What does 2022 have in store for the Swiss real estate market? Our outlook and opportunities

The consequences of the pandemic on the real estate market

In the office space sector, the impact of the pandemic is, for now, less severe than some investors had feared. Modern, flexible spaces in good, city centre locations continue to maintain their appeal coupled with offices that meet the latest environmental standards, an increasingly important criteria.

Yields continue to be squeezed, as shown by the appreciation of commercial portfolios held by companies such as PSP Swiss Property, whose net asset value increased by almost 6% over a nine-month period, from CHF 99.83 per share at 31 December 2020 to CHF 105.80 at 30 September 2021.

The underlying market remains relatively solid, and vacancy rates have only crept up marginally in Zurich, Berne, Lausanne and Geneva. We remain positive on high-quality office properties and believe that the impact of remote working will be less severe in Switzerland than elsewhere in Europe, for a variety of reasons.

Remote working versus office working in Switzerland

Firstly, the Swiss office market is much more fragmented than those in more centralised countries, given the very large number of small and medium-sized enterprises. These firms tend to have a workstation for each of their employees even when they work from home part-time. Furthermore, many large firms had already adopted flexible working models well before the pandemic, removing the need for them to scale back their space further.

Secondly, the average commute in Switzerland is just 30 minutes each way – far shorter than those found in large metropolises such as Paris and London. That is likely to limit demand for working from home.

Thirdly, and contrary to fears when remote working became normal practice in the first quarter of 2020, employees are keen to return to the office for an average of two to three days a week. This is supported, for instance, by a SonntagsZeitung survey in May 2021, which found that 55% of employees working from home would like to continue doing so for half of their hours or more. This suggests that shared offices will need to be scaled to fit the maximum number of staff wanting to attend the office at the same time.

Another consideration is that the pandemic appears to be persisting for longer than was originally anticipated, owing to successive waves of new variants. The social distancing needed to combat transmission of the virus requires an increase in the average area per employee. All of these elements lead us to think that the prime office market remains a good investment opportunity. On the other hand, we are wary about offices in peripheral locations or far from major urban centres: they will struggle to find tenants in an environment where businesses looking to attract and retain talent will need premises close to amenities such as restaurants, gyms and shops.

Online shopping is causing headaches for retail space

When it comes to retail, this segment continues to suffer from the large-scale adoption of online shopping. The pandemic has only accelerated this underlying trend, despite a sustained uplift in sales of consumer goods after restrictions were eased. Consultants Wüest & Partner are forecasting a 2.1% decline in the price of retail space in 2022.

Nevertheless, modern shopping centres with flagship tenants in the food or leisure space still draw large numbers of shoppers. Shops along major commercial thoroughfares also remain in high demand with big brands; in fact, some have even been re-let at higher rents when a tenant has changed.

A selective approach definitely remains the key to success in this area as the prospects are far from being the most attractive within the Swiss real estate market.

Future trends

Within the residential market, the trends that emerged in the early days of the pandemic, such as the appetite for well-located properties, particularly in the countryside, has weakened slightly. Peripheral areas certainly gained renewed interest, thanks to demand for larger homes that are affordable and a better match for the new aspirations that COVID-19 has brought about (more living space, extra rooms for working from home, access to green space, etc.). For example, Aargau – which is classed as a peripheral town – saw its residential vacancies shrink by 20% in 2021, clearly illustrating the impact of the pandemic. However, we witnessed the same phenomenon in a very different segment of the market, in the canton of Zurich, where homes in urban areas continued to attract tenants even though moving house became more difficult, temporarily.

With the return of face-to-face learning and the lifting of strict lockdowns, urban areas remain in strong demand. They retain many attractions, including proximity to places of entertainment and other amenities.

We expect that this trend will continue in 2022 and that the Swiss real estate market will normalise.

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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