Focus on property: Is Switzerland on its way to a real estate bubble?

Focus on property: Is Switzerland on its way to a real estate bubble?

Demand for Swiss property has been steadily rising over the past few years, driven by the low yield environment and lack of safe haven investment options. But does this mean investors should prepare for a bubble on the local property market?

Swiss property has been regarded as one of the safest investments options ever since government bonds stopped offering the yields and the “safe haven” status investors require. Even despite the high prices, investors have flocked to the Swiss real estate market for safety and returns.

As a result, prices have been on a steady increase over the past few years and do not show any signs of a slowdown.

Research conducted by UBS shows rents on commercial property, one of the most popular property types in Switzerland, have climbed up all year.

In the second quarter of 2012 they grew by 5% compared to Q2 last year. A similar trend can be witnessed in the retail space, too.

The price increases are driven to a great extent by institutional investors from within the country, which have turned to local real estate for the returns they often cannot gain from bond investments.

Apart from this, real estate is less volatile than equities, and the long term aspect fits the investment horizon of pension funds and insurance companies.

Despite the 30% cap on Swiss property holdings for Swiss pension funds, many have gained permission from local authorities to invest higher amounts in the asset class.

But it is not just the local investors that are overheating the local property market. Although they make up nearly half of all buyers of Swiss property worth more than CHF5m, a significant proportion of the money comes from Russia and the CIS, UK, Germany and France, according to last year’s report from Knight Frank Residential Research.

Despite the growing prices, investors are reluctant to turn away from the Swiss property market, attracted by its strong economy and resilience in the face of the European debt crisis.

The GDP growth forecast in the country for this year is 1.4%, compared to a slightly contracting Eurozone. Private consumption is up 1.7% and investment in construction is expected to increase by at least 2%.

All these factors contribute to the strong demand for property in the country. This high demand is leading some investment professionals to worry about the potential formation of a real estate bubble.

The Swiss Real Estate Bubble Index is much higher this year than last. Since 2008, the index has been growing steadily every year. Compared to Q2 in 2011, the indicator is almost double for Q2 this year, 0.82 compared to 0.45.

Although the index has declined in the second quarter by 0.13 points compared to Q1, UBS says “demand [for real estate] is still strong, so we do not expect the Swiss real estate market to change direction in the quarters ahead.”

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