Strong Swiss franc puts foreign investors in a quandary

Market watchers believe now may be the right time to lock in profits for foreign investors who flocked into the Swiss property sector in the aftermath of the financial crisis - with the possible exception of the hotel market where the strong Swiss franc is keeping tourists at bay.

Students at the Belvoirpark school of hotel management in Zurich have a new subject this year on their curriculum: the art of serving Asian guests. Rule number one: never give an Asian visitor a room on the fourth floor. 'That number stands for bad luck in countries like China,' school director Paul Nussbaumer told PropertyEU.

There is good reason for managers and staff members of Swiss hotels to delve into the finesses of Asian cultures. Following the rise of the Swiss franc against the euro, pound sterling and US dollar in the wake of the financial crisis, the number of tourists from European countries and North America has fallen significantly. At the same time, a growing number of wealthy visitors from Asia continues to flock to Switzerland, attracted by the beauty of the alpine scenery.

According to the Swiss bureau of statistics, more than a quarter of a million Chinese guests arrived in the first half of this year, 25.5% more than in the same period last year. The number of travellers from Singapore grew by 16.3% to 37,304. Swiss hotel owners and operators are hoping for even more visitors from Asia. 'We want to grow our business with Asian guests,' said Guglielmo Brentel, president of hotel owners and operators association Hotelleriesuisse.

However, the numbers of Asian travellers have been too low so far to offset the overall decline. The number of German visitors alone dropped by more than 80,000 to just under 871,000 in the first half of this year compared with 2008. And while European guests on average spend up to a week in the country, most Asian visitors stay only one night in a Swiss hotel during a round trip across Europe. As a result, the yearly number of overnight stays in Switzerland has shrunk by 7% since 2008, slashing revenues and profits for the owners and operators of the 4,800 hotels in the country.

The decline is hitting profits at Swiss hotel companies. Waldhaus Flims Mountain Ressort reported gross profits plunged from 19.4% in 2008 to 6.3% in 2012. Even five-star hotels like Victoria-Jungfrau in Interlaken have been forced to slash their room rates in the two-digit percentage range. Not only tourism resorts in the countryside but also hotels in the large cities are feeling the pinch. In Zurich, the average occupancy rate at four- and five-star hotels so far this year has been below the 70%-mark, according to the Zurich Hotel Association. In the three-star hotel category, the rate has fallen from 74.01% in 2012 to 71.89%. 'For the low-budget segment this is a dramatic slump in business,' said André Seiler, executive vice president of hotel operations at Jones Lang LaSalle Hotels & Hospitality in Switzerland.

This is bad news for foreign investors who have sought refuge in the Swiss hotel market since the outbreak of the financial crisis. Since 2008, funds, investment companies and family offices from Austria, France, Germany, the UK, Italy, Qatar and Saudi Arabia have been buying up hotels in Switzerland with zest. Orascom Development Holding, founded in 2008 by Egyptian entrepreneur Samih Onsi Sawiris, has invested no less than CHF1.8 bn (€1.46 bn) in the Swiss hotel market. 'Today, 40% of the Swiss five-star-hotels are owned by foreign investors,' according to Roland Schegg, professor at the Walliser School for Management & Tourism.

Although their profit expectations have been dashed, foreign hotel owners have not yet turned into sellers in the hope that the market will take a turn for the better. But currency experts believe those hopes are not justified. 'With the euro crisis subsiding, the Swiss franc will likely fall by 15% to CHF1.40 against the euro within the next 12 months,' predicted analyst Moritz Westerheide from Bremer Landesbank, a financial institute well known for its exchange rate forecasts for German export companies. The franc has already fallen against the euro from CHF1.20, the bottom rate set by the Swiss Nationalbank at the peak of the euro crisis.

The strong franc is not the only cloud hanging over the Swiss hotel market. Despite the shrinking number of tourists, developers have been racing to put up new hotels. JLL’s Seiler said. In Zurich alone, seven new hotels are currently under construction and he is predicting more pressure on occupancy rates and revenue per room in the future.

While a devaluation of the franc would have a positive effect on hotel occupancy rates, it would eat into the capital gains foreign investors have generated so far from their acquisitions of offices, retail or residential apartment buildings. Since 2008, the Swiss franc has gained 25% against the euro while prices for commercial and residential real estate have risen in parts of the country by another 30%, sending yields to record lows. According to a new study by Swiss real estate consultancy Wüest & Partner, yields for prime office buildings in Geneva and Zurich have dropped to 3% and 2.8% respectively.

'This is a good time for foreign investors to consider taking profits since demand for property is still high and Swiss institutional investors are looking for ways to grow their property portfolios inside the country,' noted Daniel Stocker, head of research at Colliers International in Zurich.

'Investors from other European countries and the US who only fled into Swiss property looking for a safe haven during the financial crisis should think about an exit as long as the franc is overvalued,' agreed Günter Vornholz, professor for real estate economics at the EBZ Business School in Bochum. However, this advice does not apply to foreign investors wanting to keep part of their capital in the Swiss currency regardless of the exchange rate, he added. 'With Swiss 10-year treasury bonds yielding only 1.05%, real estate is a far better place to keep money for anyone wanting to stay in the Swiss franc.'

Richard Haimann
Correspondent Germany