Real Estate Investment in Switzerland. How can you start?
Inevitable decline in house prices in Switzerland
After some 15 years of relentless house price increases, the Swiss government’s attempts to cool Switzerland’s overheated housing market have finally worked.
According to the Swiss National Bank (SNB), the national average price of privately owned apartments dropped by 1.44 percent (-2.05 percent inflation-adjusted) during the year to Q1 2019, the seventh straight quarter of y-o -y fallings. Apartment prices dropped by 0.67 percent q-o-q (-0.59 percent inflation-adjusted) in the last quarter.
Switzerland’s property sector saw high house prices increase from 2000 to 2016:
- Owner-occupied housing prices increased by 80.5 percent (70.2 percent in real terms)
- Single-family home prices rose by 58 percent (49 percent in real terms)
- Residential units in old and new buildings increased by 49.2 percent (40.7 percent in real terms).
The increase of the Swiss franc against the euro since 2015 has also made Swiss real estate more costly for foreign buyers, limiting competition.
Small rental returns is also stopping foreign homebuyers. According to Wüest and Partner, prime rental yields in Q3 2018 varied from just 1.7 percent to 2.4 percent. This is backed by analysis by Global Property Guide, which indicates that rented apartments in Geneva yield between 2.8 percent to 3.3 percent; while in Zurich, gross rental income is on average 3.27%.
House prices began to fall in 2016, and household values dropped by 1.3 percent (-0.8 percent inflation-adjusted) during that year.
- Lake Geneva had a fall in house prices in 2018 of 1.44 percent (-2.35 percent inflation-adjusted), after rising 1.72 percent in 2017 and 0.25 percent in 2016.
- Zurich’s house prices declined by 0.84 percent (-1.76 percent inflation-adjusted), after increasing by 1.78 percent in 2017, by 3.6 percent in 2016 and by 3.43 percent in 2015.
- Southern Switzerland’s house prices fell by 1.56 percent (-2.47 percent inflation-adjusted) in 2018.
- Central Switzerland reported the highest price drop in privately owned apartments, at 3.17 percent (-4.07 percent inflation-adjusted) in 2018.
- Eastern Switzerland had a decline in house prices of 0.93 percent (-1.84 percent inflation-adjusted).
- Northwestern Switzerland saw a dip in house prices of 1.45 percent (-2.36 percent inflation-adjusted).
- Western Switzerland’s house prices stood nearly constant from the previous year in 2018 (-0.85 percent as adjusted for inflation).
- Berne recorded an annual increase in house prices of 1.8 percent in 2018 (0.85 percent increase when adjusted for inflation).
Last year, the Swiss economy expanded by around 2.5 percent, with increases of 1.7 percent in 2017, 1.6 percent in 2016, 1.3 percent in 2015 and 2.5 percent in 2014. Economic growth is expected to fall to just 1.1 percent this year, according to the International Monetary Fund (IMF), in the wake of global instability triggered by the Brexit crisis and US-China trade tensions.
For a long time, the Swiss prohibited the selling of property to foreigners, with an annual limit of permits allocated by the Federal Government to non-resident foreigners wishing to purchase property in Switzerland.
Low rental yields in Geneva and Zurich
If you are buying in Switzerland, it is typically not the rental income that concerns you because, in the past, Swiss rental income was comparatively weak and, in any case, foreign buyings are extremely reduced. Even as the global house price bubble has soared in the last 15 years, Swiss rental sales have stayed stable. Swiss rental income is still rated as “poor” by us. But rental return in most of the world is lower than it used to be, and Swiss returns are no longer especially low.
Luxury apartments in Geneva have an average square meter (sq. m.) price of between EUR 11,400 and EUR 13,500.
A 120 sq.m. apartment in Geneva in our study costs an average of EUR 11,460 per room. A 120 sq. m. apartment can be rented for approximately EUR 3,827 per month. This means a return of around 3.33 percent.
The round trip transaction costs for residential properties in Switzerland are low.
Taxes and Fees
Swiss residential property tax is very high
Rental income: Income is paid at federal, cantonal and municipal level. The overall tax liability could easily reach 50%. Federal tax thresholds vary from 0 to 11.5 percent.
Capital Gains: Capital gains are tax-free at the state level (unless earnings come from the selling of corporate property). All cantons, however, levy their own taxes on income from the sale of immovable properties located in the canton.
Inheritance: Inheritance tax is charged at the cantonal level on net assets passed to the beneficiaries.
Residents: Residents are eligible to pay federal, cantonal and local income taxes on their foreign income.
Overall purchase costs in Switzerland are low
Closing costs in Switzerland are relatively low. Roundtrip transaction costs, i.e. gross purchasing and selling prices, vary from 3.5 percent to 8.9 percent. The estate agent’s fee forms a significant part of the sum of about 3 to 5 percent (plus 7.6 percent of VAT) typically charged by the purchaser.
The owner pays the Real Estate Transfer Tax, which ranges from 0.2% to 3.3% depending on the canton. Transfer tax in Zurich has been abolished since January 2005.
Landlord and Tenant
Swiss law is pro-tenant
Nearly 61% of all households are renters; thus, it is not shocking that Swiss law is pro-tenant.
Rents: The original rent can be mutually negotiated between the landlord and the occupant. However, the occupant can appeal against the rent as unreasonable within 30 days.
Tenant Security: Tenancies appear to be restored to unlimited duration. This is not actually a catastrophe for the landlord, as either party can send a notice of termination for three months in advance.
The court could, however, award the occupant an extension of up to four years in situations where the eviction will cause hardship.
Slow economic growth
According to the State Secretariat for Economic Affairs, the economic development of Switzerland rose by 1.7% from the previous year in Q1 2019.
Last year, the Swiss economy expanded by around 2.5 percent, up at 1.7 percent in 2017, 1.6 percent in 2016, 1.3 percent in 2015 and 2.5 percent in 2014, according to the IMF. Slow growth is due to the high franc, perceived to be significantly overvalued given record low interest rates.
Economic growth is expected to fall to just 1.1 percent this year, according to the International Monetary Fund (IMF).
Switzerland’s reported unemployment rate was 2.5 percent in March 2019, down from 2.9 percent in the previous year, according to the State Secretariat for Economic Affairs, and the lowest for a decade.
In April 2019, core inflation was 0.59%, according to the Swiss Federal Statistical Office. According to the central bank experts, inflation is expected to be approximatelly 0.3% this year and 0.6% in 2020.
The Swiss franc appreciates, as we see growth in demand for safe-haven currencies
The Swiss franc increased 39 percent against the euro and almost 30 percent against the US dollar on 15 January 2015, when the SNB scrapped its CHF 1.20 = EUR 1 exchange rate limit. The cap was imposed in 2011, when investors fled the crisis-torn Euro for Swiss properties, placing pressure on exports.
However, the SNB agreed to drop the cap in the face of monetary easing by the European Central Bank ( ECB), assuming that growing demand for safe haven currencies such as the Swiss franc would make it difficult to maintain the cap.
In the past 12 months, the Swiss franc has risen by 5% against the euro, as investors have found safe haven currencies, anticipating that the US-China trade dispute would intensify. Earnings partly balanced the 8 percent weakening of the franc to the euro in 2017.