by Political actors will continue to stir up controversy in 2017. The elections scheduled for May in France and autumn in Germany will reveal whether the established parties are capable of channeling voters' disaffection into a smooth course or not. Marine Le Pen has made no secret of her intention to have the French electorate vote on EU membership if she is elected French president – which is not an entirely absurd proposition. An exit by France would spell the end of the EU. This scenario alone shows that 2017 will be an unpredictable year. The same applies on the other side of the Atlantic, where a volatile personality has been elected president. In February there will be a decisive referendum in Switzerland on the tax system. If the Corporate Tax Reform III is approved, a great deal of uncertainty will be swept away – uncertainty that has hampered companies from setting up offices and, especially in Western Switzerland, choked the economic motor. Interest Rates Remain Low... Besides politics, another interesting question in 2017 will be how the central banks organize their exit from an only marginally successful ultra-expansive monetary policy. We expect that after the recent jump in rates, the interest rate environment will ease somewhat next year. After all, the big picture – too much saving and too little investing worldwide – is unlikely to change much.
Topics:
Credit Suisse considers the following as important: Swiss economy, Switzerland
This could be interesting, too:
Dirk Niepelt writes Budgetary Effects of Ageing and Climate Policies in Switzerland
Claudio Grass writes Is gold too expensive to buy right now?
Claudio Grass writes Is gold too expensive to buy right now?
Claudio Grass writes Private property rights under siege
Political actors will continue to stir up controversy in 2017. The elections scheduled for May in France and autumn in Germany will reveal whether the established parties are capable of channeling voters' disaffection into a smooth course or not. Marine Le Pen has made no secret of her intention to have the French electorate vote on EU membership if she is elected French president – which is not an entirely absurd proposition. An exit by France would spell the end of the EU. This scenario alone shows that 2017 will be an unpredictable year. The same applies on the other side of the Atlantic, where a volatile personality has been elected president. In February there will be a decisive referendum in Switzerland on the tax system. If the Corporate Tax Reform III is approved, a great deal of uncertainty will be swept away – uncertainty that has hampered companies from setting up offices and, especially in Western Switzerland, choked the economic motor.
Interest Rates Remain Low...
Besides politics, another interesting question in 2017 will be how the central banks organize their exit from an only marginally successful ultra-expansive monetary policy. We expect that after the recent jump in rates, the interest rate environment will ease somewhat next year. After all, the big picture – too much saving and too little investing worldwide – is unlikely to change much. This means real interest rates will be low for some time. A dearth of decent investment opportunities will likely continue to plague investors in 2017, since bonds will hardly make a positive contribution to portfolio returns in future. The search for yield is likely to intensify. In this situation, real estate continues to offer very interesting prospects.
...And Real Estate Remains Attractive
After the latest sell-off in indirect real estate investments in November, Swiss real estate funds are once again fairly valued with an agio of 24.8 percent. The payout yield alone gives investors a return of 2.8 percent. The dividend yield on real estate companies stands at 3.9 percent, albeit at a higher risk. Net initial yields on directly held real estate objects generally range from 2.5 percent to 4.5 percent, depending on their location.
Growing Challenges in the Tenant Markets
While Swiss real estate investments are currently riding high, conditions in the rental markets are much less reassuring. Rents are declining, both for commercial properties and, most recently, on the housing market. This is due less to the demand side than to the excessive output of floor space as a result of the interest rate environment. The situation is quite different in many other European markets, where price growth in rents is almost exclusively positive. Switzerland will also report a decline in rents in 2017; there will be no escaping the supply overhang next year.
Property Conversions a Popular Option
As long as interest rates remain at such a low level and the yield spread between real estate investments and risk-free Swiss government bonds remains so wide, there is no end in sight to the steady increase in construction output. Hence vacancies can only be reduced in individual cases with skillful management and price reductions. Since vacancies will continue to increase across the market as a whole, we can expect to see more cases of property conversions in 2017. Conversions may not always add up in terms of targeted returns, but are preferable to long periods of vacancy.
A Quiet Year for Homeowners
For homeowners, 2017 should be a relatively peaceful year. We expect price movements that will be close to zero growth across the country. In our view, the easing in prices observed in German-speaking Switzerland will continue, and increasingly spread to the more reasonably priced regions. In Western Switzerland, where housing prices are already falling, the downtrend should slow. Developments in mortgage rates will become more interesting; we recommend that mortgage borrowers leaning towards Fix mortgage loans use any dips in interest rates to nail down an advantageously long term. The interest rate reversal initiated in the USA seems to be solid, which will make it difficult for Swiss rates, which recently hit a new absolute low, to go any lower.
Outlook Moderate for Owners – Positive for Tenants and Producers
On balance, it seems that 2017 will be a year of light and shadow for property owners. Yields are still satisfying for investors, and development property is likely to continue to increase in value, given the trends in spatial planning. Nonetheless, the predatory conditions in the rental markets will only worsen, and will probably have an adverse effect on returns. On the other hand, tenants in all segments have every reason to rejoice. In 2017, they will regain the upper hand, both with regards to rent price growth and in terms of choice. The housing shortage will likely play a role only in major centers. The construction industry will also be on the winning side, with prospects of another year of higher revenues and full order books.