Swiss institutionals working with faulty yield expectations, finds KPMG

SWITZERLAND - Real estate investments done solely for return purposes often miscalculate yields by overlooking longer-term trends, a study of the Swiss real estate market has found.

In a study titled 'Immobilien- und Hypothekarmarkt - Quo Vadis?', examining the Swiss property market, consultancy KPMG noted that investors were being forced to lower their return expectations.

The report, conduced by the consultancy as well as Lucerne University of Applied Sciences and Arts and KloessRealEstate said: 'The spread between the 10-year government bond and real estate is 'forcing' investors to lower their return expectations for real estate.

"This means they are willing to pay higher prices," the authors concluded after noting that an increase in demand for real estate in the low interest rate environment has led to many investors - both private and institutional - competing over objects coming to the market.

However, the authors stressed that yield calculations often do not account for the fact that while a singular increase in demand is pushing prices and reducing initial yields, it does not change the value of a property without an increase in demand for more land or a prospect of higher rents.

Additionally, the low interest allows investors to adjust their return expectations as for example a Libor + 2% return means that they can go lower than formerly achieved initial yields.

"This means that currently yields of below 4% are not only possible but can also be seen on the market," the authors noted.

Should interest levels rise to 3% or even 5% this will put pressure on objects bought at similar yields, they added.
 
It was also pointed out that appreciation is historically low with the average appreciation in institutional real estate portfolios in Switzerland, standing at around 0.8% per annum for the last nine years.
If, in addition, rent levels do not have a leeway for appreciation either this will "not only render a single property less attractive".

"Future basic assumptions by investors should also be characterized by stagnating or even falling market rents in their scenarios," the authors stressed.

On the question of a possible real estate bubble in Switzerland the authors stated clearly that there "is no current real estate bubble" but that there are "dangers of overheating" in some regions.