % 1% 0% 10'000 5' % 1.0% 0.5% -1% % Source: Datastream, last annual report of real estate funds, Baublatt, Credit Suisse Source: Credit Suisse 5

6 Construction industry Positive signals at year-end The construction business has visibly weakened from a very high level. However, an uptick in project submissions and the general economic outlook suggest that the sales trend will gradually stabilize just an interim low? 2016: stabilization without fresh growth stimulus Low interest rates, strong immigration and high economic momentum compared to other European countries have driven a construction boom in Switzerland lasting over ten years. This year, though, the trend began to sputter: sales in the main construction trade (cf. fig. 3) and employment ( 3.0% compared to the previous year's quarter) have come under pressure. There are several key reasons for this: stricter mortgage lending regulations, a deliberate reduction in building of second homes following the second-home initiative, a clouded economic outlook due to the franc shock, as well as the conclusion of several large-scale civil engineering projects. Nonetheless, there are good reasons to believe that things will change in After five consecutive quarters of negative impetus, the construction index from Credit Suisse and the Swiss Contractors' Association rose somewhat for the first time in the fourth quarter of 2015 (+2.1% compared to the previous quarter). The project planning trend in structural engineering also appears to be stabilizing. Figure 4 shows how the momentum in planning applications picked up in the second half of 2015, indicating that project planning was somewhat brisker in the last six months than it was in the previous year. The positive trend in planning applications stems particularly from construction of rental apartments, a segment that still profits significantly from the interest-rate-related dearth of decent investment opportunities real estate is currently offering better returns than comparable investment alternatives (cf. page 5). Construction regions outside tourist areas in the Mittelland and Canton Ticino should particularly benefit. On balance, however, we expect to see rather a stabilization at a high level in 2016 than a move towards new record sales. Aside from the possibility of another interest-rate cut by the Swiss National Bank (cf. page 5), we do not currently foresee the growth stimulus that would be necessary to drive sales to new record highs. Although immigration and jobs growth are still high, the franc shock and the anti-immigration initiative continue to harbor downside risks. These factors could exacerbate the existing oversupply in some regional real estate markets, widening the gap between demand on the building market and that on the rental market. In this scenario, falling rents could be just around the corner. Fig. 3: Sales growth in the main construction trade Fig. 4: Momentum in planned investments in structural engineering Index: Q = 100 Planned construction investments as indicated by planning applications, moving 6- month average, as % of the average of the previous 12 months Seasonally-adjusted sales (SFSO) Construction index (CS/SCA) Sales, rolling annual sum (SCA) 25% 20% 15% 10% Momentum Momentum (smoothed) 140 5% 130 0% % -10% -15% % Source: Swiss Contractors' Association, Swiss Federal Statistical Office, Credit Suisse Source: Baublatt, Credit Suisse 6

7 Housing in old age An oasis of growth The sharp rise in births after the Second World War produced the numerically dominant baby boomer generation. As the baby boomers reach old age, they are boosting demand for goods that the elderly value, such as housing adapted to their needs. Baby boomers shape demand Great hopes for a future growth segment Guiding principles in the search for the most promising housing in old age options The earliest baby boomers have already reached retirement age. Over the next 15 years, they will be joined by the younger cohorts. Wherever the baby boomers have featured in their progression up the age pyramid, they have triggered a surge in demand for goods tailored to that age bracket (cf. fig. 5). The same is likely to happen now with housing in old age. If rental apartments continue to be churned out at the current pace, rents and prices are likely to begin falling in the foreseeable future. The real estate market is thus in search of future growth segments, and housing for senior citizens appears to be a prime opportunity. There is already considerable impetus for construction of housing for tenants who will require medical assistance. Major operators are opening one nursing home after another. Since 2004, the annual volume of approved construction permits has risen from less than CHF 300 million to CHF million (cf. fig. 6). The investment opportunities for senior citizens not yet in need of assisted living are less obvious. For many providers, the issue is less the extent of future growth and more the specific qualities of future demand. Surveys of preferences of those approaching retirement age are meticulously analyzed. No clear trends have yet emerged. However, as demand for housing in old age increases, one thing is clear: the concept of growing old in a retirement home is outdated and unacceptable to most baby boomers. Nonetheless, there are several basic considerations that investors can use as guiding principles in developing future options. First, the wish to stay within one's own four walls is omnipresent. Demand is likely to be great for housing that takes into account the possible future limitations to residents' mobility, and is constructed with the necessary flexibility and services to allow residents to stay in their accustomed homes as long as possible. Second, the cost issue is likely to play a much greater role in future. The explosive growth in AHV complementary benefits has already spurred politicians into action and indicates that efficient and thus cost-conscious solutions will be preferred in the years to come. Third, many senior citizens perceive a lack of social contact as their greatest problem. This is increasingly a concern in a society where family ties are no longer as binding. Locations and developments that encourage social contacts will have a comparative advantage. Fig. 5: Age pyramids in 2014 and 2028 Fig. 6: Planned investment in nursing homes 2028: Credit Suisse's main scenario Building permits , in CHF million, new building and extensions 100 Age in years Women '000 Nursing homes combined with other space 90 Men 2028 Nursing homes combined senior housing 900 Women 2014 Nursing homes without other use 80 Men Number of people 0 75'000 50'000 25' '000 50'000 75' Source: Credit Suisse, Swiss Federal Statistical Office Source: Baublatt, Credit Suisse 7

8 Owner-occupied housing Regulation effect outweighs interest-rate effect Thanks to persistently low mortgage rates, households across Switzerland continue to dream of owning their own home. However, a growing number of them will not realize this dream due to the current level of market prices and the stricter financing conditions introduced in the wake of (self-)regulatory measures. These two factors dampen the demand-driving effects of a long phase of rock-bottom interest rates. This is evident in the decelerating growth in mortgage volumes for private households, currently reported at just 3.3% year-onyear. To draw a comparison, the growth rate was 5.2% in Growth in mortgage volumes Change in mortgage volumes for private households and change in transaction prices for owner-occupied housing, year-on-year 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Prices residential property Mortgage loans Long-term average mortgage loans -1% Source: Swiss National Bank, Wüest & Partner, Credit Suisse Decreasing construction of owner-occupied housing Building activity for owner-occupied housing is declining, and the records for building permits indicate no change in the trend in Over the last 12 months, permits for 23'717 housing units (condominiums and single-family dwellings) were issued. Thus owner-occupied housing now accounts for just 49% of all building permits a decline of 0.8 percentage points compared to the previous year. The numbers vary considerably depending on the type of municipality. In the centers, the number of building permits bucked the trend, rising by 5.3%. The situation is different in the surrounding urban areas, where a drop of 10.9% was reported. Building permits for owner-occupied housing Building permits for housing (new construction), moving 12-month sum 25'000 20'000 15'000 10'000 5'000 Owner-occupied housing as share of total building permits (rhs) Centers Urban areas (excl. centers) Other municipalities (excl. tourist municipalities) Tourist municipalities % 80% 60% 40% 20% 0% Source: Baublatt, Credit Suisse Only weak price growth Price trend for owner-occupied housing Change in transaction prices for condominiums (condos) and single-family dwellings (SFD), compared to the previous year's period The slowing market for owner-occupied housing is reflected in the price trend, where growth rates have fallen steeply since 2011 to the current level of 2.5%. At present, the trend for condominiums differs significantly from that for single-family dwellings. Condominium prices have edged up 1.3% compared to the previous year's quarter, which is markedly lower than the average growth rate of 4.7% since Prices for singlefamily dwellings, in contrast, rose 3.1%, which is clearly lower than the 2011 highs, but only slightly below the long-term average of 3.4%. 10% 8% 6% 4% 2% Condominiums Single-family dwellings Avg. condos Avg. SFD % Q Q Q Q Q Source: Wüest & Partner, Credit Suisse 8

9 Direct real estate investments Low liquidity, but high returns Direct real-estate investments tend to be illiquid due to their heterogeneity and their high transaction costs. Nonetheless, investors with a long investment horizon can accept these risks and profit from high returns in the long term. High returns on direct real estate investments Illiquidity mainly due to heterogeneity High transaction costs increase illiquidity Illiquidity may be an acceptable trade-off for investors with a long investment horizon In the current environment of negative interest rates, investments in real estate are more attractive than ever. Despite high prices, the total yield on Swiss real estate funds since the beginning of the year amounted to 2.7% on 18 November 2015, and that on direct investments (IAZI Investment Real Estate Index) was 2.5% on 30 September (cf. fig. 7). Since the beginning of 2000, the value of direct real estate investments has more than tripled, beating even the SPI. However, direct investments in real estate also have a serious disadvantage: illiquidity. Direct real-estate investments are among the illiquid investment vehicles. Properties are physically tied to their locations, and each object has its own characteristics. This combination makes each piece of real estate unique, which in turn complicates the pricing of a property. In Switzerland, the situation is aggravated by the fact that little information on transactions is publicly available. As a result, price negotiations and transaction processes are significantly longer for real estate than for other asset classes. Other factors also contribute to the illiquidity of real estate: the due diligence for a real estate object takes a great deal of time, and the high capital requirements necessitate particular financing solutions. In addition, transactions generate high costs that can easily make up 4% 5% or more of a property's purchase price. These costs include legal clarifications, taxes, notary fees, land register fees, broker commissions and so forth. In general, a transaction is concluded in five steps (cf. fig. 8). For a commercial property, negotiations typically take around three months, followed by several months for the transaction process itself. The length of the purchase process, and thus the degree of illiquidity, is also heavily affected by market conditions. In a market downturn, the search for a buyer can take much longer. Investors should ask themselves whether they can accept these disadvantages from an opportunity/risk perspective. The answer depends on the buyer's investment horizon. Since high transaction costs are fixed costs, it makes sense to stay committed for a lengthy period. Thus pension funds, other institutional investors and affluent private investors with a long-term investment horizon are typically attracted to real-estate investments. Such investors can accept that their real-estate positions may not be 100% liquid at all times, since they generate higher returns over longer periods than more liquid investments. Fig. 7: Performance of various asset classes Total returns, index: January 2000 = 100 Fig. 8: Transaction process in real estate Schematic representation IAZI Investment Real Estate SXI Real Estate Shares Swiss Bond Index SXI Real Estate Funds Swiss Performance Index KGAST Note: Past performance is no indicator of future results. Source: Datastream, Credit Suisse Source: Credit Suisse 9

10 Rental apartments Immigration remains high despite franc shock Immigration figures remained robust in the third quarter of At the end of September, cumulative net migration since the beginning of the year stood at nearly 59'000, a figure only slightly lower than the amount recorded the previous year. This is mainly due to the growth in employment, which remained solid, contrary to expectations. A change of status for many foreigners from EU-8 nations and increased immigration from third countries also contributed to the growth. Assuming there is no significant change by the end of the year, this would make net migration of resident foreigners lower than it was in 2014 but only slightly off the average for recent years. Net migration of foreigners Cumulative net migration of foreign residents 90'000 80'000 70'000 60'000 50'000 40'000 30'000 20'000 10' Jan. Feb. Mar. April May June July Aug. Dep. Oct. Nov. Dec. Source: State Secretariat for Migration, Credit Suisse Building permits stable at a high level Construction of rental apartments has been consolidating at a high level over the last year. At the end of the third quarter, the 12-month sum had reached 25'800 housing units, not far from the previous year's figure. In the surrounding urban areas, however, construction activity has been declining since In city centers, construction activity is more or less stagnating at the level achieved in mid On the other hand, the number of approved housing units is rising in other municipalities outside urban centers and in tourist regions. In the latter, following a brief surge due to the second-home initiative, building permits have dropped back to their previous level. Building permits for rental flats by type of municipality Building permits for housing units (new construction), moving 12-month sum 30'000 25'000 20'000 15'000 10'000 5'000 Other municipalities (excl. tourist municipalities) Tourist municipalities Urban areas (excl. centers) Centers Source: Baublatt, Credit Suisse Moderate growth in rents The growth in rent prices continues to decelerate in year-onyear comparison. Across Switzerland, rents offered are rising by 1.6% compared to the previous year's quarter. While this figure exceeds the low registered at the beginning of the year, it is still lower than the growth rates from 2010 to Above-average growth was registered in the area around Lake Geneva (+2.6%) and Basel (+2.7%). In Bern and Zurich, however, the increase in rents offered was in line with the Swiss average (+1.6%) this year. Slowing growth momentum can be attributed to the persistently high production of rental apartments. At the same time, the steady stream of immigrants from abroad underpins demand. Rents offered, by canton Index: Q = 100 (lhs), annual growth rate (rhs) Annual growth, Switzerland Zurich Basel (City and Country) Switzerland 3.5% Bern 3.0% Lake Geneva (Geneva/Vaud) % 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Source: Homegate, Credit Suisse 10

11 Commercial real estate Office property: stagnating planning of new projects Although decent investment opportunities have become even more scarce since the beginning of the year, planning for new office space continues to hover around the long-term average. At the end of October 2015, the volume of planning applications was 3% higher than the average since 1994, while building permits were 7% lower. In light of the muted trend in office employment, the sharp increase in supply in recent years as well as high vacancies, the reduction in planning is a welcome development. Since many new construction projects are only just coming to market, finding tenants for new and existing offices is likely to remain challenging. Planning applications and permits for new office space New building, % deviation from long-term average (since 1994) 80% 60% 40% 20% 0% -20% -40% Building permits Planning applications -60% Source: Baublatt, Credit Suisse Retail property: Falling retail sales depressing demand for retail space The scrapping of the EUR/CHF minimum exchange rate at the beginning of the year, and the subsequent increase in shopping tourism, have weighed heavily on the retail trade. In September, retail sales declined by 2.5% in nominal terms. While the food/near-food segment bolstered sales last year, it has now also fallen into negative territory with a nominal decline of 1.4%. The picture is even bleaker in the non-food segment, where sales fell by 3.7% compared to a year earlier. Demand for retail space is likely to be correspondingly weak. Not only shopping tourism, but also the surge in online trade creates headaches for traditional retailers. Both of these trends have caused painful losses in the share of retail sales. Nominal retail sales Adjusted for number of working days, 3-month average, YoY 6% Nominal retail sales Food/Near food 4% Total non-food exluding fuel 2% 0% -2% -4% -6% 09/ / / / /2015 Source: GfK, Credit Suisse Retail property: vacancies rose again in 2015 Vacant retail space In m², as at 1 June, sample: approx. 33% of retail space market After the amount of vacant retail space held steady at around 70'000 m² in the period , it rose in 2014 and again in At 1 June 2015, 86'500 m² of retail space was standing empty, which represents a 4.7% increase compared to the previous year. Considering the negative sales trend in retail and the challenges currently facing the market for retail floor space, a further rise in vacancies was in line with expectations. The moderate increase of 4.7% is due, among other things, to the low level of planning for new retail space, which has been well below the long-term average for more than two years. 120' '000 80'000 60'000 40'000 20'000 0 Vacant retail space Source: Various statistical offices, Credit Suisse 11

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15 Other publications from Credit Suisse Economic Research Global Real Estate Monitor 4. Q4 Quartal Der The Global Real Estate Monitor is gibt a quartalsweise quarterly overview einen of the Überblick key real über estate wichtigsten markets and Immobilienmärkte trends around und the die Trends world. We rund analyze um den both Globus. direct Beleuchtedirect werden real estate sowohl investments. direkte als auch and in- indirekte Immobilienanlagen. December 11, Dezember 2015 Monitor Switzerland Q The Monitor Switzerland contains analysis and forecasts for the Swiss economy. This issue focuses on negative interest rates in Switzerland as a tool of monetary policy and their effects. December 15, 2015 Retail Outlook 2016 The annual study on the Swiss retail sector explores economic prospects for the sector as well as current challenges. In this year's focus topic we examine price differences in the international retail trade and their possible origins. January 5, 2016 Sector Handbook 2016 Structures and Prospects The Sector Handbook is the reference book on the Swiss sectors that is published annually. The individual sector portraits provide a detailed insight into the structures and economic prospects of the Swiss sectors. January 19, 2016 Lake Geneva region Corporate tax reform III Corporate taxation is due for a fundamental overhaul. This regional study focuses on the potential strategies in the cantons of Geneva and Vaud and the effects of tax reform. February 10, 2016 Swiss Construction Index Q The quarterly Swiss Construction Index provides up-to-date information about the economy in the construction industry and contains estimates and background information regarding sales performance in the construction sector. February 2016 The Real Estate Market study 2016 will be published on March 1,

16 Bright prospects for long-term returns. Adrien Barakat Reap rewards from the extensive know-how of Credit Suisse As a global provider of real estate investment products, Credit Suisse offers access to diversified property portfolios in Switzerland and abroad. Enjoy the favourable outlook for long-term returns and benefit from the earnings stability of real estate investments.