Prof. Donato Scognamiglio is a professor and Head of the Real Estate Finance Department at the University of Berne’s Institute for Financial Management as well as CEO of IAZI AG, which aims to improve the quality of real estate services. In our interview, he offers his view on key issues for (potential) real estate investors.
What do you expect for the Swiss real estate market in 2019 and beyond?
Prof. Donato Scognamiglio: “Up to six months ago, I’d have advised caution. But when I consider how the equity markets have performed over the last year, I have to concede that returns aren’t so bad. In particular, anyone who already owns real estate can consider themselves fortunate. We are, however, a little sceptical with regard to vacancy rates. Many, perhaps a few too many, properties have been built. So those who already own real estate are lucky and those who want it need to tread carefully.”
How likely is the market to collapse over the next few months and years?
“I don’t think we’ll see a crash in the coming months. Switzerland is greatly sought after, especially when Europe is in crisis. If you’re asking me about the next two to three years, then I have the feeling that the people who are buying now with gross returns of three per cent or less will have to stomach some corrections. If interest rates climb from three to four per cent and landlords are unable to increase rents due to the number of vacant properties, we’ll soon see what ‘duration, duration, duration’ really means. Up until now, this scenario has been simply disregarded, but we’ll all get to experience it soon enough.”
Which regions are currently the most attractive?
“Do you want hope or cash? People looking to buy hope will invest on Zurich’s Bahnhofstrasse and cross their fingers for a rise in value. Towns and cities are the best bet for these investors across the board. Those who want cash go to Chur.”
How attractive is the Swiss real estate market for foreign investors?
“Foreign investors are subject to a lot of rules and requirements. They can’t easily muscle in on the housing market, but they can switch to offices, commercial properties and shopping centres. More generally: what is real estate? Real estate is location, location, location. And Switzerland will still be attractive as a location in ten, and hopefully even twenty and a hundred years’ time. If you can invest here, then I recommend doing so.”
What makes the Swiss real estate market unique?
“The Swiss are a nation of tenants. In Germany, for example, multi-family dwellings are a mere sideshow. But 60 per cent of Swiss live in an ordinary rented apartment. And that’s a good thing as it’s precisely this high percentage that generates the returns on investments that pension funds need now to safeguard pension provision. In short: Switzerland has a low level of home ownership, a large number of tenants and a high degree of stability. This means stable inflows of capital, hopefully in the future too.”
Should investors focus more on commercial or residential property?
“I personally favour the housing segment. It’s regulated, you know in advance what money is coming in and that almost nothing can go wrong with a good, central location. These days, however, you should be cautious when investing in the greater urban areas due to the number of empty apartments. Offices are more dependent on the economic cycle. There have been times when vacancy rates have been sky-high. Northern Zurich is just one of many examples. When the economy picks up again, the space gets occupied. So it would be wrong to only recommend residential property. Offices are attractive but riskier, pure and simple.”
Which is the better route to go down? Direct or indirect investment in real estate, for example via equities or real estate funds?
“It’s not that easy to compare direct and indirect investments. Anyone can invest indirectly and quickly become diversified. There are some exciting products on the market. If you want to achieve the same effect with direct investments, you have to be extremely wealthy. I’ll give you an example. You buy a housing block for five to ten million Swiss francs. But you want to add 20 to 30 other locations to diversify your portfolio. Now you already need between 200 and 300 million francs. But real estate shouldn’t make up more than 20 to 30 per cent of your portfolio. So in total you need around 1.5 billion francs. There are only a handful of investors who have such a sum to invest, so indirect investments are the method of choice for most people wanting to participate in this market in one way or another.”
You’ve been observing the real estate market for 20 years. What have you experienced that has made the most impact on you?
“On a personal level, I’ve often been struck by the path that the lives of elderly, affluent people have taken. Simply because of their work, they’ve put downtime on the back burner again and again and become ill at the end of the day. To see that happen hits you hard.
I can also still clearly remember the rescue of certain Swiss banks. They were suddenly in need of a great deal of money and set great store by securing some good positions to finance themselves again. UBS with its Limmat transactions was one such aspirant. Spar- und Leihkasse Thun went bankrupt in the early ‘90s. What can we learn from this? That you can not only make a lot of money from real estate, but also lose an awful lot too.
What is striking today is that young people have no idea that interest rates can get as high as 7.5 per cent. They assume that rates are low and will remain so. Also, I personally hadn’t reckoned with Donald Trump or Brexit. Or that Italy wouldn’t make it to the World Cup. Then we wake up one day and realise that interest rates are not ‘one point nothing’ but suddenly two, three or more per cent. I notice time and time again how quickly these events are forgotten. The younger generation in particular should prepare themselves for a change in interest rates.”
What are the most common mistakes when investing in real estate?
“If you want to get rich quickly, you shouldn’t invest in real estate. Real estate is like a marriage: designed for the long term. You don’t enter into these contracts simply to go off elsewhere the next day.
You also need to do a thorough analysis of the location and shouldn’t let yourself be blinded by free money. It’s precisely these kinds of investment incentives that lead us to back the wrong horses nowadays. People are investing in valleys that no-one had heard of two or three years ago. Today’s investments will be tomorrow’s write-downs.”
Currently there is talk of abolishing the rental value of owner-occupied property. What would this mean for the various different stakeholders?
“Who will have to pay for it? The tenants. Who will benefit? Primarily wealthy, elderly homeowners. With interest rates as low as they are, they’ll breathe a sigh of relief because they won’t have to pay any more tax on their imputed income. It’ll be bad news for business people as they won’t then be able to deduct maintenance costs and investments straight away. I’m expecting this group in particular to make their voices heard loud and clear. The measures being proposed, however, aren’t really relevant for anyone investing in investment properties.”