Swiss Real SnapShot · 2020. 6. 17. · Introduction Dear Sir or Madam KPMG Swiss Real SnapShot!,...

Swiss Real SnapShot!Low Forever?

Current developments in the Swiss real estate investment market

Winter 2019

Content04 Macroeconomic

overview

07 Office property market

09 Retail property market

11 Residential property market

13 Direct property investments

14 Indirect property investments

16 Potential impact of Swiss tax reform on property investments

Swiss Real SnapShot! 1

Introduction

Dear Sir or Madam

KPMG Swiss Real SnapShot!, published twice a year, provides you with an overview of the current developments in the Swiss real estate market and its influencing factors.

The Swiss real estate market is a heterogeneous and strictly segmented structure. Thus, KPMG Swiss Real SnapShot! concentrates on a global observation. Regional deviations are commented occasionally in a focus article.

KPMG Real Estate has both Swiss-specific and global expertise in the real estate markets. Our extensive data pools on local markets along with competent andin-depth consultation generate added value for our clients in all areas related to real estate.

Turn to page 17 of KPMG Swiss Real SnapShot! to see what we can do for you and how you can benefit from our services.

We wish you a pleasant and informative reading.

With kind regards,

Ulrich PrienPartner, Head of Real Estate Switzerland

Beat SegerPartner, Real Estate M&A


Low Forever?

Macroeconomic overviewSwiss economic growth failed to meet the expectations of experts in the past year. As of December, forecasters anticipated a GDP rise of just 0.88% for 2019, a contrast to the strong growth of 2.54% seen in 2018. For 2020, analysts are more optimistic, predicting growth of 1.46%.

The slowdown in Swiss economic growth announced in forecasts at the beginning of 2019 became even more pronounced over the course of the year. The forecasting institutes included in this analysis were still expecting growth for 2019, albeit at an average rate of 0.88%. This represents a considerable downward correction on the spring outlook of 1.24%. Credit Suisse was most optimistic as of year end, predicting growth of 1.1% while the major bank UBS had the lowest expectations of growth (0.7%). At least fears of a recession appeared to be off the table.

The development of the global economy was marked by uncertainty in 2019. Trade conflict between the US and China, a lack of closure on Brexit and unrest in Hong Kong and South America are just a few examples. Against this backdrop, investors increasingly sought safe options – a trend that was also reflected in the strong Swiss franc. Economically sensitive sectors such as the machine and metals industries were unable to escape the international economic slowdown. Swissmem, the Swiss association for mechanical and electrical engineering industries, reported a decline in sales (-3.7%), exports (-1.4%) and incoming orders (-13.2%) across MEM industries1 in the first three quarters of 2019.

KOF (1.8%), SECO (1.7%) and Credit Suisse (1.4%) expect a return to slightly higher GDP growth rates in the coming year 2020. These forecasts are driven by the fact that real wages still have room for upward maneuver thanks to high employment and low inflation, which in turn tend to boost private consumption. At the same time, interest rates remain low and continue to drive construction investments. UBS is alone in being slightly more pessimistic for 2020, predicting GDP growth of 0.9%. Unlike SECO and Credit Suisse, UBS fears that Switzerland will be impacted by geopolitical problems more significantly and over several quarters.

Despite modest GDP growth, the Swiss labor market enjoyed a very positive development. For 2019, forecasters expected an unemployment rate of 2.38% on average, the lowest level of the last decade. A total of 67,000 new jobs were created in 2019, bringing the number of employees on the Swiss labor market to around 5.14 million people in 4 million FTE positions. Around 40% of employees worked

1 MEM refers to machine, electrical engineering and metals industries


part-time. For 2020, the forecasting institutes expect the unemployment rate to creep back up to 2.40%. Nevertheless, the labor market should remain robust in the coming year.

The Federal Statistical Office (FSO) estimated an inflation rate of 0.9% for 2018. The forecasting institutes included in this analysis predict inflation of 0.42% for 2019, followed by 0.28% in 2020. With consumer prices stagnating since 2009 and an inflationary trend since 2017, the consensus is that inflation will continue only at a moderate level.

Macroeconomic indicators2

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

P

2020

P

GD

P g

row

th, u

nem

ploy

men

t ra

te

and

Con

sum

er P

rices

Inde

x

GDP growth Unemployment rateConsumer Prices Index

Source: BAKBasel, Credit Suisse, KOF, SECO UBS and KPMG

The International Monetary Fund (IMF) predicted global economic growth of 3.0% for 2019. This represents a downward correction of the IMF’s July 2019 forecast. The organization also warned of the slowest economic growth since the financial crisis broke out in 2008. It cited geopolitical risks, such as the acute Sino-American trade conflict and implementation of Brexit, as main reasons for the development. The IMF is more optimistic for 2020, when global economic growth is predicted to accelerate to 3.4%.

2 P = Consensus forecast based on BAKBasel, UBS, Credit Suisse, KOF and SECO

Global GDP growth

0% 1% 2% 3% 4% 5%

Global growth

Advanced economies

USA

Eurozone

UK

Japan

Emerging anddeveloping countries

2019 2020

Source: IMF and KPMG

With 55,000 net new immigrants in 2018, the State Secretariat for Migration (SEM) announced a year-on-year increase in net migration for the first time in five years last year. In 2019, SEM reported immigration of around 37,000 persons as of the end of November, meaning that the prior-year figure was not matched. In its reference model for population trends (medium scenario), the FSO expects net annual immigration to stagnate at around 60,000 people per year until 2030, consolidating at a level of 30,000 people per year from 2030 to 2040.

Net migration

Net

mig

ratio

n

Germany France ItalySpain Portugal Asia

TotalOther countriesAfrica

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

L

Source: BFS, SEM and KPMG

Following a positive phase spanning more than three years, the Purchasing Managers’ Index (PMI) slipped below the growth threshold of 50 points for the first time in April 2019. It remained in negative territory until November 2019 before easing back to a positive 50.2 in December 2019.

The KOF Economic Barometer started a downward descent towards the end of 2018, recovering briefly before slipping continuously to 92.6 points in November, its lowest level since 2015. In December 2019, it improved again to 96.4 points. Accordingly, KOF anticipated feeble economic growth in recent months based on several contributory factors. In particular, performance was expected to be lower


than usual in the hospitality industry, banks and insurance companies, and demand from abroad will be lower. In manufacturing, however, indicators remained relatively stable.

Purchasing Managers’ Index, KOF Economic Barometer and

EUR – CHF exchange rate

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

0

20

40

60

80

100

120

140

Jan.

200

1Ja

n. 2

002

Jan.

200

3Ja

n. 2

004

Jan.

200

5Ja

n. 2

006

Jan.

200

7Ja

n. 2

008

Jan.

200

9Ja

n. 2

010

Jan.

201

1Ja

n. 2

012

Jan.

201

3Ja

n. 2

014

Jan.

201

5Ja

n. 2

016

Jan.

201

7Ja

n. 2

018

Jan.

201

9

EU

R – C

HF exchange rate

PM

I and

KO

F ba

rom

eter

EUR – CHF exchange ratePMIPMI growth threshold

KOF barometerKOF barometer 10-year average

Source: Procure, Credit Suisse, SNB, KOF and KPMG

Even in the fifth year of negative interest rates, the Swiss National Bank holds onto its belief that there are still sufficient arguments against a swift return to normal Swiss monetary policy. In the summer of 2019, the Fed cut the reference rate for the first time that year, while the ECB announced that it would resume its quantitative easing program and continue expansive measures.

Overall, the macroeconomic situation points to a slowdown, but not a trend reversal, for investment properties in the short term. The low interest rate environment that has shaped developments in recent years is likely to remain in place for the time being. It is unlikely that sluggish economic growth combined with relatively stable employment – but no serious recession – will be sufficient to trigger a phase of falling property prices.


Office marketThe economic upturn of the prior year boosted the level of office employment, which in turn pushed up demand for office space. However, growth slowed in the second half, as anticipated at the beginning of the year.

The FSO reported a fall in the growth rate of typical office employment, measured in FTEs, from +2.17% in the third quarter of the prior year to +1.60% in the third quarter of 2019.Growth in 2018 had largely been driven by an increase of over +4.0% in employment in professional, scientific, technical and economic services; this rate slowed down in 2019. In 2019, growth in the financial services and insurance segment hovered just above the 0% mark for the first time since the third quarter of 2015. The stable development enabled a strong increase in employment of +4.22% in the insurance sector, while employment in the provision of financial services was down -0.37% in the most recent analysis.

Following a rise in vacant office space in the four major Swiss cities to over 500,000 m² for the first time since 2005 in 2015, the trend has improved for office space providers over the last five years. In 2019, the level of vacant space was 14.9% below the peak of the last decade and -8.8% below the prior-year figure. The decline is attributable to the positive development in the cities of Zurich (-21.7%) and Bern (-39.2%) compared to the prior year. In Basel (+6.3%) and Geneva (+3.4%), however, vacancy rates continued to climb.

Office space vacancy in the principal centers

0

100,000

200,000

300,000

400,000

500,000

600,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Vac

ant

offic

e sp

ace

in s

q.m

Basel Bern Geneva Zurich

Source: City statistical offices and KPMG

Despite positive demand, asking rents for office space developed negatively in 2018, with a drop of -4.3% in Geneva, -0.9% in Basel and Zurich and -0.3% in Bern. When demand changes, there tends to be a lag before asking rents are adjusted in response. Some signs of a trend reversal were observed in the first half of 2019. In Basel, prices were up +1.8%, while asking rents stabilized in the cities of Bern (0.0%) and Geneva (+0.1%). At the same time, asking rents in Zurich fell by a further -2.2% compared to the prior year.

Yea

r-on

-yea

r em

ploy

men

t gr

owth

IT and telecommunicationsPublic administration

Other services

Annual growthEmployment Index

Financial and insurance servicesOther services

Indexed employm

ent developm

ent

80

90

100

110

120

130

140

150

160

-4%

-2%

0%

2%

4%

6%

8%

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

2012

Q1

2012

Q3

2013

Q1

2013

Q3

2014

Q1

2014

Q3

2015

Q1

2015

Q3

2016

Q1

2016

Q3

2017

Q1

2017

Q3

2018

Q1

2018

Q3

2019

Q1

2019

Q3

Changes in typical office employment by sector (full-time equivalent)

Source: BFS and KPMG


the focus of investors due to these effects, compounded by the scarcity of suitable investment opportunities in the residential segment.

Expectations for investment property prices by real estate

segment3

Index points

% o

f re

spon

ses

Res

iden

tial

Offi

ce

Ret

ail

Com

mer

cial

/In

dust

rial

Spe

cial

-pur

pose

pr

oper

ty

Moderately falling pricesModerately increasing prices

Price Expectation Index 2019Price Expectation Index 2018Price Expectation Index 2015Price Expectation Index 2012

Sharply increasing prices

Sharply falling pricesStable price expectation in %

-200

-150

-100

-50

0

50

100

150

200

100%80%60%40%20%0%

20%40%60%80%

100% 32% 43% 20% 57% 49%

Source: KPMG

Despite the improved situation overall, certain sections of the Swiss office space market continue to face structural challenges in addition to the issues of existing vacancies and falling asking rents. As a whole, however, the mood on the Swiss office space market has brightened and investors are confident that the downward trend of recent years will give way to stable price development.

At present, it remains to be seen how the relative attractiveness of offices in the various cantons will be affected by location competition triggered by implementation of the Federal Act on Tax Reform and AHV Financing (TRAF). The current status of developments and their potential impact for real estate investors are discussed in more detail in this issue spotlight article.

3 Visit sresi.ch for further details

Asking rents for office space in the principal Swiss cities

60

80

100

120

140

160

180

H1

2000

H1

2001

H1

2002

H1

2003

H1

2004

H1

2005

H1

2006

H1

2007

H1

2008

H1

2009

H1

2010

H1

2011

H1

2012

H1

2013

H1

2014

H1

2015

H1

2016

H1

2017

H1

2018

H1

2019

Ren

tal P

rices

Inde

x


Source: WP and KPMG

This development mirrors the findings of last year’s KPMG Swiss Real Estate Sentiment Index. With an index of 2.1 points, investments in office properties were expected to see a stable price development over the coming twelve months for the first time in Switzerland. At +53.3 points, the sub-index for office space shows the largest increase of all usage segments compared to 2018. The good economic development, successful leasing and a reduction in vacant space appear to add up to a more positive assessment of the market situation. Office properties have shifted back into


http://sresi.ch

Retail marketRecently announced changes on Zurich’s Bahnhofstrasse are symbolic of ongoing structural change in the Swiss retail market. The closure of the Manor branch marks the disappearance of another traditional name from the renowned shopping street. Retailers and owners of sales space face an uneasy future – innovation is called for.

Real and seasonally adjusted retail sales (excl. fuel) fell by -0.51% last year (as of November). The brief upward trend of 2018 stalled already in the first quarter of 2019. Consumer sentiment confirmed this development. The Consumer Sentiment Index – still positive at the end of 2018 – slipped back into negative territory in 2019 and stood at -4 points in November 2019. Contributory factors included lower expectations for economic development and a slightly poorer labor market outlook. Job security was still seen as good in 2019, however, and the associated willingness to make major purchases stayed more or less stable. Although the persistent strength of the Swiss franc last year was nothing new for Swiss retailers, it once again made shopping abroad more attractive. This international competitive pressure is set to intensify in border regions. In contrast, tourism made a positive contribution to the Swiss retail business in 2019. According to the FSO, the number of overnight stays increased over the summer of 2019 by +2.4% compared to the prior year to 22.6 million.

Retail sales and Consumer Sentiment Index

-60

-40

-20

0

20

40

60

80859095

100105110115120

Jan

2009

Nov

200

9

Sep

201

0

Jul 2

011

May

201

2

Mar

201

3

Jan

2014

Nov

201

4

Sep

201

5

Jul 2

016

May

201

7

Mar

201

8

Jan

2019

Nov

201

9

Inde

xed

reta

il sa

les

Consum

er Sentim

ent Index

Consumer Sentiment IndexSeasonally-adjusted retail sales in nominal terms

Seasonally-adjusted retail sales in real terms

Source: BFS, SECO and KPMG

Credit Suisse economists expected a further decline in sales in the non-food segment in particular for 2019. This development was once again driven by a renewed increase in online shopping. According to CRIF, store closures (2,869) outnumbered new openings (2,303) in 2019. Around a quarter of the closures relate to clothing retailers. Overall, demand for retail space is likely to continue to fall.

In the first half of 2019, the of Basel, Bern, Geneva and Zurich4 reported a +1.5% increase in vacant space overall, with Zurich (+37.4%) followed by Bern (+8.7%) recording the highest percentage increase. Basel (-11.9%) and Geneva (-1.0%) saw vacancies fall compared to 2018. Geneva remained the city with the most vacant retail space, however, followed by Basel, Zurich and Bern.

Retail space vacancy in the principal centers

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Vac

ant

reta

il sp

ace

in s

q.m


Source: City statistical offices and KPMG

The first half of 2019 saw some variation in the development of asking rents for retail space. Prices continued to climb in Zurich and Bern, with hikes of +5.9% and +5.6%, respectively. In contrast, asking rents in Basel and Geneva fell by -2.4% and -2.3%, respectively

4 Only retail space with a shop floor of more than 500m2 was included for analysis; the vacancy rate is therefore systematically under-reported.


Residential marketLittle has changed in the popularity of investments in residential space over the past year. With interest rates low and investment alternatives in short supply, investors looked favorably on the risk-return profile of this segment. The KPMG Swiss Real Estate Sentiment Index indicated that property investors will continue to prefer residential real estate in the coming year.

Although there was a decrease of -14.7% in planning permission granted for residential properties in 2019 compared to the prior period, it would be misleading to suggest that construction activity has declined. Closer inspection reveals that a large number of planning permission applications were submitted in the same urban economic regions, which led to longer waiting times. At the same time, an unusually high number of applications related to large-scale projects, which required longer processing times due to their complexity. The number of applications received for planning permission fell only slightly by 3.2% in this period.

The residential market was once again characterized by oversupply in 2019. According to the FSO, the vacancy rate rose by +4bps to 1.66% for Switzerland as a whole last year - a 20-year high. However, the pace of increase has slowed compared to previous years. While 6,500 new vacant apartments entered the market on average each year for the last five years, there were only 3,000 in the past year.

The number of one-person households in Switzerland increased in 2019. This pushed up demand for residential space. Last year, a good third of Switzerland’s 3.8 million private households consisted of one person, corresponding to 16% of the permanent resident population. The FSO reports that every other new household is now a one-person household. Away from the urban centers, rising supply is likely to outpace the additional demand.

Asking rents for office space in the principal Swiss cities

60

80

100

120

140

160

180

200

220Q

1 20

00Q

1 20

01Q

1 20

02Q

1 20

03Q

1 20

04Q

1 20

05Q

1 20

06Q

1 20

07Q

1 20

08Q

1 20

09Q

1 20

10Q

1 20

11Q

1 20

12Q

1 20

13Q

1 20

14Q

1 20

15Q

1 20

16Q

1 20

17Q

1 20

18Q

1 20

19

Ren

tal P

rices

Inde

x


Source: WP and KPMG

In summary, retailers operate in what remains a tough market. Swiss consumer sentiment was once again worse at the end of 2019 compared to 2018. E-commerce grew further and the Swiss franc appreciated as a result of geopolitical uncertainties. The year 2019 was dominated by structural shifts and providers of sales space remain under pressure in many areas in 2020.


Residential vacancy rates

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2015 2016 2017 2018 2019

Sw

itzer

land

Lake

Gen

eva

Reg

ion

Esp

ace

Mitt

ella

nd

Nor

thw

est

Sw

itzer

land

Zuric

h

Eas

tS

witz

erla

nd

Cen

tral

Sw

itzer

land

Tici

no

Source: BFS

There was also considerable variation in vacancy patterns between the regions. At +27bps, Ticino exhibited the highest increase in the number of vacant apartments, followed by the Espace Mittelland region (+16bps),

Northwestern Switzerland (+10bps), Eastern Switzerland (+8bps) and Central Switzerland (+4bps). The two urban regions of Zurich and Lake Geneva show a decline of -10bps and -7bps, respectively. This points to a widening of the gap between urban and rural areas.

There were various indications in the fourth quarter of 2019 that asking rents had recovered slightly after the low level of the last two years. According to the homegate.ch rental index, asking rents (recorded in December 2019) were up about +0.62% compared to the prior year. A cantonal comparison reveals the increase to be most pronounced in Basel Stadt at +2.25%. Appenzell Inner- and Ausserrhoden showed the sharpest decline over the same period at -1.6%. Comparing cities, Zurich exhibits the strongest growth since last December at +3.29%, followed by Basel (+1.79%) and Geneva (+1.52%). Lugano (-0.86%) and Lausanne (-0.4%), on the other hand, were the only cities in the homegate.ch rental index with falling prices.

Inde

xed

chan

ges

in r

enta

l pric

es Change Y

oY – S

witzerland

-1%

0%

1%

2%

3%

4%

90

95

100

105

110

115

120

125

130

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Dec

12

Jun

13

Dec

13

Jun

14

Dec

14

Jun

15

Dec

15

Jun

16

Dec

16

Jun

17

Dec

17

Jun

18

Dec

18

Jun

19

Dec

19

Change YoY – Switzerland

Rental Price Index for Switzerland Rental Price Index for the canton of Zurich

Rental Price Index for the canton of Basel

Rental Price Index for the canton of Bern

Rental Price Index for the cantons of Geneva and Vaud

Asking rents index, quality-adjusted

Source: homegate.ch and KPMG


The gap between the reference and asking rent indices closed further. Existing rents, measured by the FSO rent index, continued the upward trajectory of the last seven years, increasing +55bps in 2019. Asking rents exhibited growth of +26bps, which is equivalent to a delta of around 3.9 percentage points overall.

Indexed changes in current and asking rents

100

110

120

130

140

150

160

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Inde

xed

chan

ges

Existing rents Asking rents

Source: BFS, homegate.ch and KPMG

The year 2019 saw a continuation of the housing market development trend of recent years. Residential property is the measure of all things for many investors, construction activity remains high and the vacancy rate is likely to increase once again in many places in the second half 2019. Persistently low interest rates lay the foundation for further investments in this segment. However, the choice of location is becoming an increasingly central factor for residential property as the risk of regional overproduction continues to rise.


Direct property investmentsIn the second half of 2019, there was little change in the trend of persistent yield compression observed repeatedly in recent years on the Swiss property investment market.

The median net initial yields for residential property reached a temporary low of 2.9% in the first half of 2019 according to SIV/REIDA. Median net yields came to 3.2% in the second half of the year, an improvement on the prior year for the first time in the last five years. These figures point to a calmer transaction market for residential property. In the first half of the year, we already reported here that purchase yields had stabilized as a result of stagnating to falling asking rents and rising vacancy rates. This development appears to have continued in the second half of the year. However, in light of the gloomier interest rate forecast, lower purchase yields have been observed recently for some transactions. It remains to be seen whether these observations will prove typical for the residential segment as a whole and thus be reflected in returns reported this year. While median net initial yields in the residential segment rose, those in the office (3.2%, 2018: 4.4%) and in the mixed (3.1%, 2018: 3.6%) segment fell significantly short of the prior-year figures. This highlights the fact that investors view office properties significantly more positively in 2019 - a conclusion supported by the analysis of expected price development in last year’s KPMG Swiss Real Estate Sentiment Index (sresi) (see “Office market”).

Net initial yields by use category5

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

2017 2018 2019 2017 2018 2019 2017 2018 2019Residential Office Mixed use

Median

30th percentile

70th percentile

Source: SIV/REIDA and KPMG

5 Status in SIV/REIDA Market Report for second half of 2019

As in the first quarter, the median net yield on existing direct property investments fell on the prior year in the second quarter of 2019. The most significant drop of 40 basis points was observed in net yields on existing properties in the mixed segment. Here, the median net yield stood at 3.6% – the first time it has fallen below the median for residential property (3.7%) since figures have been reported. The low yield on mixed properties could be attributable to the fact that they tend to enjoy greater location quality and investors prefer central locations. At 4.1%, the highest yields on existing properties were reported in the office segment.

Net yields for existing investments by use category

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

2017 2018 2019 2017 2018 2019 2017 2018 2019

Residential Office Mixed use

Median

30th percentile

70th percentile

Source: SIV/REIDA and KPMG

Despite the weaker economic outlook of 2019 and the fact that returns on direct real estate investments stagnated or even fell, there is a risk that net initial yields could fall even further in the coming year due to current interest rate developments. If this happens, even yields on existing properties are likely to be squeezed.


closed at the end of December only slightly below record levels and showed an attractive yield of 21% for 2019, just short of the SMI performance.

Having plummeted to around 16% at year-end 2018, the premium on listed Swiss real estate funds recovered to 35% on average as of the end of December 2019. This still falls just short of the most recent peak of 37% seen at the end of February 2017. The highest premium of 65% was paid on the Streetbox Real Estate Fund, followed by La Foncière (57%). The average premium on securities from Swiss real estate companies was lower as of the end of December at 31% on the net asset value. The highest premium - 63% - was paid for Intershop, while Züblin had the largest discount at -33%.

Capital of approximately CHF 3.8 billion was raised as of the end of 2019. Novavest (CHF 52 million), Akara Swiss Diversity (CHF 131 million) and Schroder Immoplus (CHF 186 million) all raised capital in December. The volume of capital raised by listed real estate investment vehicles in 2019 thus failed to match the prior-year high of around CHF

Indirect property investmentsWith a yield of up to 0.19% in February, 10-year federal bonds were – comparatively at least – comfortably positive for much of 2018. In the first half of 2019, however, yields fell, reaching a new record low of -1.03% in mid-August 2019. By the last day of trading in December, yields had recovered to -0.47% but still closed the year 2019 clearly in negative territory.

Following a tough second half of 2018, the global equity markets were able to reverse the downward spiral and closed 2019 with the best performance since the financial crisis (MSCI World: 24%). The Swiss stock market also enjoyed a strong year of trading. The SMI closed 2019 with a plus of 26%, outperforming the global market.

Like the SMI, indirect real estate investments also generated impressive returns in 2019. At 37%, the overall yield of investments in real estate shares exceeded the explicitly positive SMI. The index of listed real estate funds

Movements in quoted property investments

Source: SWX, SNB and KPMG

-1.4%

-0.9%

-0.4%

0.1%

0.6%

1.1%

60

70

80

90

100

110

120

130

140

Jan.

18

Feb.

18

Mar

. 18

Apr

. 18

May

18

Jun.

18

Jul.

18

Aug

. 18

Sep

. 18

Oct

. 18

Nov

. 18

Dec

. 18

Jan.

19

Feb.

19

Mar

. 19

Apr

. 19

May

19

Jun.

19

Jul.

19

Aug

. 19

Sep

. 19

Oct

. 19

Cha

nge

in In

dex C

hange in 10-yearfederal bonds

Yield of 10-year bonds

Indexed change in overall return for property fundsIndexed change in overall return for property sharesIndexed change in Swiss Market Index


4.6 billion, which was attributable in part to the launch of three new funds by the insurance industry in 2018.

Like the yields on direct property investments, indirect property investments have also seen write-ups as a result of low interest rates in recent years. As interest rate differences are so important for exchange rate stability, we will probably have to wait for interest rate increases in the euro zone. The interest rate landscape in Switzerland is unlikely to change for the time being, then. However, the decline in the volume of capital raised last year – despite significant oversubscription in most cases – could point to a lack of investment opportunities in a competitive purchasing market.

Cum

ulative flow of

capital in CH

F million

In C

HF

mill

ion

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

-200

0

200

400

600

800

1,000

1,200

Property fund issues Property company borrowingsProperty company issues

Property company buyback

Cumulative capital inflows in 2017 Cumulative capital inflows in 2018 Cumulative capital inflows in 2019

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep Oct

Nov

Dec

Source: Bank J. Safra Sarasin and KPMG

Flow of capital into listed property investments in Switzerland 2019


The cantons are required to implement the corresponding measures via their cantonal tax laws and the reform is to enter into force already as of 1 January 2020. The cantons are currently working to implement measures based on the federal framework.

Tax rate cuts at the cantonal levelBesides the measures provided for by the tax reform, the cantons can lower their ordinary income tax rates. Some cantons have already approved the tax rate applicable when TRAF enters into force, or at least announced that a reduction is planned (see figure).

Potential impact on property investmentsAgainst this backdrop, the following topics could become relevant in the area of property investments:

• Cantonal income tax rate reductions may trigger extraordinary income due to the reversal of deferred tax liabilities when reported in accordance with applicable international accounting standards. In addition, tax rate reductions will lead to lower taxation of income from property leasing and, in some cases, sales, provided these are held by juridical persons.

• For holding companies with registered offices in a canton other than the canton in which the real estate company is registered, it will be important to focus more on the substance of the holding company’s financing activity in order to ensure that management actually takes place in the canton in which the holding company has its registered office.

• With regard to the NID, it is worth exploring whether financing (equity investments) currently granted by holding and group companies would be better off consolidated in a new financing company domiciled in the canton of Zurich; this would enable companies to take advantage of the NID. In particular, it may be worth restructuring loans in a financing company.

• Companies that currently still benefit from cantonal tax privileges and enjoy a low tax burden even in cantons with high ordinary income tax rates (e.g. Zurich) are currently evaluating how much tax they will pay post-TRAF implementation. The transitional measures can enable unchanged low taxation for a limited period of time (between five and ten years). If, after this, other beneficial measures cannot be applied and the tax rates are not significantly lowered, one remaining option is to transfer the company to a low-tax canton (e.g. Zug or Lucerne) or abroad. This could indirectly impact property investments by driving demand for office space up or down in the affected cantons.

• Similar effects could be seen in the residential segment if affected employees also move house.

Potential impact of Swiss tax reform on property investmentsMaxim Dolder, Senior Manager Tax Corporate

On 19 May 2019, the Swiss people voted to adopt the Federal Act on Tax Reform and AHV Financing (TRAF), confirming corporate tax reform in Switzerland. The measures are intended to strengthen Switzerland as a business location, with a focus on innovation, value creation and job security. In this spotlight article, we discuss how the act could impact the real estate sector.

Selected TRAF measuresTRAF aims to harmonize Swiss tax practices and laws with international taxation standards. Measures of potential relevance for property investors include, but are not limited to, the following:

• The tax reform abolishes the cantonal tax privilege for holding companies. From 1 January 2020, holding companies’ profits will therefore also be taxed at cantonal and municipal level (although the participation deduction is applicable).

• Alongside the abolition of the privileged tax statuses also comes a discontinuation of the generally reduced capital tax rates. Cantons have the option to introduce relief for capital tax to compensate for this, which should be granted for capital relating to participations, patents and similar rights, as well as group loans.

• Companies with an above-average equity ratio may benefit from the so-called notional interest deduction (NID) whereby an imputed interest deduction for tax purposes is granted on “safety equity”, i.e. the surplus above the average equity required for business operations. This measure is expected only to be offered by the canton of Zurich.

• Although a combination of measures may be applied, the law provides for minimum taxation of 30%. The patent box, multiple deductions for research and development, the NID and write-downs of hidden reserves for tax purposes («step-up» under old law) are permitted to reduce profit (before deduction of these measures, before loss carryforwards and excluding net participation income) by a maximum of 70%. This is especially relevant to consider in connection with the NID (see above).


Bottom lineThe individual instruments provided by TRAF are applicable to property investors only to a limited extent. The general reduction in income taxes can be seen as the main positive effect. Restructuring internal property financing may help reduce the tax burden further in certain circumstances.

Besides the direct effects on the real estate sector, it is also important to consider the indirect effects of tax reform. The adoption of TRAF puts an end for the time being to the legal uncertainty which had burdened the general invest-ment climate. However, it is important to keep an eye on the ongoing international developments in taxation. The OECD›s recently announced plans to tax company profits more heavily in the countries of sale in the future could affect location choices of companies with international operations. If companies choose to relocate away from Swit-zerland, the office vacancy rate would increase. For now, implementation of these plans is uncertain. What is clear is that TRAF has reformed and modernized Switzerland’s taxation system, which should benefit the real estate sector both directly and indirectly.

GE

VD

NE

FR

VS

BE

SO

JU

BS

SH

TI

GRUR

ZG

SZ

AG

LU

OW

ZH

TG

AI AR

SGGLNW

BL

Year 2019 Numbers in percentImplementation TRAF

24.1

613

.99

13.9

913

.99

15.6

113

.57*

20.4

015

.01*

13.0

413

.04

15.7

212

.33*

19.8

613

.72

21.3

815

.06*

20.7

013

.45*

18.6

118

.61

21.6

321

.63

21.7

416

.98

12.3

212

.32

12.7

412

.74 12

.66

11.9

7

14.3

511

.91

21.1

518

.19*

*

14.9

212

.64

20.5

515

.89*

16.1

214

.73

15.0

214

.13

16.4

313

.40

14.1

612

.66

13.0

413

.04

17.4

014

.50

15.6

812

.42

Source: KPMG* Gradual reduction over the next five years ** First reduction of the taxe rate from 2021 (on year after TRAF implementation) to 19.70% ETR, second reduction (further proposal) from 2023 to 18.19% ETR. Note: Maximum announced or decided input tax rate for direct federal taxes/cantonal taxes/communal taxes for the cantonal capital concerned. As of 31 December 2019


M&A/Capital Market• Structuring and execution of transactions (Lead Advisory)

– Asset deals: Acquisition and disposal of properties and portfolios – Share deals: Mergers, spin-offs, IPOs, private placements

• Arrangement of indirect investments, such as fands or trusts• Fand raising for specific projects• Debt & Capital Market Advisory

Investment Advisory• Investment advisory for national or international indirect real estate investments• Structuring of real estate investments within portfolios• Qualitative and quantitative analysis of investment products• Monitoring and investment controlling, portfolio performance measurement

Strategy/Organization• Strategy development and implementation

– Business planning/business modelling – Corporate/public real estate management – Asset and portfolio management

• Analysis of organization and processes; organizational development, internal control system

• Performance management/MIS/investment monitoring• Risk management and financial modelling• Turnaroand and financial restructuring• Support in digital transformation

Valuation/Due Diligence• DCF -valuations of properties and real estate portfolios or companies• Independent valuation reports for financial statements• Valuations for acquisitions or disposals• Feasibility studies and valuation of real estate developments• Transaction-focused due diligence and process management• Major Project Advisory

We are also pleased to answer your tax-related, legal and regulatory questions regarding real estate and we support you in process and cost optimization as well as solutions for your technological infrastructure.

Comprehensive Real Estate Advisory from one source


Table of abbreviationsBAK Basel BAK Economics AG

FSO Federal Statistical Office

ECB European Central Bank

GfK Institute for Consumer Research, market research institute of Switzerland

IPO Initial Public Offering

IWF International Monetary Fand

KOF The Swiss economic research institute of the Federal Institute of Technology

PMI Purchasing Managers’ Index

REIDA Real Estate Data Association

Seco State Secretariat for Economic Affairs

SEM State Secretariat for Migration

SIV Swiss Association of Real Estate Appraisers

SNB Swiss National Bank

SWX SWX Swiss Exchange

WP Wüest Partner AG

YTD TR year-to-date total return

Editorial deadline: 15 January 2020


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received, or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The scope of any potential collaboration with audit clients is defined by regulatory requirements governing auditor independence. If you would like to know more about how KPMG AG processes personal data, please read our Privacy Policy, which you can find on our homepage at www.kpmg.ch. © 2020 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.

Please contact us KPMG AG Advisory, Real Estate Räffelstrasse 28P.O. Box 8036 Zurich

KPMG SAEsplanade de Pont-Rouge 6PO Box 15711211 Geneva 26

KPMG AG Bogenstrasse 7P.O. Box 11429001 St. Gallen

Oliver SpeckerDirectorReal Estate Eastern Switzerland+41 58 249 41 [email protected]

Kilian SchwendimannDirectorReal Estate+41 58 249 36 [email protected]

Laurent AillardSenior ManagerReal Estate Suisse Romande+41 58 249 28 [email protected]

René BüchiManagerReal Estate Research+41 58 249 57 [email protected]

Ulrich PrienPartnerHead of Real Estate Switzerland+41 58 249 62 [email protected]

Beat SegerPartner Real Estate M&A+41 58 249 29 [email protected]

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