Concrete gold has clearly lost its luster in 2023
Published: Tuesday, Apr 2nd 2024, 16:20
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Investors still made money from directly held real estate last year. However, due to the rise in interest rates, returns were lower than they have been for 20 years.
According to the Swiss Real Estate Index from MSCI and Wüest Partner, directly held Swiss real estate achieved a total return of 1.4 percent in 2023. This corresponds to the weakest performance since measurements began in 2002, according to a brief study "Real Estate Switzerland" published by UBS on Tuesday.
The main reason for the lower performance was the turnaround in interest rates. In the previous 20 years, real estate portfolios had benefited from appreciation, which had contributed an average of 1.8 percentage points to the total return. In 2023, however, the valuers increased the discount rates due to the rise in interest rates. This led to a devaluation for the first time ever (-1.7%).
In an international comparison, however, Switzerland fared much better than France (2023 return: -7.5%), Sweden (-3.8%), the Netherlands (-4.6%) and the USA (-7.9%).
All segments under pressure
According to UBS, total returns across all segments were lower in 2023 than in the previous year. Industrial and logistics space once again recorded the highest total return at +4.2%. The residential (+2.1%), hotel (+1.4%) and office (+0.8% ) segments followed at a considerable distance. The lowest total return was recorded by retail space (+0.5%).
On the other hand, rental income increased. Increasing scarcity and the rise in the reference interest rate caused residential rents to rise. At the same time, commercial properties benefited from the usual link to inflation. The real estate portfolio analyzed by MSCI thus recorded an increase in market rents of 2.7 percent. This is the highest increase since 2006.
Lower profitability in cities
Yields on residential investment properties fell the most in Zurich. However, at 2.9 percent, this was still the highest of all major centers. The lowest overall yield was 0.7 percent in the city of Basel. The bank expects below-average performance here in the coming years due to government intervention in rent pricing.
In terms of office space, only Berne (+2.0%) and Zurich (+1.4%) recorded a positive overall return. Substantial devaluations of up to -4.1% (in Geneva) led to a negative overall result in the other centers (including Basel and Lausanne).
Subdued prospects
The Swiss National Bank's recent reduction in the key interest rate, together with the good earnings prospects for residential investment properties in particular, should help to stabilize the transaction market. However, portfolio valuations are unlikely to rise much this year. As a result, the total return should once again be well below the long-term average of around 5.6%.
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