Review 87th Swiss Real Estate Talk

"We must have hit a nerve," concluded moderator Markus Schmidiger from the Lucerne University of Applied Sciences and Arts, as he let his gaze wander through the hall of Zurich's Metropol. It was filled to capacity, and the 87th edition of the Swiss Real Estate Forum was completely sold out. What does it look like, or should it look like, "project development in economically difficult times" - that is obviously what many are asking themselves these days. First of all, it had to be clarified whether and to what extent times are really difficult. This was the task of Fredy Hasenmaile, Head of Real Estate Economics at Credit Suisse. His multi-perspective view of the current mixed situation in the real estate sector revealed a colorful, interesting, not monochrome picture.

"Rent growth is the new currency"

One of the takeaways from Hasenmalle's lecture: The spellbound view of interest rates only shows half the truth. The CS economist admittedly did not want to give much hope that interest rates will soon start to fall again - for too long, central banks have mistakenly believed that inflation would turn out to be a temporary effect. Stubbornly, inflation is "dynamically contagious. Switzerland is in a better position than the US and the EU in terms of monetary policy, but as is well known, the SNB cannot cook its own soup. So interest rates are not going down for now, and yes, high interest rates are "poison for real estate," according to Hasenmaile. He has calculated its effect on valuations: If discount rates rise from 3 to 4 percent, this leads to a valuation setback of 22 percent - with the effect being stronger the lower the starting level of the discount rate.

But the real estate market is - fortunately - not just about interest rates. The fact that they are now rising is also a good thing, because it reminds the real estate industry of its true mission: to create value through the property itself. And the conditions are not bad for this: things are going well on the leasing markets in many areas, such as the office market, where centralized space remains in demand, also in logistics and on the residential market. "Rental growth is the new currency," says Hasenmaile, because it can compensate for interest rate effects. His most important message: from an analyst's point of view, there is no reason to let real estate development go from now on. On the contrary, it is the developers who are more responsible for creating value than anyone else. The market's hopes rest on them.

Stoic view of sustainability and the long term

Hasenmalle's follow-up speakers were allowed to feel directly addressed, and neither gave the impression of being discouraged by the rougher seas. Marc Lyon, Head Real Estate Development CH, Implenia Switzerland, admitted that business had become "more complex" in recent months, but otherwise focused his attention on the opportunities. He pointed out many sensible measures and strategies that one might be inclined to recommend to any developer - even in times of no crisis. In particular, it was about market tests, about user surveys, which help Implenia's project development to anticipate customer needs - as happened for example This was the case, for example, with the "Baar Süd" project, in which separate office facilities with toilets and washbasins were designed outside the apartments, allowing a separation of living and working spheres in times of home offices, or with the "Rocket" project in Winterthur, the tallest wooden residential building in the world when completed, in which the high relevance of storage areas was determined in dialog with potential customers as early as the planning phase. Lyon also provided insights into his company's decarbonization strategy and the challenges posed by climate change, which he considers to be the greatest indicator of the quality of today's real estate development.

Urs Baumann, Chief Investment Officer of Swiss Prime Site Immobilien AG, expressed a very similar opinion on this point. For him, too, the issue of sustainability is at the forefront of all his company's projects. He pursues this concern in conjunction with a clear certification strategy - the material benefits of which are not always immediately noticeable, but sometimes only after years. In this case, it is important to continue the efforts "stoically", even in turbulent times. With SPS Immobilien, Baumann relies on strong ESG ratings and a long-term approach. Calculations are defensive, pre-letting levels are very important, and the company focuses on resilient regions and locations as well as flexible uses.

Of construction prices, scrap and home-made scarcity

Neither Lyon nor Baumann gave the impression that the difficult market was upsetting their strategies right now. "Reassuring!" commented moderator Schmidinger on their commitment to a long-term view. In the panel discussion, however, one or two changes became a little more concrete, such as the fact that project partners have to get their act together again, especially when it comes to the distribution of risks. Of course, it was also about construction costs and the subject of inflation clauses, which investors and general contractors cannot avoid discussing at the moment. On the subject of inflation in construction - perhaps the most pressing problem for many - it was interesting to hear Hasenmalle's assessment that it is manageable. He ventures the prognosis: "The zenith has probably been passed." To illustrate the sometimes perplexing mechanics of construction prices, he gave a surprising example: prices had been driven up in the meantime by the rise in the price of reinforcing steel, and the lower output of the German auto industry was responsible for this. With its huge quantities of steel scrap, the German industry had traditionally ensured the favorable availability of the raw material in Switzerland. But not every shortage results from crises, whether near or far abroad.

According to Hasenmaile, the fact that there is currently a fundamental "scarcity reigns" on the Swiss real estate market, and especially on the housing market, is largely the fault of the shortage of building land here. The background to this is a paradigm shift: away from urban sprawl and toward densification. Politically, it may be justified, but the replacement strategy, densification, is still lacking.

So there is also a shortage in the real estate market, which is homemade, and players can rely on this for the time being. (aw)

The 88th Real Estate Meeting will be held on November 1, 2022.