A motion by Switzerland’s Social Democratic Party to bar foreign investors from the country’s residential and commercial property, as well as shares in its listed real estate companies, is gaining momentum.

A motion by Switzerland’s Social Democratic Party to bar foreign investors from the country’s residential and commercial property, as well as shares in its listed real estate companies, is gaining momentum.

Born in Sydney, Australia, of a Swiss mother and a Lebanese father, Jacqueline Badran could be a role model for a multicultural citizen of the world. However, the member of the Social Democratic Party (SP) in the Swiss national parliament is anything but that in her professional life. The 52 year-old is spearheading a movement in Switzerland to close the country's borders to outside property investors.

BADRAN MOTION
The 'Badran Motion' – the legislative initiative inspired by her name – comes just months after a public referendum forced the Swiss government to block access to Eurozone nationals to the labour market in the alpine country from 2017. And it appeals to the same group. Already, more than 70 of the 200 members of the National Assembly in Bern have publicly stated their support for the motion which will be voted on later this year.

If approved, the motion would bring the country back to the 1990s when the Swiss property market was still closed to foreign capital. As a legacy of that period, most residential homes in holiday regions still cannot be purchased today by private foreign buyers.

Thanks to its stable economy and strong currency, Switzerland has grown in attractiveness in the turbulent years since 2008 as a destination for workers and property investors from other European countries. That has led to significant increases in residential rents and prices of commercial and residential properties, sending yields downward.

'Not only has it become difficult for Swiss families to acquire a home, Swiss pension funds also have tremendous problems finding commercial real estate at adequate yields to fulfil their obligations towards their policy holders,’ said Professor Tobias Just, head of research at the IREBS real estate academy at the University Regensburg in Germany. 'Even though protective regulations have many down sides, the motion makes sense as a tool to secure retirement provisions for the Swiss population as a whole.'

DIRE CONSEQUENCES?
However, Swiss real estate professionals warn that the motion, if it came into effect, would have dire consequence for the property market as well as Swiss pension funds. 'If the group of investors shrinks, so will demand, and that will send prices lower,' noted Markus Graf, CEO of listed real estate company Swiss Prime Site in Olten. 'This would force pension funds and insurance companies to make valuation adjustments that would disadvantage their clients.'

With the Swiss economy growing strongly, demand for new commercial buildings is on the rise, said Kai Bender, CEO of real estate investment company Acron in Zurich. 'However, without international participation it is likely that quite a few of those projects would not materialise.'

There is also another issue. In the past, Switzerland's 2,190 pension funds with assets of €560 bn under management have acquired commercial real estate almost solely within the country. As a result, national institutional investors hold property worth €245 bn, roughly 65% of all commercial buildings while foreign investors hold only 13%. Pension schemes have only recently started to set foot in neighbouring markets like Germany, urged by government watchdog Oberaufsichtskommission to diversify their property portfolios. 'If foreign money into the country were to be banned, it would be very difficult for pension funds to sell Swiss property so that they could engage in cross-border investment,' said Stephan Kloess, director of investment advisory firm KloessRealEstate in Wollerau.

Having said that, Swiss cantons may set their own limits in terms of the number of foreign buyers that can buy in each canton each year. Also, prices haven’t increased everywhere in Switzerland in recent years. For example, prices fell by between 5% and 10% throughout the popular Arc Lémanique region between 2012 and 2013. This is partly attributed to the Lex Webber ruling, a controversial new law that came into effect in January 2013 which imposes a 20% ceiling on the number of second homes in Swiss communes. Some private investors are also wary because of concerns regarding the future of the lump sum form of taxation. In addition, some foreign buyers that work in the country are allowed to buy real estate, depending on the type of work permit they hold.

Nevertheless, should foreign investors be barred form holding shares in Swiss listed property companies, the likes of Mobimo, PSP and Swiss Prime Site would have to delist from exchanges in other European countries and in the US.

'Given that roughly 22% of Swiss listed real estate shares is in foreign hands, such a move would send stock prices tumbling and that would also hurt the balance sheets of Swiss pension funds and insurance companies,' predicted Dieter Thomaschowski, director of Thomaschowski Research & Advisory in Erkrath.

No wonder then, that a preliminary commission set up by the government has rejected the motion. However, a similar commission also rejected restrictions for Eurozone nationals working in Switzerland – and was overruled by the public referendum this spring.

Richard Haimann
Correspondent Germany