UBS Outlook Switzerland - A change of direction The outlook for the economy and real estate market
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UBS Outlook Switzerland
February 2023 | Chief Investment Office GWM | Financial analysis
A change
of direction
The outlook for the economy
and real estate market
UBS Outlook Switzerland 1Q 2023 Please see the important legal information at the end of this document. Regional CIO Switzerland: Dr. Daniel Kalt Editor-in-Chief: Dr. Alessandro Bee, Dr. Katharina Hofer Editor: Lionbridge Editorial deadline: 13 January 2023 Desktop publishing: CIO content design Cover photo: Getty Images Languages: German, English, French and Italian Contact: ubs.com/cio February 2023 – UBS Outlook Switzerland 2
Editorial
Dear Reader, appreciation of the Swiss franc.
We will take a closer look
Switzerland’s economy was defined at these topics in this issue of
last year by the residual catch-up UBS Outlook Switzerland.
potential from the COVID-induced
recession on the one hand and by the The second part of our publication
supply chain bottlenecks caused by examines the Swiss real estate market
the pandemic and the war in Ukraine in more detail. The sharp rise in inter-
on the other. This was compounded est rates has had little impact on
by exploding energy prices and con- prices in the market for owner-occu-
cerns about the energy supply situa- pied homes so far. However, this is
Daniel Kalt tion. In addition, the central banks likely to change in conjunction with
Chief Economist Switzerland increased interest rates sharply in the economic slowdown expected this
response to soaring inflation, meaning year, and curb demand for residential
that the European economy has property. The economic environment
meanwhile weakened to a level bor- should have a more drastic effect on
dering on recession. The growth out- investment properties, which would
look for the current year is very mod- then have to compete with bonds
est, at least in the first half of the year, again for investors’ funds. If so, possi-
and this also applies to Switzerland. ble rent increases will not be able to
stop falling valuations.
While the supply chain is expected to
gradually normalize in 2023, we do
not expect the risks in relation to the I hope you enjoy reading this issue.
energy supply situation to be elimi-
nated so quickly. In addition, compa-
nies in Switzerland should continue to
face structural challenges, especially
labor shortages caused by demo-
graphic issues and the latent risk of an
February 2023 – UBS Outlook Switzerland 3From inflation worries to economic risks
From inflation worries
to economic risks
The catch-up in consumption and the return of inflation dominated the Swiss
economy last year. Economic risks and a decline in inflation are likely to define the
next few quarters. However, the uptick in inflation should continue to make itself
felt in 2023, with key interest rates and 10-year yields above 1% and a stronger
Swiss franc against the euro and the US dollar.
Alessandro Bee, Florian Germanier, Carla Ganzoni
Economy and inflation
In the last two years, the Swiss economy was bolstered by more the Eurozone suffers from this crisis, the greater the
the catch-up potential that arose following the strong eco- decline in demand for Swiss exports. We expect Swiss GDP
nomic slump during the pandemic. Industry realized this to grow by only 0.7% this year (Fig. 1).
potential in 2021, but the service industries with a domes-
tic focus (hospitality, tourism, leisure) could only benefit
after the COVID-19 measures were lifted. However, the
catch-up potential is now exhausted—this tailwind for the Figure 1
Swiss economy will slacken significantly this year. Slowdown in growth and inflation
GDP growth, unemployment and inflation, in %, with UBS forecasts (*)
2023 to be dominated by risks
This year’s economic environment is defined by risks. The 5
sharp rise in interest rates in the US is likely to lead to a
4
marked slowdown in growth—possibly even a recession—
which in turn burdens Swiss exports. Economic recovery in 3
China depends on the country’s COVID-19 policy. A rapid
opening of the Chinese economy supports the global econ- 2
omy, but delays in opening up also pose a risk to global
1
and Swiss supply chains.
0
Meanwhile, developments regarding the energy crisis in 21 *22 *23 *24 21 22 *23 *24 21 22 *23 *24
Europe will be crucial for the Swiss economy. The sharp rise GDP growth Unemployment Inflation
in natural gas and electricity prices in 2022 are burdening Sources: Macrobond, UBS
household incomes and companies’ profit margins. At the
same time, uncertainty about future prices and doubts
regarding the ubiquitous availability of energy in the future
is putting the brakes on investments by Swiss companies.
Foreign demand is also affected by the energy crisis. The
February 2023 – UBS Outlook Switzerland 4From inflation worries to economic risks
Energy to remain an issue next winter
While some Russian natural gas was used to replenish gas
Interest rates
storage facilities in summer 2022, this option may not be The surprising rise in inflation forced the Swiss National
available this year, meaning that Europe may potentially Bank (SNB) to end its negative interest rate policy in 2022.
start next winter with fewer reserves. The challenges in the How monetary policy will be shaped in the future will
energy sector are expected to last beyond this year. depend on how inflation continues to develop. To prevent
inflation from becoming entrenched, the SNB is expected
However, the COVID-19 pandemic showed that house- to raise its key interest rate by an additional 0.5 percentage
holds and companies were able to adapt quickly to a new points in March (Table 1). We also expect an end to the
situation. Growth may suffer from the uncertainty next rate increases once inflation returns to the SNB’s target
winter, but it is unlikely to plummet. In contrast, we expect range of 0 to 2% as the year progresses. On the other
a marked recovery next year. Though after a slow start to hand, we think the SNB will not hesitate to raise key rates
the year ahead, growth is expected to be only 1% in 2024. further in the second half of the year if inflation remains
high.
The economic slowdown should bring the recovery in the
labor market to an end. The structural labor shortage (see Besides inflation, the European Central Bank’s (ECB) mone-
section “Challenges for companies in 2023”) should lead tary policy is an important guide for the SNB. If the ECB
to only a slight increase in unemployment in 2023. opts for a less restrictive monetary policy in March instead
of raising the key interest rate as is expected today, we
Inflation to fall below 2% in 2023 would also expect the SNB to take a small interest rate step
Although the sharp rise in energy prices drove up Swiss or no step at all. However, we think the SNB would proba-
inflation last year to its highest level since 1993, inflation- bly stick to a 0.5% increase if the ECB decides to pursue a
ary pressure is expected to ease considerably during the more restrictive monetary policy than expected, especially
course of the year to below 2%. since inflation in Switzerland is significantly lower than in
the Eurozone.
The rise in rents and electricity prices should continue to
fuel inflation, but factors dampening inflation should pre- Symmetrical currency market interventions
dominate. We expect energy prices to stabilize compared While the SNB concentrated on preventing the Swiss franc
to 2022. The normalization of supply chains should remove from appreciating excessively in the past, a stronger franc is
bottlenecks as drivers of inflation. Any economic slowdown desirable at the moment because of its disinflationary qual-
will significantly limit the scope for companies to increase ities. The SNB sold foreign currency in the fall to prevent a
prices. Furthermore, a wage increase of 2.2% (according devaluation of the franc. We think it will likely repeat this
to the UBS wage survey in fall 2022) should not be enough move again in 2023 if a significant depreciation occurs.
to set a wage-price spiral in motion.
If inflation returns to the target range this year, a strong
We expect an inflation rate of 2.1% this year, followed by franc may lose some of its appeal for the SNB. If the franc
1.3% in 2024. appreciates significantly in this situation and the Eurozone
falls into a deep recession, the SNB would even resume its
foreign currency purchases.We think the SNB will not start
lowering rates until it is sure that the inflation risks have
permanently subsided—which we do not expect to happen
until 2024.
February 2023 – UBS Outlook Switzerland 5From inflation worries to economic risks
10-year bonds moving sideways Figure 2
10-year bond yields rose strongly last year because the SNB distributions also unlikely in 2023
capital market was surprised by the hike in the key interest
Estimated probability of a profit, in percentage, of over
rate, in our view. As the market already expects the key CHF 40 billion, as at the end of...
interest rate to rise in the future, no significant changes are
100
likely at the long end of the yield curve. We expect interest
90
rates to move sideways in the current range (Table 1). 80
70
60
Table 1 50
40
Forecasts for Swiss interest rates in % 30
June 2023 Dec 2023 20
10
Key interest rates 1.5% 1.5%
0
CHF 10Y Interest rates 1.25% 1.25% 2023 2024 2025 2026 2027
Source: UBS Source: UBS
Higher SNB profit potential, distributions remain
uncertain for now
The global rise in inflation and interest rates impacted over CHF 20 billion. Our conservative estimate for
the SNB portfolio heavily. The simultaneous decline in the profit potential of the entire SNB portfolio ranges
bond and equity prices caused a record loss, and fueled between CHF 10 to 15 billion.
fears that the SNB will no longer be able to generate a
profit and make distributions in the long term. For a distribution to be made in the next year,
the SNB would have to generate a profit of around
However, the long-term profit potential of the SNB CHF 40 billion in 20231. Based on our risk-return
portfolio has improved in the last twelve months. expectations for different asset classes, the probability
Higher interest rates are driving up interest income. of an SNB profit of this magnitude is less than 30%.
At the same time, the decline in equity valuations Nonetheless, distributions are realistic in the medium
increases their future expected returns, which should term. There is a 60% probability that the SNB will
also benefit the SNB’s profit potential. On the other generate a profit of more than CHF 40 billion by 2027
hand, there is a negative effect from the higher interest (Fig. 2).
on sight deposits that the SNB has to pay.
However, the longer-term profit potential depends
The Swiss franc should significantly influence the profit heavily on the size of the SNB portfolio. If the SNB
potential. If it returns to its fair value (purchasing sells its foreign exchange reserves, the portfolio would
power parity, see the section on “Currencies”), it shrink and therefore also the probability of a high net
should appreciate significantly against most currencies. profit.
This represents profit potential of around CHF 10 bil-
lion. However, if the Swiss franc remains overvalued to
a certain extent or if its fair value falls such that it
1
A distribution is only made if the sum of the net result for the year
appreciates less, the potential is more in the region
after allocation to provisions for currency reserves (assuming allocation
of CHF 15 billion. If the Swiss franc trends sideways to provisions of CHF 5 billion per year) and profit carried forward from
or even depreciates, the profit potential could be the previous year is positive.
February 2023 – UBS Outlook Switzerland 6From inflation worries to economic risks
Currencies
(Relative) purchasing
The Swiss franc was sought after in 2022 as a safe haven.
Inflation-related surprises, interest rate hikes by the major power parity
central banks and geopolitical events increased demand.
The theory of relative purchasing power parity
Significantly higher inflation abroad offset the appreciation states that changes in exchange rates between
of the franc for Swiss exporters. The purchasing power par- two countries offset inflationary differences in the
ity of the EURCHF and USDCHF exchange rate changed by long term. The currency of an economy with high
nearly 17% in favor of Swiss exporters. The sharp decline inflation depreciates in the longer term against the
in the EURCHF purchasing power parity meant that the currency of a low-inflation economy.
Swiss franc was no longer overvalued against the euro. The
undervaluation of the Swiss franc against the US dollar was
even accentuated, in our view.
Three scenarios regarding the valuation of the franc
How the valuation of the Swiss franc evolves over the next
five years depends on global inflation. If we see a return to
previous inflation trends (baseline scenario), inflation differ-
entials between Switzerland and other countries are likely
to narrow significantly and slow the decline in purchasing
power parities. In such a scenario, we expect the EURCHF
and USDCHF fair values to reach 0.92 and 0.70 respectively
in the next five years (Table 2).
Table 2
Forecasts for USDCHF and EURCHF purchasing power parity
Purchasing Power Parity EURCHF
Current 2023 2024 2025 2026 2027
Baseline scenario 0.99 0.97 0.96 0.95 0.94 0.92
Stagflation scenario 0.99 0.86 0.80 0.75 0.72 0.70
Financial crisis scenario 0.99 1.10 1.07 1.06 1.05 1.04
Purchasing Power Parity USDCHF
Current 2023 2024 2025 2026 2027
Baseline scenario 0.76 0.76 0.74 0.73 0.71 0.70
Stagflation scenario 0.76 0.65 0.60 0.56 0.54 0.53
Financial crisis scenario 0.76 0.84 0.81 0.80 0.79 0.78
Source: UBS
February 2023 – UBS Outlook Switzerland 7From inflation worries to economic risks
If energy prices even decline sharply, as happened at the Table 3
time of the 2008/2009 financial crisis, price levels abroad Forecasts for USDCHF and EURCHF
are likely to fall more sharply than here in Switzerland. This June 2023 Dec 2023
would lead to a reversal of inflation differentials and a rise
in purchasing power parity. The EURCHF and USDCHF fair EURCHF 0.95 0.95
values could return to 1.10 and 0.84 respectively in the USDCHF 0.90 0.86
short term. However, lower inflation in Switzerland would Source: UBS
follow after the end of the recession, and falling purchas-
ing power parity would therefore be expected again.
On the other hand, if global inflation remains at its current However, energy prices should remain well above what
level in the next few years, meaning that the inflation they were two years ago. Europe is likely to be even more
differentials of other countries against Switzerland remain reliant on liquefied natural gas imports in 2023, which
high, we can expect the fair value of EURCHF to fall to should continue to bolster the price.
0.70 and that of USDCHF to 0.53.
Turnaround on the labor market weighing on
Franc overvalued again in 2023? companies
The looming downturn in the Eurozone makes the Swiss Developments on the Swiss labor market after the COVID-19
franc attractive again this year. We expect the EURCHF rate crisis is surprising. It is becoming increasingly tight only two
to fall to 0.95 by the end of 2023 (Table 3), but the Swiss years after a very severe recession. The unemployment rate
franc is likely to remain undervalued against the US dollar fell in 2022 to its lowest rate in more than twenty years.
in 2023. Whenever the cycle of rising interest rates ends, One reason is the federal government’s successful labor
the overvaluation of the US dollar should come to the fore market policy during the crisis, while another reason lies in
and weaken the currency. However, the purchasing power the structural changes in the labor market.
parity of the USDCHF exchange rate remains well below
our spot forecast of 0.86 at the end of 2023 in all three The labor market account of the Swiss Federal Statistical
scenarios described, meaning that the US dollar should Office (Bundesamt für Statistik – BFS) shows that the num-
remain overvalued against the Swiss franc. ber of people in employment rose by 67,000 in 2021. This
increase is no greater than the annual average over the
past ten years. Net immigration of workers in 2021 was
also no higher than in the previous decade.
Challenges for
companies in 2023 Another factor is the reduction in the supply of workers.
While net entries to the labor market averaged 19,000
One of the greatest challenge facing Swiss companies at people per year in the last decade, 6,000 more people
the start of last year was the restrictions associated with exited than entered it in 2021. This difference is largely
the pandemic. While these were lifted during the course of attributable to demographic change. In an aging society,
last spring, supply chain bottlenecks persisted. The energy more people are retiring, compared to the number of
crisis and soaring prices that accompanied it then became younger entrants into the workforce2. Companies have
increasingly important over the last year. been increasingly forced to rely on unemployed persons to
fill vacant positions. In 2021, 42,000 new workers were
Some of these challenges are likely to lose their urgency recruited from the ranks of the unemployed—more than
in 2023, but companies still face different and new chal- twice the average in the previous decade. The sharp
lenges. decline in unemployment is therefore largely due to demo-
graphic change instead of an above-average demand for
Supply chains are easing, but not in energy labor.
There are signs that bottlenecks in the supply chains are
easing considerably at both global and Swiss level. In the
surveys carried out as part of the Purchasing Managers’
Index, companies see delivery times at the same level as
before the pandemic—supply chains have thus returned
to normal. Freight costs are falling at the same time. An 2
It is also possible that employees have given up their jobs, partly as a
economic slowdown should further promote this easing. result of the Covid-19 pandemic.
February 2023 – UBS Outlook Switzerland 8From inflation worries to economic risks
The most recent UBS wage survey produced a similar Politicians and companies need to act
result. In the survey published November 2022, 80% of The adjustment of the retirement age that has been
companies said they were finding it difficult to fill vacan- decided so far can only partially ease the situation—the
cies. In 2021, 65% of companies said they were having dif- OASI reform is expected to increase the labor force supply
ficulties in this regard compared to only 45% in 2016. Two by 20,000 to 50,000 people. A drop in the demand for
thirds of the companies surveyed see demographic change labor should not be counted on either. To close the gap,
as the most important reason for the labor shortage. growth in the demand for labor would have to be 0.4%
lower than population growth.
The challenge of the next decade: Labor shortages The labor shortage is expected to be the biggest challenge
Based on the BFS’s reference scenario for changes in the that Swiss companies and economic policy will face in the
labor force, the supply of labor should grow by 215,000 next decade. Increasing levels of immigration is a supple-
persons between 2021 and 2030. This is due in particular mentary measure because of social and political resistance.
to labor immigration—400,000 additional workers if the The focus therefore is on stronger integration of older
trend that has lasted since 2011 continues. employees and mothers into working life—where is still
some potential.
Demographic change acts in the opposite direction.
820,000 people who were employed in 2021 will reach the
3
The age at which people start their working life varies between 15 and
25, depending on the education they pursue.
retirement age in this decade (2021 to 2030) compared
with only 680,000 people coming of age to succeed them,
i.e. they will reach the age of twenty and are employed 3. Figure 3
This is in marked contrast to the last decade and the period More people leaving the labor market than
from 2001 to 2010 (Fig. 3). entering it in this decade
Entries: People who are employed and 20 years old;
Since 2000, the number of employed persons has been
Exits: Workers who will reach retirement age in the next decade,
growing at an average rate of 0.2%, faster than the popu- in 1,000 persons
lation. If this trend continues, the Swiss labor market
1000
should need approximately 490,000 new workers by 2030.
A comparison of labor demand and supply leads to a gap 800
of around 270,000 workers by 2030 (without the OASI 600
reform). 400
200
0
–200
2001 to 2010 2011 to 2020 2021 to 2030
Entries (20 years) Exits (64 and 65 years) Difference
Sources: BFS, UBS
February 2023 – UBS Outlook Switzerland 9Getty Images
New old world
Housing has become more expensive, households’ purchasing power is eroding and
real estate is competing more with bonds for investors’ money. We expect the price
of owner-occupied homes to rise only slightly this year. However, the valuations of
investment properties are likely to fall overall.
Claudio Saputelli, Matthias Holzhey, Katharina Hofer, Maciej Skoczek
Greater household growth, higher housing needs, rising purchases has continued to erode as prices for owner-
employment and increasing demand for consumer goods occupied homes have outpaced income growth over the
boosted the demand for space in the previous year. How- past three years. For the same area and based on afford-
ever, these drivers of the real estate market are expected to ability criteria, house buyers need either just under 20%
ease in 2023. more income or roughly 50% more equity on average
nationwide than before the pandemic. Against the back-
The average tenant household cannot save much and only drop of decreased assets, the consumption of space is
has limited assets overall. The higher prices for everyday therefore likely to decline also for owner-occupied homes.
goods and rising heating and electricity costs have also
eroded savings. Landlords in regions with higher vacancy Households’ lower purchasing power is also being felt by
rates will therefore likely be mindful of burdening tenants the market for investment properties. If rent increases can
with increases that match the rising reference interest only be enforced to a limited extent, this puts pressure on
rates. The inclination to change residency will also fall. This valuations. Real estate prices are likely to decline, espe-
is because it involves a reduction in space of up to 20% in cially in prime locations in the residential and office seg-
many regions, with household expenditure remaining ments. This is because higher interest rates improve the
unchanged. Overall, the demand for residential space is relative attractiveness of bonds, meaning that real estate
therefore likely to be lower, out of necessity. may no longer be one of the treasure troves of Swiss
asset classes. Therefore, this year’s key word is therefore
Thanks to long-term mortgages and moderate debt, many selectivity.
owner-occupied households tend not to have suffered any
major financial losses (yet) and are financially relatively well-
positioned. By contrast, purchasing power for new home
February 2023 – UBS Outlook Switzerland 10New old world
Owner-occupied homes: Figure 4
Expensive locations remain in demand
A breather is expected Change in asking prices by price level*, 2022 vs. previous year,
in %
The strong increase in the prices for owner-occupied
15
homes continued in 2022, increasing by 5.5% in the space
of a year in the wake of strong economic growth. The rise
in the price of single-family houses was somewhat greater 10
than that of owner-occupied apartments. At the regional
level, the price increases were relatively homogeneous. At
the same time, the expensive locations were able to set 5
themselves further apart from the rest.
Negative signs 0
Low Median Luxury
The turnaround in interest rates has hardly had an impact
on the owner-occupied housing market so far. This is firstly Condominiums Single-family houses
due to the run on money-market mortgages, which *Low: 10% quantile in the municipalities’ cheapest 50%;
luxury: 90% quantile in the municipalities’ most expensive 10%;
became considerably less expensive than long-term mort- median: 50% quantile in the other municipalities
gages during the course of 2022. Buyers of owner-occu- Sources: Wüest Partner, UBS
pied homes who relied on variable rate mortgages did not
expect significantly higher key rates over a longer period of
time either. The interest rate effect on demand is damp-
ened further by the fact that mortgage interest can be
deducted from taxable income and therefore does not bur-
den household finances entirely. However, the strong price Second homes: Slowdown
increases should come to an end this year with the
expected economic slowdown and against further interest expected
rate hikes.
Asking prices for second homes rose by nearly
The financing costs expected over the ten-year term more 10% across Switzerland last year. However, price
than doubled y/y, irrespective of the duration of the fixed increases on this scale are likely to be a thing of
interest period. 2022 was a turbulent year for the stock the past for now as buyers increasingly refuse to
market, which also weighed on assets and therefore on the pay asking prices. We are also seeing a growing
equity available to finance an owner-occupied home. For shift in demand towards smaller properties and
the first time since 2014, the ongoing costs of owning regions with generally lower prices. Given the eco-
one’s own home were higher than the rent for a compara- nomic slowdown, we expect prices in this segment
ble apartment. Likewise, new investments in the buy-to-let to increase at a much lower rate in 2023. If foreign
segment became less attractive. Long-term interest on bor- demand for prime properties levels off, lower
rowed capital was higher than the expected return on prices can also be expected in some regions.
income, meaning that the use of more expensive borrowed
capital led to a negative leverage effect.
February 2023 – UBS Outlook Switzerland 11New old world
Demand is less broad-based
However, flagging demand is met with low supply. The
Rental apartments: From a
number of planning applications for new apartments has
been falling since 2018. Higher building costs and the lack
seller’s to a buyer’s market
of skilled staff in the construction industry act as con- The turbulent economic environment at the start of the
straints here. Nonetheless, the lower demand for buy-to-let COVID pandemic reinforced expectations of sustained neg-
properties in the future, which has absorbed around one- ative interest rates. This fueled demand for multi-family
third of new homes in the past, should somewhat offset houses, resulting in increased transaction prices of around
the shortage. In addition, residential construction is 10% between the beginning of 2020 and 3Q22. The price
expected to shift increasingly towards owner-occupied of residential properties in prime locations rose by as much
homes, as rental apartments have become less attractive as as 30% during this period. However, at least since the era
an investment. Despite this, we believe the owner-occupied of negative interest rates came to an end, investor interest
housing market will remain undersupplied in the medium in prime residential properties has declined sharply. Trans-
term. action prices are falling, while net initial yields are gradually
trending upwards again.
Demand for owner-occupied homes should become more
selective again, and sellers’ price expectations will collide Unchecked demand for housing
with the new, more critical market reality. However, the At the same time, the demand for housing remains robust.
lower willingness to pay in order to own one’s own home The exhausted labor market here is accompanied by accel-
does not necessarily entail falling prices, provided that the erated immigration from the EU to Switzerland. Moreover,
number of employees in high-wage industries continues to a significantly higher number of additional residential units
grow strongly. Overall, we expect prices for owner-occu- were rented or sold in the past two years than on average
pied homes to rise slightly in the current year. The price of in the previous decade. This is due partly to increased
single-family houses should rise somewhat more (+1.5%) household growth—the number of single-person house-
than that of condominiums (+1.0%), due in part to their holds, in particular, has grown faster than the average
very limited supply. This would be the first inflation- since 2019. On the other hand, the rise in working from
adjusted fall in prices in more than two decades. home behavior (WFH) led to the relocation of primary resi-
dences to the mountains and therefore to more second
residences in urban regions. Both trends should slow down
in the next few quarters due to the weaker economy.
Nonetheless, the demand for housing is expected to con-
tinue to exceed construction activity.
Figure 5
Falling prices despite rising rents
Change in transaction prices for residential properties as well as the asking and existing rents; per quarter compared
to the previous year, in %
8
6
4
2
0
–2
–4
2019 2020 2021 2022 2023*
Prices Asking rents Existing rents
Sources: FSO, SNB, Wüest Partner, UBS
*UBS estimate
February 2023 – UBS Outlook Switzerland 12New old world
Plummeting vacancies
Vacancy rates are therefore expected to return to the long-
Office space: Flight to quality
term Swiss average of just over 1% over the next few Despite concerns, there is almost no evidence of a working
quarters. The tailwind for this comes from the number of from home effect on key figures for the office space mar-
planning applications submitted, which was down 20% in ket. The supply ratio for office space fell noticeably in the
2022 versus the average of the previous three years. In last four quarters from 6.9 to around 6%, and is therefore
addition, significantly higher construction costs reduce the at the lower end of the range seen over the last 15 years.
profitability of new construction projects, which delays or This decline was spread broadly across the regions and was
in some cases even prevents them from being carried out. a direct consequence of the good economy, which was
reflected in office-based employment being 5 to 6% higher
Asking rents (rents for first-time letting, new letting and re- than at the end of 2021.
letting) are therefore expected to rise by around 2.5% this
year. In the Greater Zurich Area, Central Switzerland and However, office space is unlikely to become scarce in the
the Lake Geneva region, where vacancy rates are well near future as the pipeline for construction projects is well-
below the national average, asking rents are expected to filled. The supply of modern office space, especially in
grow as high as the mid-single-digits. Unlike recent years, Western Switzerland, is expected to rise significantly up to
asking rents in the upper rental segment are also expected 2024. However, construction planning points to a clear
to rise, as competition with home ownership has eased on slowdown in new building in the medium term. Building
the back of higher mortgage rates. permits are already below the long-term average for sev-
eral years. Higher financing costs and uncertainty regarding
Cash flows lagging behind the market outlook for office space investments also led to
Rents for existing rental contracts are expected to rise more reduced interest in new projects in 2022.
slowly than asking rents. Current rental law allows existing
rents to be increased by a total of 3–4% by the end of Green is key
2023 due to the expected increase in the reference interest New buildings currently offer a clear marketing advantage
rate and increased consumer prices. However, only rental over existing stock. “Green” office space is increasingly
contracts that are based on today’s reference interest rate becoming a pillar of companies’ internal sustainability strat-
of 1.25% will be affected by the increase initially. Further- egies. Tenants—international companies in particular—are
more, not all landlords are expected to enforce this, given therefore likely to be increasingly focused on the sustain-
the ancillary costs and the lower purchasing power of ability status of their office space. WFH has also led to
many households. competition between office and WFH workspaces. The
quality of office spaces has therefore become more impor-
The number of changes of tenants is also likely to decline tant for recruiting and retaining talent, and is a key factor
as asking rents rise, which should slow down the adjust- for rental success, in our view.
ment of rents to market levels. Existing tenants with leases
of more than 15 years pay nearly 30% less rent on average However, a broad-based refurbishment boom has not
nationwide than new tenants. In Geneva and Lausanne, materialized so far, as the purely financial incentives were
where this difference between existing and market rents is relatively low. This is because energy costs for many ten-
particularly pronounced, up to 40% of tenants have these ants account for a negligible 1 to 2% of total expenses.
rental contracts. Any change of residence would signifi- However, this restraint is likely to evaporate soon, in our
cantly drive up rental costs for these tenants. view. Because of the growing strategic importance of sus-
tainable space and possibly stricter legal requirements, we
Revenues in the residential property portfolio should there- expect increased refurbishment activity in good locations
fore only increase in part and with a delay. Combined with towards “green” offices.
current interest rate expectations, residential investment
properties are currently overvalued by 10 to 15%, in our
view. Rental prices are rising too slowly to offset the nega-
tive interest rate effect on the property values. We there-
fore expect value corrections to be made over the next few
quarters.
February 2023 – UBS Outlook Switzerland 13New old world
Only the best counts
Employment growth in the office sector should more than
Retail space: No reliance on
halve from the previous year to around 1% in 2023, which
should lead to slightly higher supply ratios. Inflation is likely
consumers
to favor higher rents in general through indexation in cur- Real retail sales were just over 6% higher between January
rent rental contracts. However, we think the potential for and November 2022 than in the same period in 2019
real rents to rise is low and is limited to office space in eas- before the COVID pandemic. This is significantly higher
ily accessible and representative locations fit out to the lat- than the potential growth in demand that would have
est standards. resulted from population growth alone. One of the key
drivers was the increase in working from home since 2020,
Transaction prices and valuations for office properties are which led to higher demand for foodstuffs and fixtures at
likely to trend downwards overall as a result of higher interest home. The fall off in shopping tourism also supported the
rates. In addition to highly interest-sensitive prime locations, local retail trade. Both effects have eased the pressure on
the value of office space in secondary locations requiring ren- the demand for retail space caused by the increase in
ovation should fall significantly—even if fully occupied. online shopping, and have prevented a sharper decline in
rents averaged across the country.
Question mark over WFH
Roughly half of office workers are working from home part Return to normality
of the time, meaning that many offices remain empty or Changes in consumer behavior as a result of working from
are extremely underoccupied. Nonetheless, this has only home have also led to a regional shift in demand for retail
impacted marginally on the overall demand for office space goods away from the major centers. For example, asking
so far. Many companies are tied to long-term rental con- rents in major centers declined by almost 10% cumulatively
tracts, or are retaining their spaces to absorb peaks in between 2019 and 2022 while increasing by more than
demand or facilitate structural growth. If a company does 8% in mid-sized centers due to rising demand for retail
not provide any office space for its employees, it also has space. Demand remains high for retail space in prime loca-
to contribute to their costs of working from home. The tions, which generally benefit from the high demand for
cost of office space is generally low relative to wages and luxury consumer goods. Rents there increased by more
only accounts for a single-digit percentage of total costs, than 15%.
which reduces the pressure to act. As a result, the rise in
working from home has not led to any discernible struc- However, the normalization of economic life in 2022 weak-
tural break in the demand for space. However, it may ened the growth in demand for retail goods. Despite a
dampen demand over the next few years due to ongoing robust economy and a dynamic recovery in tourism, real
space optimization. retail sales failed to increase y/y. Demand for additional
retail space fell. Retail space vacancies in shopping centers
rose by two percentage points last year to 9%. Vacancy
Figure 6 rates only fell in the major centers, and then by just under
Strong employment growth one percentage point to around 3.5%.
Change in nominal market rents and employment in office
sectors, vs. previous year in %
3
2
1
0
–1
–2
09 10 11 12 13 14 15 16 17 18 19 20 21 22
Employment Market rents
Sources: FSO, MSCI, UBS
February 2023 – UBS Outlook Switzerland 14New old world
Focus on contractual arrangements Figure 7
We expect falling purchasing power to result in real retail Falling space productivity
sales this year stagnating at 2022 levels, at best. Despite
Gross value creation in retail trade per unit of retail space (GVA per
high inflation in neighboring countries, the strong Swiss unit of space) and nominal asking rents, index 2000 = 100
franc should favor the rise in shopping tourism. Value cre-
ation in the sector and the willingness to pay for rental 130
space are therefore likely to decline, in our view. Retailers
also face higher energy and labor costs. In general, con- 120
tract structuring is likely to involve increasingly intensive
discussions about possible rent reductions, the implementa- 110
tion of inflation indexation or incentives for new rentals.
Though in the current environment of declining space prof- 100
itability, landlords may not be willing to grant major con-
cessions. Accordingly, the year may be defined by a tug-of- 90
war between investors and retailers over the assumption of 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
the actual costs incurred. This is expected to lead to a 2% GVA per unit of space, nominal GVA per unit of space, real Rents
decline in asking rents on average nationwide in 2023. Sources: SFOE, SECO, Wüest Partner, UBS
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