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Global Research

Swiss Issues Real Estate March 2013

Real Estate Market 2013 Structures and Prospects

Credit Suisse Global Research

Publishing Details
Publisher Giles Keating Head of Research for Private Banking and Wealth Management +41 (0)44 332 22 33 giles.keating@credit-suisse.com Oliver Adler Head Economic Research +41 (0)44 333 09 61 oliver.adler@credit-suisse.com Contact immobilien.economicresearch@credit-suisse.com Phone +41 (0)44 334 74 19 Cover Picture Uetlihof 2, Zurich (Architects: Stcheli Architekten AG, Zurich) Photographer: Thomas Rieder, Zurich Printing Galledia AG, Burgauerstrasse 50, 9230 Flawil Copy Deadline 1 February 2013 Orders Directly from your relationship manager or from any branch of Credit Suisse Individual copies (free of charge) can be ordered via www.credit-suisse.com/publications or fax +41 (0)44 333 56 79 Internal orders via MyShop quoting Mat. no. 1511454 Subscriptions quoting Publicode ISE (HOST: WR10) Visit our website at www.credit-suisse.com/immobilienstudie Copyright The publication may be quoted providing the source is indicated. Copyright 2013 Credit Suisse Group AG and/or affiliated companies. All rights reserved.

Authors
Martin Bernhard Denise Fries Fredy Hasenmaile Philippe Kaufmann Dr. Christian Kraft Thomas Rieder Thomas Rhl Andrea Schnell Contribution Marc Bill Viktor Holdener

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Table of Contents

Management Summary Residential Property Structure of the Housing Stock Demand Supply Market Outcome Outlook for the Residential Property Market in 2013 Discussion Topic: Higher Density Office Property Demand Discussion Topic: Desk-Sharing Supply Market Outcome The Five Largest Office Property Markets in Detail Zurich Geneva Berne Basel Lausanne Outlook for the Office Property Market in 2013 Retail Property Demand Discussion Topic: E-Commerce Supply Market Outcome Outlook for the Retail Property Market in 2013 Real Estate as an Investment Direct Real Estate Investments Indirect Swiss Real Estate Investments Real Estate Funds Real Estate Corporations International Real Estate Investments Outlook for Real Estate as an Investment in 2013 Cantonal Real Estate Markets in Summary

4 7 7 8 13 16 22 23 25 25 27 29 31 31 32 34 36 38 40 42 43 43 46 49 52 54 55 55 60 60 61 63 65 67

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Management Summary
Durable goods, such as real estate, that generate returns for a period of well over 20 years, have benefited disproportionately from the current low-interest environment. The low interest rates push back the economic horizon so that returns to be gained far ahead in the future make a significant contribution to the current value of the real estate. This results in steep price increases and overvaluations. The market needs to cool down, but given the obstacles to interest rate policy, it appears that this can only be achieved through greater regulation. The discussions regarding the overheating of the market are at least having a deterrent effect and increasing the level of uncertainty for investors. This may not be harmful in a phase in which the aura of stability of the Swiss real estate market has become exaggerated and could help to ensure it has a soft landing. We hope that our study of the real estate market makes a contribution to successfully achieving this.
Residential property Page 7

Less Dynamic no Trend Reversal as Yet The housing market will benefit from a similarly healthy, although not quite as healthy, set of fundamentals as last year, when all signs showed green. In addition to the continued low interest rates, we expect a slight weakening of immigration and only moderate growth in real incomes. The higher unemployment rate will, together with the tightening of the financing rules, have a dampening effect on demand. The latter has already had an impact on the higher end of the owner-occupied residential property market. Overall, we expect price growth in the owneroccupied residential property market to flatten out, but we are not yet expecting a trend reversal. Stagnating or even falling prices at the upper end of the owner-occupied residential property market are likely to be accompanied by continued strongly rising prices in the middle and lower segments of the market as self-regulation shifts demand from more expensive to more reasonably priced real estate. The market for rental accommodation is also likely to benefit from this, but its price growth remains under that of owner-occupied residential property, which is considerably more attractive in terms of costs. There are three dams that prevent the housing market from overheating to the extent that it reaches the level of a bubble which leads to a crash. These are the comparatively moderate level of speculation in the market, a relatively restrained and largely risk-aware mortgage lending policy and the absence of oversupply in the market. Although we expect an extremely high net increase in housing in 2013 and the project pipeline is full to bursting, with certain exceptions in the upper price segment and in certain regions where the level of construction activity has been high, this is unlikely to cause any significant problems and will only slightly increase vacancy rates. The medium-term risks of a price correction have however increased once again, as we have ascertained overvaluations in 49 of 106 regions. A correction is most likely to be brought about by a sharp rise in interest rates. Higher Density but How? In terms of its buildings, Switzerland is still a flat country. Only 10% of all homes are on the fourth floor or higher. If we want to solve the problem of urban sprawl but also want to have affordable living space and avoid building an inefficient infrastructure, we need to achieve higher density. Current developments are hardly taking this direction. If higher density is achieved at all, it is generally done in the wrong way. More space is used at ground level, thus increasing building density but at a cost in terms of outdoor space and aesthetic quality. People are left feeling closed in. Therefore, the municipal building regulations are being challenged. Stricter regulations are needed at ground level, while height restrictions need to be relaxed. At the same time, highrise zones need to be actively developed where higher buildings are explicitly permitted. The quality of the buildings and, in particular, of public space at ground level must not be neglected if these buildings are to blend in well, preserve the quality of life, and win the favor of local people. Consolidation of Space on a Large Scale Clearly rising supply figures towards the end of 2012 are the first indication of the threat of a supply surplus and a rising level of empty space in the office property market. The first effects of this are expected to be felt in 2013. Some large companies are starting to move to large offices in agglomerations and consolidate multiple sites. These processes which offer opportuni-

Discussion topic: Higher density Page 23

Office property Page 25

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ties as well as create problems will take a number of years to run their course in all large urban centers. They present office property markets with challenges primarily because the growth of jobs in typical office-based sectors is slowing too much to prevent office space that is vacated from staying empty. The situation is aggravated by the fact that demand is going through a period of structural change. New workspace models, which result in the more efficient use of space and are becoming increasingly popular with large companies, cannot be implemented in many of the older buildings. Moving to new buildings permits space to be saved in two ways: firstly by dispensing with small and inefficient offices and secondly by using the new office space more efficiently by introducing workspace concepts such as desk-sharing. Nevertheless, there is currently no reason to be concerned about offices being left empty to the extent that they already are in many large European cities. One reason for this is that tertiarization is progressing in manufacturing companies and ensuring that these companies also have a demand for office space. This constant growth in the group of potential tenants should ensure that more serious vacancies are avoided for the time being.
Discussion topic: desk-sharing Page 27

Desk-Sharing Revolution at the Workplace Desk-sharing is a phenomenon that has attracted a great deal of attention. Yet desk-sharing is just one element of modern workspace concepts attempting to come up with an answer to the changed requirements that have to be met both by people at work and by their working environment. They combine new developments in information and communication technology with findings from the fields of human resources and corporate real estate. The most far-reaching of these concepts involve dispensing with the fixed workspace in favor of mobility and desksharing. This development has been triggered by the recognition that, due to vacation, illness, outside appointments, and meetings, 20-40% of workspaces are unoccupied at any given time. In a desk-sharing system, people no longer have their own desk. Instead, there is an open seating plan. The advantages of this approach are more efficient use of existing workspaces, a more dynamic environment, increased cross-departmental communication in the office, and the possibility of creating teams on an ad hoc basis. It is clear from these advantages that desk-sharing is not equally well suited to every field of activity. Locational Quality in Terms of Public Transport Links a Key Factor in Developments The five largest office property markets represent over 40% of all office property in Switzerland. Therefore, not only are the overall trends in these markets interesting; just as important are also the shifts within the individual office property markets and their various business districts. These changes provide an insight into trends and developments overall Switzerland. The focus of this year's analysis is on the quality of the links to public transport, which is calculated and shown separately at the hectare level. The quality of public transport is a factor that frequently causes large companies to relocate, particularly in the office property markets in the German-speaking part of Switzerland. The key development in both office property markets of Western Switzerland, on the other hand, is that the supply of new office space is now greater than before, which has eased the situation somewhat in Geneva and Lausanne, both of which had a great shortage of office space. Subdued Demand from Retailers The recovery of retail sales in 2012 must not be overvalued in terms of the demand for retail space, as sentiment among retailers is not as good as retail sales figures would suggest. Against the background of sustained structural change and the threats from shopping tourism and e-commerce, the retail industry has become cautious. This is holding back demand for retail space, which is likely to remain only modest. On the supply side, a cautious approach is being taken toward the planning of new retail space. While the planning of new specialist stores has practically come to a standstill, it is increasingly difficult to make headway with shopping center projects, as both tenants and investors are holding back. As far as we are concerned, there are also question marks against the numerous projects where retail space is planned in mixed-use buildings. This particular usage of ground floor space is likely to increasingly fall victim to structural change in the coming years. Given these challenges, the empty retail space that can be seen still remains at a modest level, although supply did increase markedly in the second half of last year. The rise in rents observed toward the end of the year does not quite fit with this.

The five largest office property markets in detail Page 31

Retail property Page 43

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Discussion topic: e-commerce Page 46

E-Commerce as a Serious Threat to Retail Space The Internet has revolutionized the retail industry. The benefits of online shopping in terms of transparency, flexibility, and lower transaction costs are ensuring that a growing proportion of retail sales is migrating to the digital distribution channel. Mobile Internet use means there are no longer any limits to online shopping. Shopping is now no longer location dependent at all; it can be done absolutely anywhere. The disappearance of flagship international retailers such as Virgin Megastores in France and the leading record store chain HMV in the UK serves as both a memorial and a warning. Only in segments in which the focus is on personal advice, the consumers own senses, or the shopping experience itself can bricks-and-mortar retailers hold their own over the long term. Although physical stores can complement e-commerce very well as part of a cross-channel management strategy, this will not nearly compensate for the drop in demand for retail space. We expect that up to a third of today's retail space to be threatened within the next 15 years. Swiss Real Estate Investments have Acquired an Aura of Stability Swiss real estate investments have recently acquired the aura of being immune to global economic crises, no matter how severe. It is therefore not surprising that this asset class with its stable and attractive dividends has appeared on the radar of investors. Rising prices have been and remain the consequence. Last year, it was not just direct investments that delivered high total returns; listed Swiss real estate investment vehicles performed quite well, too. In most cases, the prices for real estate investments can still be explained by robust fundamentals and, above all, by very low interest rates. The prospects for Swiss real estate investments are unlikely to change significantly this year. Prices are expected to continue to rise. The timing of the correction still appears to be far in the future. Several factors suggest this: First, there is no end in sight to the current phase of low interest rates; second, there are few signs of speculation; and third, vacancy rates are low, which is an indication of sound fundamentals. However, the extent of a potential correction, particularly in direct investments, continues to increase. Besides, the focus of the overvaluation discussion is still concentrated too much on owner-occupied residential property. International Real Estate Investments Offer Alternatives to the Swiss Market In light of low initial yields, the advanced stage of the real estate cycle and early indications of a slowdown in rent momentum in the Swiss commercial real estate market, an increased diversification into foreign real estate investments offers interesting opportunities from both a return and a risk perspective. In particular, the growing correlation of the performance of global financial assets within their asset classes makes the diversification potential of global direct real estate investments appear all the more appealing. The example of Switzerland has recently shown quite nicely that the performance of real estate is primarily dependent on the domestic economy. Since this seldomly runs in parallel with economies in different parts of the world, the result is high diversification effects. Cantonal Real Estate Markets in Summary Real estate is a special asset. Its defining feature is that it cannot be moved from place to place. The location, to which it is intrinsically bound, thus, has a significant influence on its use and value. Switzerland-wide trends such as immigration and their effects on the real estate market can have a very different impact in regional sub-markets. The regional section of this study therefore looks at how specific regional factors influence the structure and development of local real estate markets. Like a real estate manual, the regional section allows private and professional investors to compare regional markets and to discover how Switzerland's cantons differ in their core features in an informative double-page outline.

Real estate as an investment Page 55

International real estate investments Page 63

Regional focus Page 67

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Residential Property
The housing market will remain characteristically stable in 2013 as there will only be minor changes to the underlying factors. Self-regulation has brought about shifts in demand that are thought to have peaked overall. Given the high level of applications and the backlog in completion, the peak has not yet been reached on the supply side. Various limiting factors should prevent a fully developed price bubble but price risks are gradually rising, with the result that price corrections should be expected by the time interest rates normalize at the latest.

Structure of the Housing Stock


Age of housing stock indicates movement or stagnation

Geographic information systems allow us to carry out a spatial analysis of the Swiss housing market on a much smaller scale and in much more detail than would have been possible a few years ago. After all, real estate is an extremely localized affair, and analysis at the municipal level fails to do justice to many properties. Significant differences in quality can even be found between locations and properties within the same part of a city. The building and housing statistics compiled by the Swiss Federal Statistical Office in recent years provide interesting insights into the structure of the Swiss housing market.
Figure 1

Average Age of Housing Stock


Age of housing stock in years, per km2

Source: Credit Suisse Economic Research, Swiss Federal Statistical Office, Geostat

More modern housing stock in the agglomerations

Figure 1 shows the age of the housing stock in Switzerland. We calculated the average age of all dwellings per every square kilometer. This revealed a span of around 100 years, ranging from 12 years for example in rapidly expanding parts of the Bassersdorf or Bonstetten municipalities in Zurich to as much as 112 in outlying areas where time appears to be standing still. There are striking differences between rural areas, easily accessible municipalities in agglomerations, lowtax regions and cities. Housing in the urban centers tends to be old on average as the scarcity of building land makes new construction more difficult. High numbers of new buildings can be found in the deep-blue municipalities within agglomerations, which keeps the average age low. In the city of Zurich on the other hand, where the layout has been strongly influenced by its historical development, housing is more than 80 years old on average. In the surrounding municiSwiss Issues Real Estate Real Estate Market 2013

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palities of the agglomeration, particularly those that benefit from Zurich's rapid-transit system, the average age of dwellings is usually less than 30 years. The situation is similar in the canton of Zug and the March/Hfe region, where low taxes have primarily made the region so appealing as a place to live.
Small-scale demarcation of growth regions

The map gives a clear idea of which parts of Switzerland have seen the strongest growth recently. This not only points to the two large, well-known growth regions of Lake Geneva and the greater Zurich area, but also reveals that growth in the west of Switzerland is spreading further and further into Gros de Vaud and Rhonetal. There is also substantial growth centered around the canton of Fribourg, particularly in the Sarine region and the municipalities surrounding Bulle. In the Berne metropolitan area, in addition to the agglomeration around the capital, housing has a low average age in the Seeland region and the area around Thun. In Basel, not only do the municipalities along the Birs river exhibit high levels of growth, but also those along the Birsig from Binningen via Oberwil to the enclaves around Hofstetten in the canton of Solothurn. For each region of Switzerland it is possible to see which areas are currently in high demand, where a large number of new residences are therefore being built and the housing stock is getting younger as a result. The reverse conclusion is no less interesting. The existing stock ages in areas where there is little demand for housing. Old housing stock is therefore seen in many rural and structurally weak regions. The low appeal as a place to live due to a peripheral location puts investors off building new housing. Any new construction primarily serves to replace old buildings. The high quality of building and resulting longevity of residential properties in Switzerland mean that the housing stock is only renewed at a very slow rate. But a high proportion of protected residential properties, as is the case in the canton of Appenzell Ausserrhoden for example, can also result in excessively old housing stock. The map shows the weaker regions of Switzerland better than almost any other analysis. The lower Tsstal in particular on the eastern fringe of the canton of Zurich stands out in this regard, as do Toggenburg. Very high average ages can also be found in Glarner Hinterland, the lower reaches of the Wgital in the canton of Schwyz, and in localized parts of the Bndner and Ticino valleys. In the west of the country, the circular shape of the Napfgebiet (which translates as the "bowl" region) lives up to its name. It is also clear that the southern Freiberge and the Neuchtel Jura (excluding La Chaux-de-Fonds) is a particularly underdeveloped region. The same applies to the district of Molondin in the east of the Yverdon region, as well as Pays-d'Enhaut and the adjoining outlying areas of the region of Aigle. Analyzing the age of housing on a small scale can therefore tell us a lot about the quality of different locations and corresponding demand for housing, even if other influential factors cannot be entirely ignored (particularly in cities).

High age of housing in many rural and structurally weak regions

Demand
Ownership Still Popular Thanks to Low Mortgage Rates
The financial cost of owning property as low as never before

Owning your own home remains an attractive prospect, mainly due to the development of mortgage rates. Interest rates for fixed-rate mortgages have fallen to almost absurdly low levels in connection with continuing uncertainty on the financial markets, the development of the sovereign debt crisis and correspondingly high demand for safe investments. This has had a direct impact on demand for residential property. Although purchase prices have continued to rise (which also adds to housing costs for new buyers, all other things remaining the same), the annual financial cost of owning your own four walls has fallen overall. The reduction in interest rates more than compensates for the effect of increasing prices (figure 2). The ongoing housing costs for a new, medium-standard condominium (including the interest payments for a five-year mortgage plus maintenance amounting to 1% of the purchase price) have fallen from almost CHF 28'000 in mid-2008 to below CHF 17'000. This means that the average annual financial cost of a condominium for a new buyer is now less than half the annual rent for a comparable apartment. This is driving demand for home ownership. Only the equity requirements and the affordability analysis carried out by mortgage lenders (who base their calculations on interest rates that are three times higher) represent increasingly challenging obstacles to benefiting from low interest rates. 8

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Home owners save CHF 5.4 bn each year

An increasing number of home owners are benefiting from the low interest rates, which have been low for such a long time that even households that swear by fixed-rate mortgages have been able to swap their previous mortgages for more affordable ones as they have matured. This is reflected in the constant but slow fall of the average interest rate for all outstanding mortgages from 3.45% at the end of 2008 to its current level of 2.25%. Existing home owners have also benefited to a lesser degree from falling interest rates since the outbreak of the financial crisis because repayments have caused their loan-to-value ratios to fall below those of new owners (figure 3). Since 2008, average annual mortgage interest costs have fallen from CHF 14'000 to CHF 10'000, which equates to a reduction of 28%. The savings for all owneroccupiers now amount to CHF 5.4 bn a year. A substantial portion of these savings is likely to have been spent on consumption, which is receiving a significant boost from home owners as a result.
Figure 3

Figure 2

Ongoing Costs for a New Condominium


Estimated annual mortgage interest costs (including maintenance) in CHF
40'000 35'000 30'000 25'000 20'000 15'000 10'000 5'000 Cost component prices 80% loan to value ratio Cost component interest rates 80% loan to value ratio 2012/07

Mortgage Interest Costs for Existing and New Owners


Average estimated annual mortgage interest costs in CHF
20'000 18'000 16'000 14'000 12'000 10'000 8'000 6'000 4'000 2'000 0 2008/07 2009/07 2010/07 2011/07 Mortgage interest costs for first-time buyers (left scale) Mortgage interest costs for existing owners (left scale) Fixed-rate five-year mortgage (right scale) Average mortgage interest rate (right scale) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2012/07

Actual housing costs 80% loan to value ratio 0 2008/07 2009/07 2010/07 2011/07

Source: Credit Suisse Economic Research, West & Partner, Datastream

Source: Credit Suisse Economic Research, Meta-Sys AG, FHO, Datastream

Interest rates promote home ownership

First-time buyers, on the other hand, have benefited directly from declining interest rates since the fall of 2008 (figure 3). Back then, an advertised condominium taken from the housing stock could be expected to involve annual mortgage interest costs amounting to CHF 18'000 (fiveyear Fix mortgage, 80% loan to value). The situation has changed fundamentally since then. In the fall of 2012, a new buyer would only expect to pay annual mortgage interest costs of CHF 6'900 for a 4.5-room condominium. This is despite the fact that the advertised market prices for 4.5-room condominiums have risen 25% over the same period. It therefore comes as no surprise that those renters who are able to afford it are choosing to buy, pushing the rate of home ownership further up. The latest data refutes the idea that home owners mainly come from high-income households while lower-income households mainly rent. Home ownership is much more evenly spread between the various income brackets than expected (figure 4). Despite their high incomes, a slight majority of households in the top bracket rent, while home owners make up almost one-third of households in the bottom bracket.1 In peripheral regions in particular, the housing landscape is dominated by aging single-family dwellings. These properties are often affordable even for lowincome households. At a national level the rate of home ownership is just under 40%. Although these results are not immune to distortion, multiple sources suggest that these figures are representative. While the number of home owners in the low-income bracket is falling (which is hardly surprising given the steady rise of real estate and land prices), it is rising in the middle and high-income brackets to achieve 2011 figures of 42% and 48%, respectively. The period of low interest rates seen in recent years seems to have allowed middle-income households in particular to

Home ownership seen in all income brackets

Limited rise in ownership among middle and highincome households

Since the thresholds for the income brackets are not adapted for each region, the rate of ownership among lower-income households is likely to be slightly overestimated.

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access the ownership market, even if the share of ownership has risen slightly faster in the high-income bracket over the observed period.
Stricter equity requirements soften demand for ownership

The lower-income bracket will also see a reduction in the proportion of home owners over the next few years because the latest regulatory measures have made it substantially harder to acquire residential property, particularly for lower-income households. For many households in the lower and middle-income brackets the main obstacle to buying a property is not the annual housing costs associated with ownership, but rather raising the necessary equity (usually 20% of the purchase price). Furthermore, since July 1, 2012, it has no longer been possible to exclusively use pension fund money for this purpose. The household must raise at least 10% of the purchase price from other sources. Given the high prices of real estate, a household therefore requires savings of at least CHF 65'000 (including private pension provisions) to purchase an average property. According to the 2009 wealth statistics, however, only 43% of all taxpayers hold assets with a value of more than CHF 50'000. This obstacle is therefore likely to prove impossible to overcome for "threshold households" in particular, removing them from the demand for home ownership. For their part, middle-income households will scale back their requirements and be forced to make more concessions with regard to floor space and location. This will cause demand to shift downward across the entire price spectrum. Gaps in demand will therefore mainly result in the more upscale market segments.
Figure 5

Figure 4

Proportion of Home Ownership by Income Bracket


Estimation
50%

Effect of the Normalization of Interest Rates


Anticipated costs for existing and new owners, in CHF
25'000 20'000 15'000 10'000 5'000 0

Low income

Medium income

High income

Total

Housing costs for existing owners Housing costs for first-time buyers

45%

40%

35%

30%

25% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

6 7 Quarters

10

11

12

Source: Credit Suisse Economic Research, Swiss Household Panel

Source: Credit Suisse Economic Research

Exit scenario: rising interest rates

Stricter equity requirements should soften demand for home ownership, but this remains positive. It seems that only rising interest rates are likely to bring about any change in this situation. Although it is not clear when and to what extent interest rates may normalize, the impact can already be modeled. We are assuming the scenario of a sustained recovery in the eurozone, as a result of which interest rates will return to the levels seen before the onset of the financial crisis in 2008. At that time there were fears of inflation based on the preceding period of low interest rates. Such fears are not likely to be any less pronounced the next time around in light of the glut of liquidity. As a result we repeatedly explore the question of how this may change the framework conditions for individual participants in the real estate market. We begin with property owners and potential candidates for home ownership. Rising interest rates will have a delayed impact for about four-fifths of home owners because they have protected themselves with fixed-rate mortgages (figure 5). In the above scenario, average mortgage interest costs would rise from around CHF 10'000 today to around CHF 14'000 in the space of three years. Despite rising 40%, they would still be lower than in the year 2000. The loss of purchasing power would nevertheless amount to more than CHF 5 bn a year by the end of the third year, which would impact private consumption negatively. This kind of interest rate hike would, however, have direct consequences for first-time property buyers (figure 5). While the annual housing costs for purchasing property currently average CHF 6'900 in the case of a five-year, Fix mortgage, a first-time buyer would have to pay an average
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High proportion of fixedrate mortgages limits consequences for owners

First-time buying quickly loses its appeal when interest rates rise

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of CHF 24'000 in three years' time, 3.5 times what they would spend today. This enormous leverage effect is due to the simple fact that increasing interest rates by, say, one percentage point at their current, extremely low levels has a completely different effect than if they rise from 4% to 5%. Increased housing costs as a result of the normalization of interest rates would massively reduce demand for home ownership, and could trigger a price correction after more than twelve years of constant price increases. Simply the prospect of falling property prices would dissuade many households from buying, exacerbating the negative spiral and leading to a slump in demand for residential property. Depending on economic conditions, rental accommodation would experience a corresponding revival since rents only respond to rising interest rates with a considerable delay due to the very slow reaction of the reference mortgages interest rate. Strong Demand for Rented Accommodation Due to Immigration
Immigration continues apace

The phenomenon of immigration continues to surprise. Despite Switzerland's economy only realizing about half of its potential growth, immigration remained at the same level as the previous year. Population growth of 1% once again exceeded the annual average of 0.9% since the year 2000. The monthly immigration figures, which exactly matched those of the previous year, show no sign of saturation. The combined net migration of Swiss and foreign nationals amounted to more than 68'000 individuals (figure 6). These sustained high levels of immigration are the result of the well-functioning Swiss labor market. Employment in Switzerland is estimated to have grown by 1.8%, creating 74'000 jobs in the space of a year. Immigration has been selfsustaining for a while, with new jobs being created to meet the new arrivals' needs.
Figure 6

Net Migration Alongside Growth in GDP and Employment


Growth in GDP and employment (left scale), net migration including change of status (right scale)

6% 5% 4% 3% 2% 1% 0% -1% -2% 1991

GDP growth (left scale) Growth in total employment (left scale) Net migration (right scale)

120'000 100'000 80'000 60'000 40'000 20'000 0 -20'000 -40'000

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Source: Swiss Federal Statistical Office, State Secretariat for Economic Affairs, Credit Suisse Economic Research

Slight slowdown likely in 2013

Sooner or later, however, the growth in employment and the immigration it brings in its wake are likely to run out of steam. This will be a gradual process that could start in 2013. We expect immigration to fall slightly from 68'000 to net migration (including change of status) of 60'000 individuals on account of the after-effects of the 2012 downturn in the economy as well as the slight clouding of the labor market. This would reduce population growth to 0.9% in 2013. We do not expect any serious setbacks as many companies are still having difficulty recruiting welltrained staff. Migration patterns have remained largely the same. As shown by figure 7 migrants are mainly drawn to the labor markets centers, or neighboring regions if housing is scarce, as evidenced by the area around Lake Geneva. The five regions of Zurich City, Lorzenebene/Ennetsee (Zug), Basel, Lausanne and Geneva account for 29% of total net migration. The choice of first place

The domino effect of immigration

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to live is therefore often determined by the individual's place of work and the need to establish a social network, which is easier in urban centers. This makes the rental accommodation market, which is widespread in the urban centers, one of the main beneficiaries of immigration.
Figure 7 Figure 8

Net International Migration by Region in 2011


Including change of status, relative to population, in percent
2.0% 1.5% 1.0% 0.5% 0.0% < 0.0% 2.5% 2.0% 1.5% 1.0% 0.5%

Internal Migration by Region in 2011


Relative to population, in percent
> 3% 2% - 3% 1% 2% 0% 1% -1% 0% -2% -1% -3% -2% -5% -3% < -5%

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research, Geostat

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research, Geostat

Crowding effects in urban centers

Population pressure in urban centers is making housing increasingly scarce and expensive, pushing people out into the municipalities of surrounding regions within the same agglomeration as shown by the internal migration data in figure 8. These include first-wave immigrants who have decided to stay for longer and often want to buy a home, which is easier and more affordable outside the urban centers. Most well-qualified recent migrants also have the necessary means to buy property. This means that immigration not only benefits the urban centers, but also well-developed municipalities within the agglomeration on account of the second round effect. All of the aforementioned labor market centers exhibit negative net internal migration. On the other end of the scale, the regions with highly positive net migration figures in the greater Zurich area are Oberland-West, Knonaueramt and Zurich Unterland as well as the Mutschellen and Freiamt regions in Aargau. In the Geneva-Lausanne economic area the corresponding regions are Gros-de-Vaud, Broye, Glne/Veveyse and Gruyre in particular. The negative internal migration figures for many rural and mountainous regions are also striking. This reflects an ongoing process of urbanization and the concentration of employment opportunities on the urban centers and their agglomerations. Potential Future Demand on the Rental Market

One-sided distribution of potential demand for rented accommodation

While the construction of rented accommodation was neglected for a long period of time, it has picked up in recent years thanks to immigration and pressure from institutional investors. For investors in major projects in particular it is crucial to be able to assess the potential future demand for rental apartments, and there are substantial differences between regions. Using a synthetic indicator of demand, we can show the regions in which demand for rental apartments is expected to be strongest over the next few years. Our calculations are based on projected population growth up to 2020, the age structure of the population, accessibility using transport and the situation with respect to income. We see the strongest potential for future demand in the greater Zurich area, where potential in the regions of Glattal, Furttal, Limmattal, Knonaueramt, Zurich Unterland, Pfannenstiel and Mutschellen is roughly as high as in the cities of Zurich, Winterthur and the region of Zug (figure 9). We also see above-average potential in the regions between Geneva and Lausanne. Potential demand is merely average in many regions of Eastern Switzerland and the Mittelland area, even for regions such as Berne, St. Gallen or Wil. At the other end of the scale, demand for rental apartments will be below average in the future in most of the highly rural and alpine regions. Calculating the average number of days on the market for rented apartments shows
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that rented apartments in regions with high potential demand are already being taken up by the market much sooner than in regions with lower potential in most cases.
Figure 9

Synthetic Indicator of Demand for Rental Accommodation


Relative to the Swiss national average
Potential demand +++ ++ + = ---Number of days on the market 13 - 20 21 - 30 31 - 40 41 - 50 51 - 98

Source: Credit Suisse Economic Research, Meta-Sys AG, Geostat

The noticeably higher number of days on the market in the Zurich area relative to the area around Lake Geneva, where supply is still not keeping pace with demand, is also interesting. In Lower Valais, the Glne/Veveyse region or also in Einsiedeln, for example, the low number of days on the market does not reflect potential future demand, making it likely that the market will change in the medium term. Equally, the rental market in regions such as Knonaueramt should tend to exhibit more tension in the future than suggested by the current figures regarding number of days on the market.

Supply
Less housing built in 2012 than expected

It only became apparent after the customary delay that the housing stock grew by more than 48'000 units in 2011. Not counting the years 1994/1995, when the federal government sought to support the construction of housing with subsidies following the real estate crisis, similar figures have not been seen since the 1970s. The 2012 figures should be lower, despite a full pipeline. The weather-related setback due to a cold snap in the first quarter could no longer be made up in the remainder of the year on account of capacity bottlenecks and structural problems in the construction industry. This has led to a steady increase in the number of dwellings undergoing construction. No fewer than 75'320 properties were in the process of construction at the end of the third quarter of 2012. Comparing building permits and net addition to the housing stock shows that the completion of units has been struggling to keep up since 2005 (figure 10). Assuming that 95% of approved dwellings are realized, housing construction is currently lagging by more than 20'000 units. If you also include approved units, the number of dwellings at an advanced stage of planning at the end of 2012 comes to 91'000. This is 2.3 times the average net addition to the housing stock since the millennium. This figure still stood at 1.7 in 2005.

Pipeline is full to bursting

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The bottleneck in housing construction raises the risk of surplus supply in the future

While the growing bottleneck in housing construction represents a welcome cushion for the construction industry when times are bad, it increases the associated risks. Even in the currently unlikely event of a slump in demand, the very high number of dwellings currently under construction would still come onto the market. However, even more important is the fact that the large volume of incomplete homes is not having enough of an impact on vacancy rates and ultimately on prices. The pricing signals being received by investors and principals are therefore too positive, and could mislead them into creating an excessive amount of additional housing.
Figure 10

Indicators for the Anticipated Expansion of the Housing Stock


Net additions, homes under construction, building permits, all as the number of residential units

80'000 Building permits 70'000 60'000 50'000 40'000 30'000 20'000 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Swiss Federal Statistical Office, Baublatt, Credit Suisse Economic Research

Housing under construction Net increase

Applications on the rise

A look at the application figures shows that these fears are not entirely unfounded. The number of homes for which applications were submitted in the last twelve months has literally gone through the roof, and currently stands at 69'000 units (figure 11). This development cannot be explained by the second homes initiative alone. It is true that the expiry of the window for receiving a legally binding building permit and preserving the opportunity to build a second home at the end of 2012 resulted in a flood of applications in the 573 municipalities affected by the initiative. The growth of 114% in these municipalities probably consists of second homes for the most part. However, this only accounts for around half of the increase. As figure 11 shows, applications in other municipalities are experiencing a similarly steep rise. We can only speculate about the reasons for this increase. Does it reflect the fact that many institutional investors are turning to project development due to a lack of profitable properties for sale, or does it also reveal the fear that the spatial planning act will be amended, resulting in the potential reclassification of land at a later date? At the time of going to print it is impossible to conclusively assess how many of the planned second homes will actually be built. The Federal Supreme Court will have the final say in this regard. If most of the homes become a reality, the construction industry should be working at full capacity for the next two or three years after which capacities will have to be scaled back by an estimated 30% as the underlying conditions in the tourist-oriented regions change. While building permits in the second-home municipalities are following applications, there is no evidence of any such correlation for permits in other municipalities. These should also start to rise in the months to come but this will not be reflected in the net addition to the housing stock until 2014 at the earliest. 2013 will still be characterized by a severe backlog. The weather and the construction companies' situations with respect to capacity will therefore determine the net addition to the housing stock this year, and not the pipeline. As a result we expect an extraordinary 49'000 net new homes in 2013.

Net increase of 49'000 homes expected in 2013

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Focus increasingly shifting to rental apartments

Construction activity in terms of segments will increasingly focus on rental apartments in 2013 (figure 12). These now make up 44% of all approved dwellings (excluding second-home municipalities). This figure stood at just 19% as recently as 2002. This is due in part to the growing number of major projects in urban centers and nearby municipalities. The proportion of condominiums is falling despite the fact that mortgage rates remain very low, and currently stands at 37%. Single-family dwellings are becoming less of a priority for construction, and currently make up 19% of all approved residential units. Having accounted for 38% in 2002, the single family dwelling continues to become less of a priority with respect to new construction.
Figure 12

Figure 11

Planning Applications and Building Permits


Number of residential units, 12-month moving total
60'000 50'000 40'000 30'000 20'000 10'000 0 1995 Applications in second-home municipalities Applications in other municipalities Permits issued in second-home municipalities Permits issued in other municipalities

Building Permits by Intended Use


Number of residential units, 12-month moving total
24'000 20'000 16'000 12'000 8'000 4'000 0 2002 CH excluding second-home municipalities rental apartments CH excluding second-home municipalities single-family dwellings CH excluding second-home municipalities condominiums

1997

1999

2001

2003

2005

2007

2009

2011

2004

2006

2008

2010

2012

Source: Baublatt, Credit Suisse Economic Research

Source: Baublatt, Credit Suisse Economic Research

Construction activity focused away from urban centers

As in previous years, the focus of construction activity is primarily on the Zurich and Lake Geneva metropolitan areas (figure 13). However, the anticipated expansion of housing stock in the urban centers and nearby regions has turned out to be relatively low. Construction activity is much higher further away from the urban centers on account of the greater abundance and lower prices of building land. This is why building work will focus on the Zurich metropolitan area and Zurich Unterland as well as the Mutschellen and Aarau regions of Aargau over the next two years. There will be even more construction activity in the Sursee/Seetal region. In western Switzerland the focus is on Lower Valais and the regions of Vaud bordering the regions of Lake Geneva. The high levels of expansion anticipated in the Werdenberg regions and St. Galler Rheintal are astonishing at first glance. They are due to the high number of employees in Liechtenstein who are unable to live there for legal reasons and are therefore looking for housing in nearby Swiss municipalities. The focus of the anticipated expansion in the urban centers and nearby municipalities is mainly on rental apartments, followed by condominiums (figure 13). Single-family dwellings account for a significant share of construction activity in an increasingly small number of regions. Within the canton of Zurich they are mainly still being built in Zurich Unterland and Oberland East. Even in rural regions such as Entlebuch or Willisau, an increased share of the anticipated expansion currently concerns condominiums. The situation is different along the Jura mountains and in rural regions of the cantons of Vaud, Fribourg and Valais due to the use of chalets as second homes. In these areas, construction activity is dominated by single-family dwellings in many places. The general conclusion that can be drawn is that single-family dwellings are still being built on a large scale in areas where reserves of building land are still relatively freely available, even to this day. In other words, dense construction is mainly practiced in areas where prices no longer allow any other choice. House hunters can still fulfill the dream of a single family dwelling in places where building land is still affordable, which is practically only the case in peripheral regions. Single-family dwellings therefore dominate construction activity particularly in underdeveloped (i.e. affordable) regions, as well as areas where reserves of building land are still plentiful (e.g. the Broye and Glne/Veveyse regions in Western Switzerland).

Regions vary widely with respect to focus on segments

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Figure 13

Anticipated Expansion in 2013, Total and by Type of Housing


Anticipated expansion as a percentage of the housing stock; share of each segment in the planned expansion

Projected expansion 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%

Rental apartments Condominiums Single-family dwellings


Source: Baublatt, Credit Suisse Economic Research, Geostat

Market Outcome
Situation stable

If the vacancy rate remains unchanged at last year's level of 0.94% it is safe to assume that supply roughly corresponds to demand at present on the Swiss real estate market. Sustained immigration means that the rapid expansion of the housing stock can be almost entirely absorbed by the market. Or would it not be better to say that the rapid expansion has made it possible to absorb demand? In contrast to previous years the number of vacant rental apartments (which dominate the vacancy figures) has barely risen at all (figure 14). This shows how strong demand is for rental apartments as a result of immigration, despite the fact that they are currently much less appealing than ownership from a financial perspective. Vacancy rates for the ownership sector also only saw marginal increases in 2012. However, the fact that ownership prices have continued to rise unabated suggests continued imbalances. These imbalances take very different forms in the various regions. Comparing changes in vacancy rates in urban centers and peripheral areas shows where the market is diverging (figure 15). The situation is very tense in the five major urban centers of Zurich, Berne, Basel, Lausanne and Geneva. While vacancy rates have recently fallen slightly in the municipalities within agglomerations (suburban municipalities) and in small to medium-sized urban centers, over the last few years they have been moving sideways overall, roughly in line with the general market. By contrast, vacancy rates in peri-urban and rural municipalities are showing a tendency to rise, and not just since last year, but more or less since 2003 when the frenzy of construction activity first began. The situation itself is relatively clear. There is ample living space available in peripheral regions while scarcity reigns in the major urban centers that are home to about 12% of the population. The areas in between seem to be more or less in a state of equilibrium. Rising vacancy rates can also be found in sought-after, high-income and therefore expensive municipalities. This trend seems to be becoming more pronounced, indicating falling demand for upscale real estate.

Growing supply surplus in peripheral areas, scarcity in urban centers

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Vacancy rates expected to rise slightly in 2013

In light of the growing number of rental apartments that are soon to enter the market, we expect vacancy rates to rise slightly in 2013. The increase in demand for housing should not be quite as high as it has been due to slightly lower projected levels of immigration and some clouding of the labor market. Housing construction, on the other hand, is set to rise. The new rental apartments coming onto the market will therefore not be absorbed entirely. As a result the vacancy rate is expected to approach but remain below the long-term average of 1%.
Figure 15

Figure 14

Vacancy Rate and Change by Segment


Change by segment: Number of residential units
8'000 6'000 4'000 2'000 0 -2'000 -4'000 -6'000 -8'000 2001 2003 2005 2007 2009 2011 Single-family dwellings (for sale) Rental apartments Condominiums Vacancy rate 1.4% 1.3% 1.2% 1.1% 1.0% 0.9% 0.8% 0.7% 0.6%

Vacancy Rates between Centers and Periphery


As a percentage of the total housing stock
2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Major urban centers Medium-sized and small urban centers Suburban municipalities Peri-urban municipalities Rural municipalities High-income municipalities

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Significant impact of stricter regulation

The situation is made clearer by looking at changes in the number of homes offered on the market (figure 16). In the fourth quarter of 2012, 124'000 homes were advertised for rent or sale on the various online platforms. This means that 3.0% of the total housing stock is currently on offer, representing a slight increase since the end of 2009 (2.7%). As shown by the change over time in figure 17, the current increase is not attributable to the rental accommodation sector (in which fewer homes were recently advertised), but to a strong increase in the supply of residential property, in particular single-family dwellings, over the last year. In the whole of Switzerland there are currently around 31'000 single-family dwellings being offered for sale, 6'500 more than a year ago. Since the number of building permits for single-family dwellings has not changed to any significant extent recently, this increase can be attributed to a sudden drop in demand as well as stricter equity requirements, which are a particularly important factor in the case of expensive single-family dwellings.
Figure 17

Figure 16

Change in Number of Homes Advertised


As a percentage of the total housing stock
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2006 Single-family dwellings Condominiums Rental apartments

Change in Number of Homes Advertised


Change in volume relative to the same quarter in the previous year
30% Rental apartments Single-family dwellings 20% Condominiums Total

10%

0%

-10%

-20% 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012

Source: Meta-Sys AG, Credit Suisse Economic Research

Source: Meta-Sys AG, Credit Suisse Economic Research

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Reduced development in rental prices

The general difference in demand for ownership and renting is also reflected in the performance of prices. Rents for those advertised homes that best reflect the progression of market rents rose 2.8% in 2012, and therefore not quite as rapidly as in recent years (2000-2012: 3.1% p.a.). The strongest increases in rental prices were once again seen in the Lake Geneva region. Rents for existing homes have risen much less rapidly. The SFSO rental price index, which is strongly influenced by rents for existing homes, even stagnated. The fall in the mortgage reference interest rate as of the end of 2011 and mid-2012, combined with negative inflation, offered no potential for rent increases. In 2013 we expect the increase in the SFSO rental price index to be nearer the 1% mark again. By the end of 2012 the stricter financing regulations had done little to impact the various price indexes for home ownership. Prices in 2012 were once again entirely driven by strong demand resulting from low interest rates (figure 18). Condominiums continued to see the strongest growth at 6.8%. Only in the upscale segment, which had stood out by exhibiting the strongest rate of growth in the previous year, did growth slow significantly toward the end of the year. Stricter equity requirements and gloomy income prospects in important sectors such as financial services meant that many households were forced to settle for more affordable properties due to limits on the advance withdrawal of money in pension funds. This resulted in a shift in demand from upscale properties to medium-standard and low-standard properties. It is therefore not surprising that the new self-regulation has not yet had any limiting effect on prices. The slowdown in growth for upscale properties is even more clearly reflected by the performance of prices for single-family dwellings where, according to Fahrlnder Partner's price indexes, the upscale segment even suffered falling prices in the fourth quarter of 2012. Prices for single-family dwellings rose 4.3% overall last year. The price slowdown has hit municipalities with rising vacancy rates the hardest. These are the high-income municipalities where price growth has ground to a halt, and the rural municipalities where slightly negative price growth has even been recorded for ownership. We expect home ownership prices to continue to rise in 2013 thanks to the fact that the fundamentals remain solid. However, this growth will be much less pronounced than in previous years. Falling prices should even be expected in the upscale segment, while the mid-scale and lower-scale segments are likely to benefit from a shift in demand toward more affordable properties. This development is also heralded by the reduced volume of mortgages, which has fallen and stabilized below the 5% threshold, as well as the falling asking prices observed for singlefamily dwellings and in some cases also for condominiums.
Figure 18

Further strong increases in prices for residential property 2012

Sharp slowdown in the growth of prices for upscale owner-occupied properties

Price growth to remain positive in 2013 but slow considerably

Price Performance of Owner-Occupied Housing and Rents


Index: 1. quarter 2000 = 100; nominal

180 170 160 150 140 130 120 110 100 90 2000

Rent quoted rents Rent existing and new rents (BFS rent price index) Condos transaction prices SFD transaction prices

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: West & Partner, Swiss Federal Statistical Office

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Only a significant increase in mortgage rates could bring about a reversal in the trend for prices

Just a slight change in the underlying situation will probably not be enough to reverse the trend for prices in the ownership sector. We expect that only significant interest rate hikes will be able to put a stop to rising prices. Even if this will not yet come to pass in 2013, the hefty price increases of the past will not really become a burden for the market until interest rates normalize. This can be illustrated by considering financial affordability with respect to an assumed mortgage interest rate of 5% plus one percent for maintenance and ancillary costs. We are assuming a loan-to-value ratio of 80% in order to model the situation for first-time buyers in particular. Financial affordability requires that the costs of home ownership do not generally exceed 33% of gross income.2 Based on current price levels, a mortgage interest rate of 5% would make buying residential property unaffordable for households with the average regional gross income in 30 out of the 106 regions (figure 19). In addition to the area around Lake Geneva, this would be the case in the regions surrounding the city of Zurich, in Winterthur and Zug, as well as in the entire Basel area, South Ticino, Engadin and even in those regions of Fribourg and Vaud that do not belong to the Lake Geneva region. The greatest burden would be found in the canton of Geneva, at 76% of gross income. The burden for the average household would rise above 25% in 72 regions. Owning property would lose its appeal overnight, and demand among first-time buyers would veritably collapse. Such a sudden change in the market would mainly impact real estate promoters and project developers as sales volumes for their projects would begin to falter, resulting in problems with liquidity. However, business would be more likely to pick up for estate agents as slow sales would significantly boost demand for their services. The situation is different for existing home owners. Regardless of the fact that they will have protected themselves in most cases from the direct consequences of rising interest rates with long-term mortgages, the price they paid will be considerably lower than current price levels depending on when they bought their property. This can be illustrated using the region of Zug as an example. If a household purchased residential property in 2005 it would currently have to spend an average of 24% of its present gross income based on a mortgage interest rate of 5% and a (now reduced) loan-to-value ratio of 66%, as opposed to 36% for a first-time buyer with an identical loan-to-value ratio (figure 20). This shows that a significant increase in mortgage rates in the regions in question would mainly be problematic for home-owners who purchased their residential property late. In addition to higher interest costs, losses on the value of the real estate, which are induced by significant interest rate hikes, would be in particular painful.
Figure 20

The normalization of interest rates would choke demand for ownership

Particular risk for late buyers with high loan-tovalue ratios

Figure 19

Affordability for First-Time Buyers Following the Normalization of Interest Rates


Costs of home ownership as a percentage of gross income based on a mortgage interest rate of 5% plus maintenance costs of 1%
> 40% 33% 40% 30% 33% 25% 30% 20% 25% 15% 20% < 15%

Affordability for Existing Owners Depending on Purchase Date


Costs of home ownership following the normalization of interest rates as a percentage of gross income when purchased in the corresponding year
70% 60% 50% 40% 30% 20% 10% 2000 2002 2004 2006 2008 2010 2012

Zurich Aarau Geneva

Pfannenstiel Lugano

Zug Nyon

Source: Credit Suisse Economic Research, Geostat

Source: Credit Suisse Economic Research

We have limited our calculation of median income among home owners to taxpayers with net income of at least CHF 50'000.

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Rising interest rates and supply surpluses the triggers for price drops

In addition to rising interest rates, supply surpluses can also trigger price drops. The latter reverse the trend for price growth at first, after which they also prevent the market from bottoming out, at least not until the surplus has been overcome which usually takes several years. However, there are no signs of construction activity overshooting the mark despite the substantial expansion of the housing stock. As long as immigration continues to generate the same level of additional demand the market can withstand the addition of almost 50'000 units to the housing stock. Only the normalization of interest rates would kill demand for the most part and bring about a supply surplus for residential property, especially since there are an incredibly large number of homes currently under construction due to extraordinary factors, as described above. We have been closely monitoring prices for the purposes of risk assessment for some time now. To this end we have prepared a checklist identifying the typical signs of a real estate bubble (figure 22). The decoupling of real estate prices from incomes has become even more pronounced in the course of the price increases described above. However, there have been no other indicators of a bubble in real estate prices. There are three dams that have thus far prevented the formation of a genuine price bubble, and they are still holding. Firstly, while the 4.7% increase in the volume of mortgages taken out by private households is still substantial, it falls well short of the historical average of 5.8% and cannot be described as excessive, especially since the growth rate must be viewed in the context of record levels of immigration and the new regulatory measures will have a delayed impact on prices. It would also be wrong to talk of insufficient credit checks when issuing mortgage loans, as recently observed in the run-up to real estate crises in other countries. Otherwise the Swiss National Bank would have long ago raised more of an alarm in connection with its continuous monitoring of mortgage market data relating to the most important banks since the fall of 2011. Secondly, the proportion of speculative real estate purchases is still at a relatively modest level. And thirdly, there is no supply surplus as yet in the Swiss housing market. However, none of this should disguise the fact that rising prices since the year 2000 have raised the risk of a correction, which we expect to occur in connection with rising interest rates. When this happens, the gap between prices and regional income will be one of the factors determining the risk of a rebound. We have been monitoring both of these figures since 1996. In the long term, real estate prices should not rise faster than household incomes. Short-term discrepancies are entirely normal, but sooner or later they must correct. We now consider the ratio between prices and incomes to be unsustainable in 49 of the 106 regions (figure 21). A year ago this was only the case in 38 regions.
Figure 22

Overheating: three dams still holding

Overpricing in a growing number of regions

Figure 21

Regional Analysis of Residential Property Prices


Price trend for condominiums in relation to income trend
> 1.6 1.5 1.4 1.3 1.2 1.1 1.0 < 1.0

Criteria of a Real Estate Price Bubble

1.6 1.5 1.4 1.3 1.2 1.1

Source: Credit Suisse Economic Research, Geostat

Source: Credit Suisse Economic Research

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Overpricing around Lake Geneva and in the greater Zurich area

The situation has become even more critical in western Switzerland in particular. The most striking imbalance can be found in the canton of Geneva, the only region where we see a fullyblown price bubble, where real estate prices have risen 2.6 times faster than incomes. But prices are also no longer sustainable in the other regions directly adjacent to Lake Geneva and large parts of Lower Valais. Overpricing is increasingly starting to spread to regions of Vaud situated away from Lake Geneva, as well as the canton of Fribourg. The situation is not yet as severe in the greater Zurich area. But even here, regions situated further away from Zurich such as Zurich Unterland and Zurich Oberland are increasingly feeling the pull of high prices. A growing gulf between prices and incomes is also emerging in the canton of Ticino as well as the Locarno, Bellinzona and Lugano regions. Less worrying are the high values seen in the touristoriented regions, where real estate prices are determined by demand for second homes. Factoring in the second homes initiative and the resulting limitations on the construction of second homes, the resulting shortage of supply should bolster prices in the medium term. The trend remains unproblematic, on the other hand, in large parts of the Mittelland region and eastern Switzerland.

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Outlook for the Residential Property Market in 2013


Less dynamic no trend reversal as yet

The housing market will benefit from a similarly healthy, although not quite as healthy, set of fundamentals as last year, when all the signs were good. In addition to the continued low interest rates, we expect a slight weakening of immigration and only moderate growth in real income. In combination with the slightly higher unemployment rate, the tightening of the financing rules will have a dampening effect on demand. This has already had an impact on the higher end of the owner-occupied residential property market. Overall, we expect price growth in the owner-occupied residential property market to flatten out, but we are not yet expecting a trend reversal. Stagnating or falling prices at the upper end of the owner-occupied residential property market are likely to be accompanied by continued strongly rising prices in the middle and lower segments of the market as self-regulation takes its course and demand shifts from more expensive to more reasonably priced real estate. The market for rental accommodation is also likely to benefit from this, but its price growth remains under that of owner-occupied residential property, which is considerably more attractive in terms of costs in the short term. There are three factors that prevent the housing market from overheating to the extent that it reaches the level of a bubble, culminating in a crash. These are the comparatively moderate level of speculation in the market, a relatively restrained and largely risk-aware mortgage lending policy and the absence of oversupply in the market. Although we expect a high net increase in housing in 2013 and the project pipeline is full to bursting, with certain exceptions in the upper price segment and in certain regions where the level of construction activity has been high, this is unlikely to cause any significant problems and will only slightly increase vacancy rates. The medium-term risks of a price correction have however increased once again, as we have ascertained overvaluations in 49 of 106 regions. A correction is most likely to be brought about by a sharp increase in interest rates. The activation of the anticyclical capital buffer would not suffice for this. Demand, Supply and Market Outcome
Demand Demographic trends: The effects of last year's deterioration in the economy are likely to be noticed in a slight fall in immigration in 2013, resulting in somewhat lower population growth of 0.9%. Income trends: No major triggers are expected in 2013 as was the case in the previous year. Moderate increases in nominal pay and low inflation will result in only modest growth in real incomes. Interest rate trends: The Swiss National Bank will remain focused on the development of the exchange rate in the coming months, and will continue its policy of low interest rates. Accordingly, interest rates will remain at an extraordinarily low level in 2013. However, an easing of the euro and sovereign debt crises would result in a steeper interest rate curve and increase medium and long-term rates. Supply Development of housing stock 2013: Against the background of a project pipeline that is full to bursting and record numbers of homes under construction, we expect a high net increase of 49'000 homes, with an increasing number of them aimed at the rental market. Expansion planned in the medium-term: The number of submitted planning applications reached a new record high at the end of 2012, not just in those municipalities affected by the second home initiative but in other municipalities as well. It is thus already becoming clear that construction activity will remain at a high level in 2014. Market Outcome Vacancy rates: We expect a slight increase in vacancy rates in 2013, primarily in the market for rental accommodation, where the growth in the construction of rental homes (Owner-occupied) (Owner-occupied) will continue, but demand will be somewhat lower. Growing vacancy rates can also be expected in the upper price segment of the market for owner-occupied homes. (Rented) (Rented) Prices: The prices of owner-occupied homes will continue to rise in 2013. However, growth is likely to be lower than last year and under the long-term average due to the (Owner-occupied) (Owner-occupied) stricter guidelines in relation to own funds. There will be a slight increase in prices in the rental homes segment, although it will be a higher increase than last year. (Rented) (Rented) Performance: The prices for investment properties are likely to continue to increase as a result of the large difference in returns between real estate investments and government bonds and the sustained pressure to invest. Cash flow returns, however, are likely to stay at the same level or even fall slightly on account of the limited potential for rent increases and higher valuations. Total returns are thus likely to remain largely unchanged on balance. Source: Credit Suisse Economic Research Background Outlook

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Discussion Topic: Higher Density but How?


Housing pressure the price of success

Switzerland has done a lot of things right. The most visible evidence of this is the stream of incoming workers and companies, resulting in moderate growth in Switzerland while the rest of Europe stagnates. Steady growth is the reward for Switzerland's high quality as a location; the price for this is the resulting pressure on housing. The pressure on housing is particularly high in the urban centers, where there is competition for the best locations with other forms of land use. As a result, rents rise and people move to areas on the periphery of the urban centers. This pattern of development, which has been observed in the residential market for decades, can now also be seen in the office property market. The differences in price behind this migration from the center to the periphery of urban areas are artificially large, as the municipal building codes regulate the amount of available floor space by means of the building density figures (the ratio of floor space to plot size) and thus limit the supply of floor space in popular locations. Market interventions designed to provide legal protection for tenants contribute to the excessive consumption of available floor space, because many tenants remain in homes that are too large for them. The other factors favoring the development of greenfield sites include Swiss federalism. While this has actually contributed to Switzerland's success, on the other hand it also shares some responsibility for the negative consequences of urban sprawl. Federalism can be blamed for the fact that it has not been possible to achieve planning goals of overriding importance to the extent required. The unchecked development of the transportation infrastructure, initially of the motorways and subsequently of the rail system, has also contributed to the current urban sprawl. How wasteful Switzerland is with its scarcest resource can be seen from an analysis of the floors on which homes are located. 90% of all homes in Switzerland are on the first (ground level) to fourth floor. Only 10% of homes are on the fifth floor or above (figure 23). Even in the city of Zurich, only 14% of all homes are on the fifth floor or above (figure 24). It may be true that the reserves of land in Switzerland are limited and thus scarce, but the same cannot be said for vertical space. If the aim is to relieve the pressure on housing without making living space unaffordable, there is only one economical solution: more floor space per square area of land. In other words, Switzerland needs taller buildings. While this preserves cultivated land, it also changes the appearance of Switzerland's towns and cities. This is the price to be paid for growing prosperity.
Figure 24

Urban sprawl is homemade

In terms of its buildings, Switzerland is still a flat country

Figure 23

Homes by Floor of Building: Switzerland


Percentage of homes on different floors of buildings, 2010 (estimated)
35% 30% 25% 20% 15% 10% 5% 0% 0 1 2 3 4 5 6 7 8 9 10 11 12

Homes by Floor of Building: City of Zurich


Percentage of homes on different floors of buildings, 2010
35% 30% 25%

86% = 1st (ground) to 4th floor

90% = 1st (ground) to 4th floor 20% 15% 10% 5% 0% 0 1 2 3 4 5 6 7 8+

Source: Credit Suisse Economic Research, Swiss Federal Statistics Office

Source: City of Zurich statistics, Credit Suisse Economic Research

Compensation mechanisms required

Unspoilt landscapes are a typical example of a public asset. While there are people who are interested in having this asset, too few of them are prepared to pay the market price for it. The development of this land, on the other hand, increases the returns that can be obtained from it 23

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not only for the land owner but also for the authorities in the form of taxes and charges. Progress can only be made here by means of cooperation. The various local authorities involved have to find ways of working together that allow them to ensure economic development takes place in a concentrated form within their borders. To ensure the agreement of the various local authorities, corresponding compensation measures are required. For the first time, these mechanisms are provided for in the revised Swiss spatial planning legislation in relation to the transfer of reserves of building land. The canton of Zug, which has a very progressive approach to spatial planning, has also explored these kinds of compensation mechanisms between municipalities.
The myth of higher density

The solution to the problem of urban sprawl inevitably involves more concentrated development. Concentration means higher density. As is the case with true-cost pricing in transportation, which is another issue that needs to be addressed, it is hard to dispute that higher-density building is necessary. Whether it will actually happen, however, is another question. Analyses based on building permits make this appear at least doubtful: Too much building is still taking place on the edges of urban centers. Zug is one of only a few cantons that have recently managed to reduce the square area of developed land per resident and employee. How higher density is achieved is critical. It is important to realize that higher density cannot be achieved without cost. As a result of resistance at the local level (along the lines of "higher density is all well and good, but not in my back yard"), higher density is either not being achieved at all or it is achieved mostly in the wrong way, because the municipal building regulations are not amended. In areas that are suitable for higher density, this mainly results in buildings with a larger footprint. The distance between buildings is reduced to a minimum, opportunities are taken to build between existing buildings, or more floor space is obtained by building on "stilts" above entrance areas. As a result, there is more building at ground level because the building regulations on building heights and building density figures impose restrictions on how tall buildings can be. The goal of achieving greater density is achieved, but it comes at a cost in terms of space and aesthetic quality. If this process is not moved in the right direction by amendments to the building regulations, the quality of public space will become poorer and people will begin to feel closed in. As a result, popular resistance will sooner or later put a stop to higher-density building. A great deal of attention should be paid to the quality of the buildings and, in particular, those at ground level. As long as higher density does not have an impact on the quality of life, it is likely to be accepted by the population. A high quality of life in an urban environment depends greatly on the extent to which public use is made of buildings at ground level. Extra-wide sidewalks are one way of linking the use of buildings at ground level with the public space outside them. This space in front of a building can be used for commercial purposes or by people out for a stroll, local residents, or employees.3 As a result, social interaction takes place, which is essential to the quality of life. If we want to solve the problem of urban sprawl but also want to have affordable living space and avoid building an inefficient infrastructure which will not be possible in future anyway given the existing level of funding, according to the NFP 54 focus study4 taller buildings must be tolerated and, indeed, encouraged. A Swiss Real Estate Institute study5 found that a sensitive approach to allowing additional floors on buildings in selected parts of cities would enable a substantial proportion of the expected growth in population to be absorbed without using any additional land. The owners of residential buildings would have an incentive to take action. It is up to the planners to amend municipal building regulations. Stricter regulations are needed at ground level (building spacing, sidewalk widths, etc.), while height restrictions need to be relaxed (building density ratios, shadows cast, etc.). At the same time, there is a need to actively develop high-rise zones in which higher buildings are explicitly permitted. The quality of the buildings and, in particular, of the public space at ground level must not be neglected if these buildings are to blend in well, preserve the quality of life, and win the favor of local people.

Higher density the only solution but how?

Trade-off between spatial density and urban quality of life

Summary: Height instead of width

3 4 5

Cf. Zst, who makes interesting points on the trade-off between spatial density and urban quality of life: Zst (2008): Das Spannungsfeld zwischen rumlicher Dichte und urbaner Lebensqualitt, master's thesis. Cf. Schalcher et al. (2011): Was kostet das Bauwerk Schweiz in Zukunft und wer bezahlt dafr?, NFP 54 focus study, vdf Zrich. Cf. Swiss Real Estate Institute (2012): Verdichtung der stdtischen Wohnbevlkerung.

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Office Property
The Swiss office property market is facing challenging times. Warnings about oversupply have been circulating for some time now, and rightly so. But the looming short-term oversupply from a purely quantitative perspective is not what the market will struggle with the most. Rather, it's the long-term structural changes in the demand for office property. This includes increased demand for decentrally located large properties at the expense of urban centers, the changing demands on office space in an era of flexible working conditions, and increasing demand for office jobs by industrial companies as they gradually shift their business from production operations towards being service providers (tertiarization). The latter development will admittedly alleviate the risk of oversupply. Yet at the points where pure office jobs, IT, research and development, logistics, and technology overlap, the demands placed on office space by industrial companies varies considerably from the requirements of traditional office-based sectors. In short: Demand for office space is becoming increasingly hybrid and demands on office space are growing. At the same time, the supply side is willingly responding to the new requirements from the demand side thanks to low interest costs, leading to the development of a cutthroat market in which new properties are seducing away tenants at the expense of old properties because the new properties offer the right solutions for this challenging demand. Demand: Insufficient Growth Despite Tertiarization of Industry
Ongoing weak growth in the number of classic office workers

The growth in employment in the main sectors with demand for office space, which we call classic office-based sectors in the following sections of the study, is still robust, but it has not been sufficient for some time to prevent increasing vacancies. To be sure, the overall economy has recovered strongly in the aftermath of the 2009 recession when measured in terms of GDP. But in contrast to previous recoveries, two important service sectors did not follow with a pickup in employment. First, the start of the financial crisis impacted the financial sector directly. The belief that the crisis involved only a temporary slump admittedly led to an increase in the number of jobs in 2009. But it became apparent since 2010 at the latest that the banking sector is faced with significant structural challenges, bringing growth in employment to a standstill (figure 25).
Figure 25

Employment in Classic Office-Based Sectors and GDP Growth


Growth rates with contributions to growth and forecast, year-on-year

12% 10% 8% 6% 4%

Research and development Architects and engineers Employment agencies Information technology GDP (annual growth)

Corporate services Financial and insurance services Real estate activities Employment (annual growth)

Prediction 2% 0% -2% -4%

2000

2002

2004

2006

2008

2010

2012

Source: Credit Suisse Economic Research, Swiss Federal Statistical Office, State Secretariat for Economic Affairs

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Second, the banks' problems have had an impact on the growth potential of certain corporate services, too. In the wake of widespread cost cutting, orders for financially-oriented business consultants, agencies, and law firms have been held back. Moreover, corporate service providers in industry have felt the effects of currency-related investment reluctance by export oriented companies since the end of 2010, meaning that this service sector too has decided to forgo incremental hiring for the time being. This lack of hiring at banks and corporate service providers has eliminated the previous sources of demand with the highest willingness to pay for high-value properties at very good locations. That means the structure of demand is changing. Today's incremental hiring is occurring in the tertiary sector, involving architects, engineers, real-estate activities, information technology companies, and the public sector, i.e., domestically-oriented companies and institutions that are not involved in high-margin business to the same extent as banks and management consulting firms were in the last ten years.
2013: Banks and IT are a drag on demand

This year too, most of the moderate and slowing growth in employment will be derived from construction-related, domestically oriented sectors. It is expected that by mid-year, corporate services will pick up again as well, as it's likely they will increasingly receive restructuring-related orders from industry and providers of financial services. By contrast, further headcount reductions must be expected at banks during the year; this reduction will progress gradually, but over a longer period of time. This may impact the IT sector in the second half of the year, too, since this sector represents a significant portion of the cost base at banks and insurance companies. We believe the decline in growth in the IT sector will be reinforced by streamlining initiatives within companies. Currency-sensitive export enterprises, logistics companies, banks, healthcare companies, and the public sector are attempting to implement the process optimizations and automation previously performed by IT companies internally. IT automation aims to replace handmade and in many cases person-dependent individual solutions with comprehensive and longterm process planning and to increase the efficiency of the IT function. Overall, we expect that employment in classic office-based sectors will increase this year by about 8'000 jobs, which represents an office space need of more than 130'000 m2. But in fact, this figure alone might considerably underestimate the effective need for office space. Because besides the classic office-based sectors, the administrations of the growing public sector, and the back-office and service departments of industrial companies can be interesting tenant groups for vacant properties. The latter in particular represent a growing clientele, as tertiarization is making rapid progress within industrial companies. In the Swiss machine, electronics and metal industry (MEM industry), the staff structure has been steadily shifting toward office jobs for quite some time now. According to Swissmem, the number of staff in administration, sales, IT, research and development, and project planning has increased from 37.8% in 2004 to 43.7% in 2011. Seen from a macroeconomic perspective, the share of office jobs in 2000 was exactly a third of all staff in the second and third sectors. Based on the tertiarization process in general and within industry in particular, we expect that this share has risen to about 38% today. That's around 1.3 mn office employees on a full-time basis across all sectors. New demand groups are thus continually being discovered for service-oriented office properties. Admittedly, Industrial companies sometimes place different demands on properties to those made by pure service providers for example in research and development. But not every company can house the growing number of computer-based jobs in their own real estate, so when they're expanding, they seek additional rented area. Figure 26 integrates the incremental industrial and public sector need outside of classic office-based sectors into the trend of total employment, showing how tertiarization of industry has continually supported the demand for office property in recent years. Even after the dotcom bubble burst and many service companies had to lay off people as a result in 2003, you can still assume that the need for administrative office space rose in other sectors. It's also likely that going forward, the incremental need outside of the classic office-based sectors will be responsible for a portion of the demand for office space, too, because the appreciation of the franc has further accelerated the tertiarization process within industry.

Industry increasingly needs service-oriented office properties

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Figure 26

Estimated Macroeconomic Development of Office-Based Jobs


Growth rates and contributions to growth, year-on-year

8% 6% 4% 2% 0% -2% -4%

Employment outside offices Office employment of classic office-based sectors Office employment outside of classic office-based sectors Total employment GDP (annual growth)

2000

2002

2004

2006

2008

2010

2012

Source: Credit Suisse Economic Research, Swiss Federal Statistical Office, State Secretariat for Economic Affairs

Upheaval in the working world

In many respects, office property markets are in upheaval just like the use of the office space itself. Desk-sharing is a phenomenon that has attracted a great deal of attention. Yet desksharing is just one element of more comprehensive workspace concepts that attempt to come up with an answer to the changed requirements that have to be met both by people at work and by their working environment. In a desk-sharing system, people no longer have their own desk. Instead, they can sit anywhere. The advantages of this approach are the more efficient use of existing workspaces, a more dynamic environment, increased cross-departmental communication in the office, and the possibility of creating teams on an ad hoc basis. It is clear from these advantages that desk-sharing is not equally well suited to every field of activity. Large companies, in particular, have recently shown considerable interest in desk-sharing concepts. Indeed, it is hard to find a large company that is not giving consideration to the issue. Desk-sharing was initially tried out by companies that seemed predestined for it, primarily IT and consulting companies, and it has the potential to develop into a widespread trend. It has not escaped the attention of companies that, given normal desk occupancy rates of 60-80%, significant savings are possible. Sharing ratios, which indicate the number of workspaces per employee in desk-sharing systems, are typically around 70-80%. In other words, there are seven to eight workspaces available for every ten employees. These new systems, which require investment to be made initially, are often introduced when companies move into new offices or refurbish existing offices. Against the background of imminent rationalization in numerous large companies, which in itself will lead to considerable space savings, the question arises as to what impact desk-sharing will have on demand for office space. If a large number of companies start to use their available office space much more efficiently and actively manage their existing reserves of space, this would have consequences for the office property market particularly since, given normal use of space, the supply of space will exceed demand in future. Discussion Topic: Desk-Sharing Revolution at the Workplace

Desk-sharing: a threat to the office property market?

Traditional workplaces are generally very underused

Modern workplace concepts combine new developments in information and communication technology with findings from the fields of human resources and corporate real estate. The most far-reaching of these concepts involves dispensing with the fixed workspace in favor of mobility and desk-sharing. This development has been triggered by the recognition that, due to vacation, illness, outside appointments, or meetings, 20-40% of workspaces are unoccupied at any given time.

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Diverse benefits of the flexible use of workspace

The reasons for introducing desk-sharing appear clear at first glance. If a company can put more staff into the same square area, this will result in savings in terms of rent as well as building maintenance and running costs. However, such efforts to rationalize can only be effective if they are accepted by staff. For this reason, modern office environments have what are known as functional zones that provide the ideal conditions for meeting staff needs. The requirements that staff place on their workplace change depending on what they are actually doing at different times of the day. Work involving a high level of concentration requires a different working environment from intensive teamwork or work on confidential matters. The functional zones designed for these activities therefore complement the standard zones. Staff alternate between these different functional zones and workspaces, as required. These zones must be thoughtfully arranged to keep the distances between them as short as possible. A new world of work emerges in which staff can adapt their environment to meet their current requirements, and communication between teams increases. Equipped with the latest mobile devices, staff can log in from anywhere, ensuring seamless mobility. As a result, both staff satisfaction and productivity improve. In addition, the company profits greatly in terms of flexibility. The buffer areas required in conventional workspace concepts in order to absorb any growth in staff numbers can be managed centrally. Overcrowding at peak times can be dealt with by using alternative workspaces in the functional zones. These areas can be managed much more efficiently across the whole system because peak workspace occupation times are not the same in different areas. The sharing ratio can be adjusted to optimize the system on a continuous basis. Additional staff can be integrated at the available workspaces by reducing the sharing ratio. However, threshold values also have to be respected. If they are violated, it can result in a shortage of workspaces and have a negative impact. If the optimum sharing ratio is not met, the system threatens to collapse as a result of the "towel on the deckchair effect", for example. Staff who repeatedly find that their favored workspace is occupied start to come in early to reserve these spaces, and as a result too much space is blocked and the system becomes unhinged. This example illustrates how such systems only work when the staff feel comfortable in them, make use of the options offered to them and adhere to the defined rules. The aim of such systems is to ensure that staff are contented and productive. The optimum sharing ratio has to be determined separately for each workplace. The system is particularly effective in areas that involve a lot of project work with frequently changing project teams. Moreover, if staff are often away visiting customers, sharing ratios can be reduced down to 0.3. For long-term work requiring a high level of concentration and little daily interaction, such as research, sharing ratios of 0.8 to 0.9 are appropriate. The level of desk-sharing that can be achieved depends less on the industry in which a company works and more on the kinds of activities carried out in the company. The system is not as suitable for companies with fewer than 200 staff because noticeable efficiency gains in terms of space usage can only be realized as of a certain size. It is also possible to further develop the system, for example by including additional elements such as flexible working hours and home working. In this way, it is possible to reduce the pressure on space at peak times of the day and further reduce the buffer areas required. A non-representative survey of large Swiss service companies shows that, although some companies have already introduced desk-sharing systems, they are generally only in place for a small portion of their employees. The number of employees in Switzerland who no longer have a permanent, fixed workspace is still likely to be only a negligible proportion of the total number. However, there is great interest in such new working arrangements because they can be introduced systematically and expanded gradually. All of the surveyed companies that have already introduced desk-sharing intend to further reduce the sharing ratio, for example. Although a substantial portion of the space savings made are counteracted by the increased space requirements for the functional areas, overall space requirements can still quickly be reduced by 10-20% without fully exploiting the potential. Since desk-sharing systems are primarily worthwhile for large companies, which account for 35% of typical office use, it can be assumed that this will reduce demand by around 5% over a period of roughly 15 years. It will take this long because systems such as this require investment, and for business reasons they are therefore linked with moves to different locations and renovation cycles. The annual demand-

Functional zones provide balance

The optimum sharing ratio must be found in each workplace

Desk-sharing is still in its infancy

Demand dampened by an estimated 100'000 m2 per year

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dampening effect should desk-sharing be adopted in most companies would amount to savings of almost 100'000 m2. This projection does not take into account expectations that, as flexibility is introduced to the workplace, work requiring a high level of concentration will increasingly be done at home in future, whereas knowledge-sharing and communicative work will continue to take place in the office.
In spite of everything, the need for office space will grow by an impressive 400'000 m2 per year

Although the more efficient use of space can be expected to have an increasingly negative impact on the demand for space, the demand for office space should not be underestimated on the macroeconomic level. Summa summarum, and as shown in figure 27, it can be assumed that the demand for office workspaces has increased since 2008 by about 23'000 positions per year. This represents an annual need for office space of around 400'000 m2 across all sectors and regions, and it is likely that this is an accurate forecast for this year, too. Is this growth in demand sufficient to prevent oversupply in the office property market? Supply: Oversupply Is Coming

Planned office space expansion exceeds demand significantly

The annual demand for office space of 400'000 m2 per year from 2008 until 2012 stands in contrast to the total amount of office space approved to be built annually in the same period, totaling more than 670'000 m2. Figure 27 shows an estimate of the cumulative expansion in office space versus demand, taking into account all sectors including industry and the public sector. At the end of economic upswings in 2000/01 for example the respective cumulative expansion in office space covered the corresponding demand, which was also accompanied by low levels of vacancies. A period of oversupply developed between 2003 and 2005 because employment growth failed to materialize amid a period of brisk construction activity and corresponding expansion in office space. During this period, vacancies in service-oriented properties rose sharply in German-speaking Switzerland. Then, in the subsequent economic upswing, this oversupply was largely eliminated by the end of 2008. The number of properties reported vacant in 2009 marked the most recent low point, although this decline did not fully reach the previous low seen in 2001.
Figure 27

Cumulative Growth and Demand for Office Space


In m2; growth in office space based on building permits assuming building costs of 3'600 CHF per m2 of main office space; need for office space based on employment assuming 17 m2 per FTE; 33-38% of total employment

8'000'000 7'000'000 6'000'000 5'000'000 4'000'000 3'000'000 2'000'000 1'000'000 0

Cumulative growth in office space

Cumulative need for office space

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Swiss Federal Statistical Office, Credit Suisse Economic Research, Baublatt

Since then, history has repeated itself, although not to the same extent, because since 2008, the demand for space has systematically lagged behind the level of expansion. At the end of 2012, the gap between the demand for and expansion of office space reached nearly 400'000 m2, representing oversupply of more than 23'000 office workspaces. This discrepancy isn't fully depicted today in official vacancy statistics, as reported vacancy figures cover only
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about 44% of the Swiss office property market. For instance, they don't take into account regions such as Glattal or Limmattal. The good news is, and this can be seen from figure 27 as well, that it would be possible to work off the excess supply of office space with the help of one or two years of dynamic economic growth, including an increase in employment, similar to the upturn that took place in 2006/2007. But that level of growth is not yet in sight. The bad news is that a significant part of the approved properties will initially increase the rate of expansion in the next several quarters, making it all the more difficult to close the gap.
The growing supply of office space reflects the trend towards excess supply

The excess new construction is clearly apparent in the advertisements for new office space. The amount of advertised property is more than twice as high as it was in the years prior to the expansion wave (2005-2008), although the volume of approved construction permits has "only" increased by around one quarter. Compared year-on-year, the supply of new office space has increased by almost 170'000 m2 and most of that increase has occurred in the "central business districts" (CBDs) of large and mid-sized urban centers (figure 28). The problems facing CBD office properties resulting from the demand from many companies for more affordable and larger properties at decentralized locations are reflected in the high volume of advertising for new office properties and the increased supply of existing office space in the CBDs. As the year goes by, this trend is likely to have an even stronger impact on the existing stock of office space because the effects of workplace relocations out of the CBDs to the outer business districts will really start to become apparent this year. The supply of existing office space in the extended and outer business districts of large and mid-sized urban areas has on the up for quite some time now. The reason for this is the strong level of construction activity in the agglomerations and the resulting cut-throat market that has taken hold. In this situation, attractive new buildings seduce away the tenants from old properties, which then have to be advertised again for rent (figure 29).
Figure 29

Figure 28

Advertised New-Building Office Space


Advertised office space from new projects in m2
600'000 500'000 400'000 300'000 200'000 100'000 0 2005 2006 2007 2008 2009 2010 2011 2012 Other regions Extended and outer business districts CBD Total supply of floor space

Advertised Office Space Stock


Advertised office space stock in m2
1'600'000 1'400'000 1'200'000 1'000'000 800'000 600'000 400'000 200'000 0 2005 2006 2007 2008 2009 2010 2011 2012 Key: see diagram on the left

Source: Meta-Sys AG, Credit Suisse Economic Research

Source: Meta-Sys AG, Credit Suisse Economic Research

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Market Outcome: Short-Term Increase in Rents Figure 30 summarizes the trends of the 20 largest Swiss office property markets. The areaweighted average of Swiss gross rents has risen from 262 CHF per m2 p.a. last year to 283 CHF in 2012, an impressive increase of 8%. The increase in rents has occurred across most of the regions. At the same time, the number of offers has risen considerably in many locations above all in the heavyweight markets Zurich, Geneva, Basel, and Lausanne. This development is not a surprise, given the oversupply, and suggests it's likely that with some delay, another reversal in price trends will occur to the downside. The delay relates primarily to two factors. First, many rather expensive new buildings are currently appearing in advertisements, thereby raising prices in the short term. Second, expensive inner-city locations have recently been advertised as well, particularly in the large markets, which hardly ever was the case in the past. The structural change that has been observed now for quite some time, involving large companies shifting their back-office workplaces to well developed outlying areas of the office space markets, is likely to be reflected in corresponding rent corrections in the medium term.
Figure 30

Overview of the 20 Largest Office Property Markets


Office space in m2 as of Q4 2012; average rent (gross) 2012 area-weighted in CHF per m2 p.a.; trend for 2013

Economic region Existing office space Zurich City 6'281'000 Geneva 3'963'000 Berne 3'218'000 Basel City 2'204'000 Lausanne 2'099'000 Glattal 1'663'000 Lucerne 1'386'000 St. Gallen/Rorschach 1'361'000 Aarau 1'286'000 Lorzenebene/Ennetsee 1'199'000 Lugano 1'138'000 Lower Baselbiet 911'000 Winterthur City 712'000 Baden 672'000 Neuchtel 617'000 La Sarine 604'000 Limmattal 563'000 Olten/Gsgen/Gau 559'000 Oberland-West 556'000 Upper Baselbiet 546'000 Switzerland 49'630'000

Advertised office space Supply rate 222'000 3.5% 250'000 6.3% 38'000 1.2% 49'000 2.2% 95'000 4.5% 91'000 5.5% 25'000 1.8% 40'000 2.9% 19'000 1.4% 58'000 4.9% 43'000 3.8% 43'000 4.7% 75'000 10.5% 12'000 1.8% 23'000 3.8% 20'000 3.3% 24'000 4.3% 19'000 3.4% 12'000 2.1% 6'000 1.1% 1'693'000 3.4%

Supply trend

Average rent 339 451 255 280 330 218 217 214 208 228 283 209 232 195 195 221 186 164 195 228 283

Price trend

Source: Credit Suisse Economic Research, Meta-Sys AG

The Five Largest Office Property Markets in Detail The five largest office property markets represent over 40% of all office property in Switzerland. As a result, it's not just the overall trends in these markets that are interesting; what's equally important are also the shifts within the individual office property markets and the different characteristics of their various business districts. These changes provide an insight into overall Swiss trends and developments.

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Zurich

Figure 31

Quality of Public Transportation Connections at Office Location and Advertising Period


Quality of location per ha by frequency and distance of public transport stops: median advertising period per ha 2011/2012

Source: Credit Suisse Economic Research, Meta- Sys AG, Federal Office for Spatial Development, swisstopo

Too much office space in advanced stages of planning

In the Zurich office property market, the quality of connections to the public transportation network plays an especially important role because the market is larger than each of the other four large Swiss urban centers. The selection of a location is decisive for a company to limit the commuting time of its employees and to be able to quickly reach other company locations, clients, and partners. The quality of a location with regard to public transportation is calculated based on the distance and traffic frequency of train stations and bus and tram stops in the immediate vicinity. At locations with high-quality public transportation for example in the central business district (CBD) landlords were quickly able to rent out an overwhelming number of their office properties that were advertised in 2011 and 2012. These properties are not necessarily located in the immediate vicinity of a large train station, but rather at locations where the catchment areas of multiple railroad lines overlap with high bus and tram frequencies. It is therefore less a question of a single train station that gives a location a particularly good quality, but rather the limited distance to a wide variety of high-frequency transportation alternatives that travel in different directions. In contrast to the CBD, the situation is more difficult in many places in Limmattal and Glattal, where numerous slow-moving properties were only able to be rented out after vacancies of more than 250 days. The upheavals heralded for quite some time by the numerous initiatives by large companies to concentrate their workplaces will be more pronounced in Zurich's office property market starting from this year; indeed, they will dominate the market for the upcoming three to four years. From Schlieren and the city itself, to Zurich North, Glattpark and the airport, the volume of newly constructed office space is estimated to reach around 535'000 m2 by 2017. This means that the office space in the advanced stages of planning could not only absorb the annual growth in office-based employment in the canton of Zurich, but also the entire annual growth in all employment (in a ten-year average). There is definitely no need for this number of office workplaces. By 2017, several large companies will have relocated their offices. The upheavals are already fully underway at banks. In addition, Swisscom IT Services just celebrated the opening ceremony of its office property Fifty One in November 2012, thus initiating the process of relocating 1'000 employees from the Zurich metropolitan area to Zurich West. 38'000 m2 will become

Large office-space displacements will start to occur in 2013

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available this year at the Richti site for 1'600 employees of Allianz Suisse. In fact, it appears the Allianz Group is driving this facility consolidation at an international level, too: The German parent company recently announced that the Allianz branch in Frankfurt, which has 1'550 employees, will be relocated to the periphery of the city for cost reasons. During the course of the year, the office space at Europaallee will be ready for UBS to occupy. The relocation of Zurich Insurance to a 40'000-m2 property in the Leutschenbach district is planned to take place next year. In 2014, SBB is moving more than 800 employees to 13'000 m2 of office space at the new Plaza building, which is being constructed as part of the West Link building project in Zurich Altstetten. Likewise in 2014, upc Cablecom will relocate 1'400 office workplaces to the new Richtiring office building in the immediate vicinity of the new Allianz Suisse headquarters. For 2015, SIX Group, the stock exchange operator, is considering leaving the new exchange on the Selnaustrasse with the intention of occupying new office space in the Hardturmpark in Zurich West. These examples show that over the coming years at least one large company intends to relocate every year, each vacating between 10'000 to 30'000 m2 of office space in older properties. By contrast, new properties continue to benefit from workplace relocations by large companies, meaning that new projects are repeatedly being initiated. For instance, the planned office property at the Welti Furrer site which is equivalent to the office space of the Prime Tower has brought new momentum again to Zurich West, which in fact just completed the last expansion wave with office properties. The fact that new tenants don't necessarily have to be classic service companies can be seen in numerous new leases in Zurich. New office space in Zurich North and Glattpark is particularly in favor with regional administrations or headquarters of global companies in a variety of sectors. In times of increased construction activity and limited organic growth by traditional companies, significant opportunities lie in further corporate relocations. This is the only way to hold the looming oversupply of office property in check.
Price pressure in the CBD

The sluggish demand for office space, in combination with the structural relocations from the CBD to the outer business district, can be seen in the data. In comparison with the previous year, advertised office space in the Zurich CBD increased in the fourth quarter of 2012 by 50% (figure 32). In contrast, the supply in the outer business district increased only slightly (+3%), despite the brisk construction activity there. Similar to Geneva (see page 35), the higher supply of expensive CBD office space leads to a temporary increase in average rents to a gross value of more than 450 CHF per m2 p.a. (figure 33). We expect that further companies will feel compelled to abandon the CBD especially when you consider that, for example, new, modern and well-situated properties in Zurich North can be rented for considerably less than 400 CHF per m2, while comparable properties at very good CBD locations can cost up to 700 CHF. For this reason, we believe a correction will soon take place, with average CBD rents likely falling to around 400 CHF per m2 p.a.
Figure 33

Figure 32

Trend in Advertised Office Space


Advertised office space stock: quarterly totals in m2
450'000 400'000 350'000 300'000 250'000 200'000 150'000 100'000 50'000 0 2006 2007 2008 2009 2010 2011 2012 Zurich outer business district Zurich extended business district Zurich CBD Total supply

Trend in Advertised Rents


Area-weighted average gross rents in CHF per m2 p.a.
500 450 400 350 300 250 200 150 2005 2006 2007 2008 2009 2010 2011 2012 Zurich CBD Zurich outer business district Zurich extended business district Switzerland

Source: Meta-Sys AG, Credit Suisse Economic Research

Source: Meta-Sys AG, Credit Suisse Economic Research

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Geneva

Figure 34

Quality of Public Transportation Connections at Office Location and Advertising Period


Quality of location per ha by frequency and distance of public transport stops: median advertising period per ha 2011/2012

Source: Credit Suisse Economic Research, Meta- Sys AG, Federal Office for Spatial Development, swisstopo

Slow-moving properties in Geneva are still very rare

Within the last two years, office space in Geneva has usually been rented to new tenants either quickly or extremely quickly. Slow-moving properties, which were advertised for longer than 250 days before they disappeared from the online platforms and thus were considered to be rented, were the exception in Geneva especially in the old town district of the CBD. This part of the city combines vibrant life with high-quality public transportation at the intersection of the three train stations Cornavin, Lancy-Pont-Rouge and Chne-Bourg, which are connected with each other in the CBD with a high-frequency bus and tram network. Numerous properties in and around the CBD were rented within 15 days, and the estimated number of unreported cases as regards properties that did not even become available publicly due to their desirability, changing tenants within a short period of time either in a private transaction or via exclusive brokers, is probably nowhere near as high in other parts of Switzerland as it is in Geneva. The properties in the immediate vicinity of the Cornavin train station were highly sought after, too. The quality of public transportation there is likewise quite high. The advertising periods related to locations starting from the Cornavin train station and extending outwards across the international district to the airport are quite brief. There are practically no slow-moving properties there. The location qualities of these properties are less impacted by public transportation connections. Instead, for international organizations the proximity to similar institutions is important, while the advantages of large properties near the airport are the priority for companies. Going forward, locations with high-quality public transportation in Geneva will not remain nearly as focused on the CBD as it is today. In particular, the quality of locations around the stations of the proposed Geneva suburban train system (CEVA), which is scheduled to begin operating in 2017, is likely to improve significantly. The rarity of large, contiguous properties that would be suitable for concentrating workplaces at one location is one of the biggest problems for Geneva's market. The construction of large properties that would satisfy the office space demands of large companies is a complicated endeavor due to a number of office space and planning problems in Geneva. For example, Japan Tobacco International, a company that has been located in Geneva for quite some time, announced in February 2010 its plans to house 1'000 employees at 25'000 m2 of new office 34

Despite slowing market momentum, Geneva suffers from its inability to satisfy the demand for large properties

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space in the immediate vicinity of the Scheron train station. The construction site was opened in April 2012. The building is only scheduled to be occupied in 2015, almost six years after the start of planning, and it will lead to the vacancy of office space in Carouge. The office space and planning problems experienced by large companies are increasingly becoming a problem for the city of Geneva at least until large properties become available at its future development sites (La Praille, Eaux-Vives etc.) starting in 2017. The stable political, fiscal, and economic circumstances in Switzerland, combined with the city's international atmosphere, still make Geneva extremely attractive as a location for the administrative headquarters of international corporations. But due to the lack of office space, Geneva is at risk of no longer fully benefiting from these good conditions for business locations. Against the backdrop of weaker demand and a temporarily higher supply of new office space, the market does appear to be easing at the moment, particularly at good CBD locations. However, it is frequently the smaller and more expensive properties that are placed on the market, i.e., properties less favored by large companies. Moreover, the shortage of residential housing and the accompanying hefty prices are playing a growing role in decisions regarding relocations. Just as price levels lead to repeated discussions at various international organizations about Geneva as a location for their organizations, companies are also frightened away from Geneva because of the difficulties of finding adequate housing for their employees at reasonable prices. In fact, this may have contributed to a slowdown in the market, as can be seen in the significantly higher number of vacant properties. But with vacancy rates of 1.2% in the canton and 0.8% in the city, Geneva's vacancies remain very low in comparison with other Swiss office property markets.
Increased supply in the CBD: problems at a very high level

In comparison with the previous year, the challenging market environment is reflected, particularly in the CBD, in increased supply and higher vacancies. The 70'000 m2 of advertised office space in the fourth quarter of 2012 exceeded the prior year's level by almost threefold, making it the highest quarterly figure since 2006 (figure 35). The amount of advertised property increased in the outer business district, too. However, larger properties there are likely to remain in demand, thereby making the current situation just a short-term phenomenon. Advertised rents have simultaneously reached a record level of gross 551 CHF per m2 p.a. in the CBD (figure 36). This figure is deceiving however, as the trend describes the increasing number of expensive properties since 2011. The upward momentum in the CBD probably reflects the last gasp before the turnaround in sharp contrast to the outer business district, where the opposite process is underway: The supply there has been declining since 2011 due to decentralization initiatives. This means that there is a demand for decentralized properties. This demand manifests itself in rising rents since the start of 2012, which reached 384 CHF per m2 p.a. in the fourth quarter of 2012. All in all, the prospects for Geneva are modest. The Switzerland-wide trends of increasing reluctance by high-value-added service sectors on the one hand, and the growing need for office space by more cost sensitive industrial companies, construction-related sectors and the public sector on the other, are reflected in Geneva, too. For the time being however, these problems are at a very high level in Geneva.
Figure 36

Figure 35

Trend in Advertised Office Space


Advertised office space stock: quarterly totals in m2
250'000 Geneva outer business district Geneva extended business district Geneva CBD Total supply

Trend in Advertised Rents


Area-weighted average gross rents in CHF per m2 p.a.
600 550 500 450 400 Geneva CBD Geneva outer business district Geneva extended business district Switzerland

200'000

150'000

100'000

350 300 250

50'000

0 2006 2007 2008 2009 2010 2011 2012

200 2005 2006 2007 2008 2009 2010 2011 2012

Source: Meta-Sys AG, Credit Suisse Economic Research

Source: Meta-Sys AG, Credit Suisse Economic Research

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Figure 37

Berne

Quality of Public Transportation Connections at Office Location and Advertising Period


Quality of location per ha by frequency and distance of public transport stops: median advertising period per ha 2011/2012

Source: Credit Suisse Economic Research, Meta- Sys AG, Federal Office for Spatial Development, swisstopo

Mediocre, but widespread public transportation quality at office space locations

In comparison with most other urban centers, the quality of public transportation in the CBD of Berne is somewhat lower with regards to traffic density and frequency. From a public transportation perspective, the best locations are concentrated in the immediate vicinity of the train station. The suburban train stations Bmpliz, Ausserholligen, Liebefeld, Wankdorf, and Ostermundigen span an area in which a dense network of tram and bus stops ensure transportation. The quality of public transportation therefore declines only slightly when leaving the city center, meaning that office space in the extended and parts of the outer business district is still provided good, widespread coverage. The gap between the very good public transportation quality in the CBD core and the worse locations on the outside is therefore not as a pronounced in Berne as it is, for example, in Basel, Lausanne, or Geneva. As a result, no clear patterns can be determined as regards the marketability of office property based on their advertising periods. Vacant properties that are very rapidly re-rented can be found across all three business districts, as can slow-moving properties that have been on offer for more than 250 days during the period 2011 until 2012. Overall, the number of slow-moving properties is rather limited. Starting this year, two developments announced long ago will shake Berne's office property market to its core. First, the new service district Wankdorf City will begin to grow. Following the formal ground-breaking ceremony for the entire district in 2011, the foundation was laid for the new headquarters of the Swiss Post exactly one year later. Overall, office space totaling 89'000 m2 for around 4'400 employees will gradually be built beginning in 2014 for the Swiss Federal Railways, the Swiss Post and Losinger Marazzi, which is constructing the offices for the Swiss Post in addition to its own building. Prior to that, PostFinance will occupy its new headquarters located next to the arena with the same name. The new high-rise building, an addition to the existing stadium annex, will offer space for 870 employees in 12'000 m2 of office space. This means that by the end of 2014, new properties equivalent to 3.1% of the estimated office space in the entire Bernese economic region will be created in the north of the city. 2013 is therefore likely to be the start of process in which several thousand employees are relocated from the entire office property market in Berne over the course of several years. But thats not all: in the second half of 2012, the master plan for Wankdorf City 2 was released, according to 36

PostFinance's move in 2013 marks the start of company relocations toward the north

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which the SBB has expressed an interest in an additional service-oriented office property on the other side of Schdelinstrasse. However, residential usage will be the priority in this location, which means that in the future, there will be a high number of jobs there with a corresponding amount of residential space.
Federal Administration also taking decisive action

Second, this movement is being reinforced by the public sector. The Federal Administration has been planning to systematically relocate workplaces for some time now, with the aim of reducing rent costs and optimizing administrative processes. The construction of the new administrative center on Guisanplatz plays a crucial role in its long-planned accommodation concept. It will be constructed in two phases. The first phase with about 48'000 m2 could be ready for occupancy by the end of 2017. In a second phase, 36'000 m2 would be added for additional federal employees from various agencies. Ultimately, there should be office space for 4'700 employees. Increasing vacancies will be the consequence of this upheaval. On the other hand, this development also offers opportunities. Smaller companies from the periphery, which always would have preferred a central location, will now have the possibility to obtain their preferred location. Following a period of renovation and reconstruction, new life has been breathed into the former offices of the Federal Administration or the semi-public companies. The incentive to convert the buildings has also been increased. Until now, the number of converted buildings has been limited. For instance, the former Losinger high-rise from the 1960s in Fischermtteli was converted into apartments for senior citizens in 2009. Otherwise, conversions frequently fail because they are not economical due to high initial investment costs. However, should a higher base of vacancies result from upcoming developments, particularly among smaller properties in the CBD for which demand is already weak, it is likely that increased pressure on owners to consider alternative uses. These developments however are still a long way off. For the time being, there's no need to be alarmed as the data shows that the office property market in Berne has easily been able to deal with the large expansion in office space until now. Office property vacancies in the city of Berne, which rose temporarily to 27'000 m2 in 2011, have settled down again in 2012 at an extremely low level of 19'000 m2. For the last three years, the supply of advertised space in the CBD has been low at between 6'000 and 10'000 m2, and the expansion in supply during the last two years in the extended and outer business districts has eased again (figure 38). Until now, new properties have not led to an oversupply thanks to robust demand, which is reflected in the increase in rents in 2011/2012 across all business districts (figure 39). This means that the market is still intact at the moment and will probably also be able to deal with the free office space that becomes available from PostFinance as the year progresses. Nevertheless, the future of Berne's office property market is not completely carefree. The number of approved construction permits over the last two years is almost twice as high as the average since 1995. It is therefore likely that the environment will become much more challenging, causing rising vacancies and stagnating prices.
Figure 39

The upheavals will have a delayed impact on the market

Figure 38

Trend in Advertised Office Space


Advertised office space: quarterly totals in m2
100'000 Berne outer business district Berne extended business district Berne CBD Total supply

Trend in Advertised Rents


Area-weighted average gross rents in CHF per m2 p.a.
350 Berne CBD Berne outer business district Berne extended business district Switzerland

80'000

300

60'000 250 40'000 200

20'000

0 2006 2007 2008 2009 2010 2011 2012

150 2005 2006 2007 2008 2009 2010 2011 2012

Source: Meta-Sys AG, Credit Suisse Economic Research

Source: Meta-Sys AG, Credit Suisse Economic Research

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Basel

Figure 40

Quality of Public Transportation Connections at Office Location and Advertising Period


Quality of location per ha by frequency and distance of public transport stops: median advertising period per ha 2011/2012

Source: Credit Suisse Economic Research, Meta- Sys AG, Federal Office for Spatial Development, swisstopo

High-quality public transportation at locations in the extended business district

The small-scale CBD of Basel's office property market is reflected in the high concentration of locations with excellent public transportation. In particular, proximity to the SBB train station and locations from there along the local transportation axes toward the old town offer very highquality public transportation. Seen from this perspective, this explains the high level of development activity around the train station, where numerous office properties have been or are being constructed since the turn of the century, including the Peter Merian House, the Jacob Burckhardt Building, the Elsssertor, the Sdpark, and the planned Baloise Office Tower, as well as the development activity further east, such as the City Gate project and the planned Grosspeter Tower. Consequently, the CBD is increasingly spreading to the south. Starting from this hub, the quality of public transportation in the extended business district declines just slightly, which explains this district's popularity with companies. Measured on the length of the advertising period, marketability there is good; indeed, there were practically no slow-moving properties there at all during the 2011-2012 period. Moreover, there are generally few signs of any larger difficulties to rent properties. There were admittedly a few offers reported in the CBD that could only be rented after a longer period of online marketing, which confirms once again that even in Basel, inner-city locations no longer have it quite so easy. However, isolated observations should not be overinterpreted. Similar to other large urban centers over the coming years, Basel will see the construction of several large properties, an increase in the number of larger companies moving in led by Roche and Novartis and long-term city-development projects (Dreispitz, Erlenmatt, Hafenareal) that will provide incremental room for new service-oriented office properties in the distant future. This will not result in excessive expansion, should the chemicals and pharmaceuticals sectors remain faithful to Basel and the city succeeds not just at preventing external migration, but also at attracting a few service companies. This is not an easy task at the moment. The trend towards concentrating workplaces on large properties at decentralized locations makes it difficult to attract firms to settle in the CBD and in vast parts of the extended business district. Large properties are rare there and more expensive than in the periphery of the outer business district, where, in turn, the quality of public transportation leaves much to be desired. In the

Basel's dilemma: few large central properties; poor public transportation in the periphery

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worst case, this dilemma causes companies to leave the Basel region, as SBB Cargo recently announced. The company is relocating 500 workplaces from the city of Basel to Olten for cost reasons. According to media reports, this initiative will in the future save the company one mn francs every year. The current rental agreement for the 15'000 m2 property "Elsssertor" at a top location at the SBB train station expires in 2014. Prior to its decision to relocate, the company searched in vain for an alternative in Basel. It sought a larger, more affordable property at a location with similar first-class public transportation links. But such office property bridgeheads outside the CBD, such as those in Berne with Wankdorf City or in Zurich with Altstetten, Oerlikon or most recently Zurich West, are practically non-existent in Basel. The locations that may most likely meet such requirements would be Muttenz and Pratteln, which are both served by high-frequency suburban train lines. Yet so far, corresponding plans in Pratteln have not been a resounding success. Thus, for instance, the planned office property offering in Viererfeld was recently redimensioned. They will instead focus on residential housing.
High level of vacancies points to deficits

A key reason for the change in plans may have also been the high amount of base vacancies in Basel's office property market, which reached a new record in 2012 at 162'000 m2, of which 91'000 m2 is located in the city. This base vacancies consists of a collection of smaller to medium-sized properties, which will continue to struggle. Since property expansion in recent years has been below average, the reasons for the unusually high level of vacancies are more likely to be found on the demand side rather than in excessive supply. External migration, e.g. by SBB Cargo, can never be completely avoided, as the example of Merck Serono in Geneva demonstrates. As long as a location remains sufficiently attractive however, it will continually attract new firms. This, however, does not appear to be happening in this case. The quality of Basel as a business location is also reduced by unfavorable corporate taxation, which companies also take into account in their calculation of costs. Nevertheless, Basel does have a promising mix of sectors, whose companies repeatedly send clear signals that they are committed to Basel as a business location. Following Roche and Novartis, the agricultural chemicals company Syngenta is now doing this too; it is strengthening its location in Basel by renovating and constructing new buildings at its headquarters along Rosentalstrasse. The inadequate absorption has also become apparent in the increasing supply since 2009 (figure 41). Besides the high level of supply in the outer business district, which indicates that the increased level of vacancies occurs primarily in peripheral locations, the supply also skyrocketed in the CBD during the fourth quarter of 2012. The CBD price trend reflects this development in a stagnation of prices. In a comparatively small market like Basel, prices are always strongly dominated by the quality of the properties that are currently on offer. It is becoming increasingly clear that rents beyond the gross 300 CHF m2 p.a. threshold are not sustainable in the extended business district; this is in stark contrast to 300 CHF in the CBD and 250 CHF in the outer business district, where the uncertainty surrounding future price trends is likely to increase because of vacancies (figure 42).
Figure 42

Increased supply, heterogeneous pricing structure

Figure 41

Trend in Advertised Office Space


Advertised office space: quarterly totals in m2
120'000 100'000 80'000 60'000 40'000 Basel outer business district Basel extended business district Basel CBD Total supply

Trend in Advertised Rents


Area-weighted average gross rents in CHF per m2 p.a.
350 Basel CBD Basel outer business district Basel extended business district Switzerland

300

250

200 20'000 0 2006 2007 2008 2009 2010 2011 2012 150 2005 2006 2007 2008 2009 2010 2011 2012

Source: Meta-Sys AG, Credit Suisse Economic Research

Source: Meta-Sys AG, Credit Suisse Economic Research

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Lausanne

Figure 43

Quality of Public Transportation Connections at Office Location and Advertising Period


Quality of location per ha by frequency and distance of public transport stops: median advertising period per ha 2011/2012

Source: Credit Suisse Economic Research, Meta- Sys AG, Federal Office for Spatial Development, swisstopo

Despite the M2, growth is heading west because of public transportation

In the center of Lausanne, there are large-scale locations with access to one of the best public transportation systems in all of Switzerland. The highly frequented train station is superimposed with a dense network of numerous local transportation stops. The quality of public transportation at office properties is highly important in Lausanne because car travel, particularly for commuters, is rarely an alternative due to the high volume of traffic in the city and on the bypass. The impact of the M2 metro line, which started running from Lausanne Ouchy via the CBD toward the mountains in the north in 2008, is clearly apparent; the quality of public transportation for locations along the M2 has improved considerably. Yet despite the M2 running toward the north, Lausanne is mainly growing west, from the CBD via the Flon district and the Malley Centre development area towards the EPFL near Ecublens. This westward trend in growth is caused by the expansion of public transportation, which is also the reason for the increased number of property offerings in 2011 and 2012, among which there were hardly any slowmoving properties. The tension experienced on the market over the last two years is easily apparent when you consider how rapidly many properties were rented. Overall, the average advertising period of office property in the entire Lausanne economic region in 2011/12 was 52 days thus half of the long-term average. Nevertheless, it is easier to let properties in some areas of Lausanne than in others. The market environment is becoming more difficult, and larger properties that are decentrally located and lack good public transportation connections are faced with lower demand, particularly as accessibility, property flexibility, and costs are currently the most important demand criteria. The East, for instance, suffers somewhat from the poorer quality of its public transportation. In this respect, the office property market in Lausanne differs from the market in Geneva, where there continues to be such large shortages that the development of public transportation to the outlying areas still plays a smaller role. In Lausanne, on the other hand, demand is focused on four main areas. First, the old town remains popular among smaller companies or for the branches of larger companies, which seek smaller and older, but presentable properties. Likewise, smaller yet more modern properties are found, second, in the lively Flon district that borders on the west. In the city district developed by Mobimo, a mixed-usage property is currently being con-

Four focuses of demand: Altstadt, Flon, Ecublens (EPFL), Epalinges (Biopole)

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structed on one of the last remaining free parcels of land. The Malley Centre city development project, which is located further west, will provide large and new office property that in the long term will join the Flor district in the West. The region at the doorstep of the new Prilly-Malley suburban train station, which opened last summer, will benefit from the sudden improvement in the quality of public transportation. The Malley Centre aims to become the core of a future new part of the city, where 10'000 jobs are expected to be created on 83 hectares across five districts by 2030. In contrast, service companies in the high-tech industry, third, have for some time sought locations near the EPFL and its "Innovation Square" in Ecublens. The fourth demand cluster is in the north of Lausanne in the municipality Epalinges; it is dominated by biotech companies and their service providers in the field of research and development. The Biopole biotechnology park has been growing steadily since 2009 with office and laboratory buildings. Losinger Marazzi is currently constructing another building complex there with 7'000 m2 of space for offices and laboratories. Overall, the total usable office space is expected to grow in the coming years to 80'000 m2. In 2009, CSS Insurance also acquired building land at the site in the direct vicinity to the M2 station and is likely to move 500 employees there from throughout the entire region in the near future.
Increased supply of office space triggers a reversal in price trends

On the whole, the uniform image of rising challenges and changing demand requirements also continues in the smallest Swiss major urban center. New projects and office space growth are currently being created primarily through the growing administration and R&D needs of the hightech industry, construction-related sectors, or due to a lack of space for the growing public administration. Demand from classic office-based sectors, in contrast, remains subdued and is more price-sensitive than just a few years ago. That results in Lausanne also being subject to a stronger focus on good locations or toward existing local sector clusters. Ultimately, the noticeable increase in office space in Lausanne since 2004 is starting to show some effects. The supply of office property has risen sharply to 111'000 m2 at the end of 2012, 18% above the prior year (figure 44). The rising trend in supply has continued now for two years based exclusively on developments in the extended and outer business districts. In the CBD on the other hand, the supply of property was 26% below the previous year and thus at about the same level as it was two years ago. This development confirms the sustained demand in the CBD compared to the more selective choice of properties in outlying areas. Now that the supply has been rising for two years, rents are starting to be affected too. It appears that landlords must make concessions, even in the CBD. In comparison with the previous year, rents have been corrected there by 13% to gross 394 CHF per m2 p.a. (figure 45). We anticipated last year that this steep upward trend until last year couldn't continue in this form in a challenging environment. It is, however, equally likely that the relationship in the CBD between demand and a lack of office space will remain strong enough to prevent a drop to below 350 CHF. Higher market liquidity may in the near future lead in the near future ongoing slight price corrections in the outer and extended business districts too.
Figure 45

Figure 44

Trend in Advertised Office Space


Advertised office space: quarterly totals in m2
140'000 120'000 100'000 80'000 60'000 40'000 20'000 0 2006 2007 2008 2009 2010 2011 2012 Lausanne CBD Lausanne extended business district Lausanne outer business district Total supply

Trend in Advertised Rents


Area-weighted average gross rents in CHF per m2 p.a
500 450 400 350 300 250 200 150 2005 2006 2007 2008 2009 2010 2011 2012 Lausanne CBD Lausanne extended business district Lausanne outer business district Switzerland

Source: Meta-Sys AG, Credit Suisse Economic Research

Source: Meta-Sys AG, Credit Suisse Economic Research

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Outlook for the Office Property Market in 2013


Consolidation of space on a large scale

Clearly rising supply figures towards the end of 2012 are the first indication of the threat of surplus supply and a rising level of empty space in the office property market. The first effects of this are expected to be felt in 2013. Some large companies are starting to move to large offices in agglomerations and consolidate multiple sites. These processes which offer opportunities as well as create problems will take a number of years to run their course in all large urban centers and present office property markets with challenges primarily because the growth of jobs in typical office-based sectors is weakening too much to prevent office space that is vacated from staying empty. The situation is aggravated by the fact that demand is going through a period of structural change. New workspace models, which result in the more efficient use of space and are becoming increasingly popular with large companies, cannot be implemented in many of the older buildings. Moving to new buildings permits space to be saved in two ways: firstly by dispensing with small and inefficient offices and secondly by using the new office space more efficiently by introducing workspace concepts such as desk-sharing. Nevertheless, there is currently no reason to be concerned about offices being left empty to the extent that they already are in many large European cities. One reason for this is that tertiarization processes in manufacturing companies mean that these companies have a growing demand for office space. This constant growth in the group of potential tenants should ensure that more serious overcapacities are avoided for the time being. Demand, Supply and Market Outcome
Demand Background Development of office-based employment: Over the course of the year, we expect a further moderate increase of around 8'000 jobs in the typical office-based sectors. This corresponds to demand for a good 130'000 m2 of space, and tertiarization processes in manufacturing companies will add to this. The demand for office space will thus grow for the third year in succession but not strongly enough to take up all of the available capacity, which is considerable. Situation in individual sectors: Jobs growth in the tertiary sector is being fueled by firms of architects and engineers, real estate developers, IT companies, and the public sector. Moreover, corporate services are expected to pick up again by the middle of the year, whereas the number of people employed in banking will fall. The cost pressure at banks is likely to limit job growth among bank-related IT service companies in the second half of the year. Supply Planning activity: Although less new space is planned, the level of planning activity is still significantly above the long-term average. The wave of expansion announced last year is now being realized and will increase supply in outlying locations, in particular, by 2014. Opportunities arising from the upheaval in office property markets and low interest rates are ensuring a sustained high level of planning activity and will strengthen the oversupply for the time being. Supply structure: As a result of the predominantly high pre-letting rates for new space, the supply of space in older buildings will noticeably increase. It is likely that investment or price reductions will be necessary in order to let this space again due to its unfavorable size, the need for renovation, or the fact that transport links are less than ideal. Market Outcome Vacancy rates: The vacancy rates for office space in 2012 were only slightly higher than in the previous year. However, the sharp rises in the supply figures toward the end of 2012 indicate that vacancy rates can be expected to increase more strongly in 2013. Indeed, in regions where no data is available, this is likely to be happening already. Rents: After years of stagnation, rents for office space rose in 2011 and 2012, reaching a weighted value of CHF 283/m2 per year (gross) in the fourth quarter of 2012. This upward trend is likely to run its course during the year and be followed by another period of stagnation. Performance: Due to the lack of direct investment opportunities in residential real estate and the high level of stability offered by the Swiss real estate market, office space is in demand with many international investors, resulting in high prices. Since the potential for rent increases is limited due to the threat of overcapacity and higher vacancy rates, initial returns are increasingly coming under pressure. Source: Credit Suisse Economic Research Outlook

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Retail Property
Retailing held up surprisingly well last year thanks to the robust domestic economy. The fact that retailers are nevertheless still quite cautious has to do with the multiple challenges facing the sector. Retailing is being pressured by shopping tourism, heightened competition and ongoing structural change. Demand for retail property suffers as a result. On top of that, this demand is exposed to a fundamental threat, namely the growing share of online retailing. In this section of the study, we will try to address the question as to what extent demand for retail property will suffer under changes to shopping habits caused by technology. In particular, ground floor uses could be faced with significant marketing difficulties in the future.

Demand
Actual financial situation better than consumer sentiment

Last year, consumer sentiment only managed to crawl above its long-term average for a brief period in the second quarter before falling back into negative territory in the second half of the year (figure 46). The stagnation of consumer sentiment at below-average levels during the course of 2012 reflects a certain degree of insecurity among consumers, which is fueled by the unresolved problems of numerous highly indebted countries, the sluggish economic growth in Europe, and the hesitant approach towards dealing with the financial crisis. In contrast, retail sales experienced a robust recovery in 2012 following the turnaround at the end of 2011, closing last year with impressive real growth estimated at more than 3%, after recording 0.8% in the year before. One possible explanation for the divergence between consumer sentiment and actual consumer spending habits might lie in the observation made during the recession in 2009 that consumers systematically judge their own personal financial situation to be better than that of the overall economy. Given the fact that the 2009 recession was quite mild and hardly affected the financial conditions of consumers, consumers might have become thick-skinned, not allowing themselves to be bullied by crisis headlines during the course of 2012. This can be seen in the positive trend in the personal components of the overall consumer sentiment index (assessment of future savings possibilities and the personal financial situation), which were both better than the expectations about the general economy. In other words, although the numerous reports of crisis dampened expectations for the economy as a whole, consumers did not really feel personally impacted thanks to the robust domestic economy and low unemployment, and continued to spend freely. Two further factors contributed to the rapid recovery in retail sales during 2012. First, declines in prices encouraged consumers to spend. Second, in view of higher nominal wages and negative inflation, consumers benefited from increased purchasing power. Nevertheless, the sentiment in retailing was not as good as the sharp recovery in retail sales would suggest. Once again, retailers had to grant significant discounts to consumers, meaning that estimated nominal sales growth totaled nearly 1% in 2012 (figure 47). Although this growth in sales was above the poor result of the prior year at -1.8%, the pre-crisis level of sales from the end of 2010 still has not been reached again. The slump in sales in the prior year, when consumer confidence was still severely impaired by the debt crisis, was simply too massive for that. The discounts in 2012, which resulted in declines in retail prices of more than 2% as in the year before, reflect the fierce competition in the sector. In the non-food segment, the market entry of foreign providers years ago has already created a different quality of competition. As one of the last segments, food retailing has recently been confronted with this competition and is also struggling accordingly.

The crisis never found its way into the wallets of consumers

Subdued sentiment among retailers

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Figure 46

Figure 47

Consumer Sentiment and Retail Sales


Consumer sentiment: index; retail sales: year-on-year change in percent (fuel not included)
4 3 2 1 0 -1 -2 -3 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Consumer sentiment: old index (standardized) Consumer sentiment: new index (standardized) Real retail sales (three-quarter average, right scale) 4.5% 3.0% 1.5% 0.0% -1.5% -3.0% 7.5% 6.0%

Retail Sales and Retail Prices


Year-on-year change in percent (fuel not included)
6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% 2003 Retail prices Nominal retail sales (six-month average) Real retail sales (six-month average) 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: State Secretariat for Economic Affairs, Swiss Federal Statistical Office, Credit Suisse Economic Research

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Shopping tourism is making life difficult for the sector

Besides the heightened competition domestically, the sector is also under tremendous pressure from cross-border competition. Although the appreciation in the franc was brought to a halt by the intervention of the Swiss National Bank, it is likely that foreign shopping increased considerably again last year, despite the discounts granted in domestic retailing. This is indicated in the statistics from Germany's main customs offices in Singen and Lrrach. The stamped VAT forms in border traffic with Germany increased from January until September 2012 by nearly 30% in comparison with the same period in the previous year. It is likely that the outflow of purchasing power in 2012 due to foreign shopping climbed to an estimated CHF 5 to 6 bn.6 This means that the situation for domestic retailers intensified even further, resulting in significant loss of sales, particularly in border regions. The lower sales potential has an unfiltered impact on demand for retail property, which is sometimes highly subdued depending on the distance to the national border. In 2013, both the global and the Swiss economies will be confronted by similar themes and challenges as in 2012. It is likely that the Swiss economy will grow somewhat more strongly than 2012, although slightly below its potential. However, real growth in private consumption will probably weaken somewhat, because the gradual increase in unemployment in the current year will no longer not affect consumers as it has to date. Slightly less positive momentum can be expected from real wage growth. Inflation will pick up again somewhat and thereby largely offset nominal wage increases. These factors, which will be only slightly weaker compared with the prior year, will stand in contrast to ongoing low interest rates, which will primarily enable home-owner households to benefit once again from significant savings in housing costs. According to our calculations, these savings total around CHF 5.4 bn per year, a large part of which flows into consumption. The second important support for consumption is robust immigration, which has been providing a base level of growth in retailing for years. Due to their higher educational status and the correspondingly higher income, as well as the consumption-intensive age of immigrants their average age is 32 years immigrants are probably more inclined to spend than the average Swiss consumer. Added to this is the initial spending resulting from the change in residence (purchase of furniture, etc.). As net immigration/emigration in 2013 is likely to weaken only marginally versus 2012, the consumer base will expand further, making migration a crucial support for domestic retailing and thus the demand for retail property. The very different distribution of immigration regionally offers good opportunities for expansions in retail property, particularly in regions with strong population growth.

Outlook for retailing in 2013

Cf. Credit Suisse Economic Research (2013): Swiss Issues Branchen Retail Outlook 2013, Fakten und Trends, p. 12.

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2013: less severe price decreases

The largest change in 2013 will occur on the price front. The current trend in price growth indicates that this year's price decreases will be considerably less than they were last year because the impact of the franc appreciation will dissipate little by little. This means the gap between nominal and real sales will gradually diminish. In overall terms, we expect sales growth in 2013 will be approximately in line with the average of recent years (1.5% nominal, 2.5% real). This forecast is based on our expectation that shopping tourism will not worsen further, but rather stabilize in the current year. The financial crisis and the turmoil in the retail market have led to a subdued investment mood in the retail property market, with some expansion, renovation, and new construction projects being delayed or even abandoned. Last year's rebound in retail sales changes virtually nothing about this starting point and should not be overemphasized with regard to demand for retail property by retailers. Sales were slightly higher year-on-year on a nominal basis. In addition, price discounts are a heavy burden on the sector, costing margin. It is likely that the problem of shopping tourism will stabilize this year, but it still will not be solved. Finally, the threat from online retailing is growing from year to year, too. As a consequence, the sentiment among retailers, similar to consumer sentiment, is not as good as retail sales would suggest. Accordingly, the demand for retail property remains under pressure. Opportunities are available due to ongoing structural change, which forces retailers to focus on high frequency locations, and immigration, which creates new consumer potential in some regions.
Figure 49

Demand for retail property will remain under pressure in 2013

Figure 48

Planned Change in Retail Floor Space for the following year


Share of answers in %; n = 64 (2010); n = 62 (2011); n = 69 (2012)

Planned Change in Retail Floor Space for the following year


Share of answers in %, n = 34 (2011); n = 32 (2012)
100%

3% 18% Not specified 26% 45% Increase less than 5% 32% 36% Increase between 5% and 10% Increase more than 10% 16% Survey 2012

Survey 2010

36%

52%

12%

80%

Survey 2011

2%

39%

55%

4%

60%

40%
Survey 2012 4% 40% 46% 10%

20%
0% 20% 40% Reduction in floor space Increase in floor space 60% 80% 100% No change to floor space Do not know / n.s.

24% 0% Survey 2011

Source: Fuhrer & Hotz

Source: Fuhrer & Hotz

Property expansion continues to lose momentum

A detailed review of the growth plans of expanding retailers shows that the average planned increase in property, at 5.6% compared with the prior year, remained fairly stable (figure 49). Nevertheless, the pace of expansion appears to be slowing because the share of retailers who are even considering an expansion in floor space this year, according to a survey by Fuhrer & Hotz, is considerably smaller than last year and has fallen below 50% (figure 48). Aldi and Lidl, for example, intend to ease up on their further plans to extend their store network. Wholesalers are increasingly focusing their growth plans on niches (convenience shops, soft discounters), expansion abroad, and online retailing. In the non-food segment, retail property will probably grow primarily through specialty stores. Instead of extensive expansion plans, most retailers will mainly focus their energies on dealing with the new realities such as strong shopping tourism (further reduction of positions in border regions), ongoing high price sensitivity (tough negotiations with suppliers), and increasing competition from the online channel (developing crosschannel strategies). This means that the sedate pace of property expansion evident in previous years will probably continue.

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Discussion Topic: E-Commerce as a Serious Threat to Retail Space


Travel agencies have been struggling against e-commerce for some time

The threat to traditional retailers posed by e-commerce is something the travel industry has been facing up to for quite some time. The travel industry was hit by the "curse" of the Internet comparatively early, and travel agencies were forced to radically alter their strategy and services. For example, a simple flight that is today generally booked on the Internet would have been booked through a travel agency 20 years ago. Already by the year 2009, every third Swiss franc spent on a flight was spent online (figure 50). For travel with overnight stays, the online share of expenditure was somewhat lower at just over 12% but still in third place compared with other categories. The consequences for travel agencies were as you would expect: In 1998, there were still 2'088 travel agencies in Switzerland; ten years later, there were only 1'675, a fall of 20%. And there is no end to the bloodletting in sight. The Internet has revolutionized the retail industry. The benefits of online shopping in terms of transparency and flexibility are clear. Today, it is possible to compare prices and products on the Internet in no time at all. To do the same thing before the advent of the Internet, you had to go round numerous shops or browse through sales brochures, and transaction costs were high. However, social changes have also been a factor in smoothing the path for online shopping. With both parents in families increasingly working, and given that the demands of the working world have generally increased, there is a need for greater flexibility and simplicity in everyday life. The option of ordering products online with no need to worry about opening hours or travel costs is a welcome one. The current trend toward using the Internet from mobile devices such as smartphones and tablet computers will give e-commerce an additional boost. Mobile Internet use means there are no longer any limits to online shopping. Shopping is now no longer location dependent at all; it can be done absolutely anywhere. Although e-commerce has been technically possible in Switzerland for a long time and some vendors have been in the Swiss market for years (e.g. Amazon, Digitec), e-commerce did not appear to be much of a threat for a long time despite its dynamic growth figures. In 2009, ecommerce accounted for only 2% of monthly expenditure, according to the Swiss Federal Statistical Office. Although there is no more recent data available, it is undeniable that the trend has since continued and possibly even accelerated. On the supply side, after the initial boom phase in the years from 1996 to 2000, a second wave of new e-commerce vendors has appeared since 2009.7 Nevertheless, the number of web stores run by the largest retailers in Switzerland, as measured by the number of branches they have, is still low. To analyze the situation as regards web stores, a study was conducted to ascertain whether the largest retailers in Switzerland (determined by number of branches) in selected food and non-food sectors had a web store (figure 51). Of a total of 224 retailers studied, not even half of them (106) had a web store. There are big differences between different retail segments. Whereas all of the perfumeries and retailers in the communication segment studied have an online store, only a few DIY retailers, drugstores, and pharmacies offer online shopping. There is a similar picture for clothing and footwear retailers: only a third and a quarter, respectively, of the clothing and footwear retailers analyzed have a web store. On the other hand, online shopping is much more common in other segments, such as jewelry and watches, sports, toys/games/books/music, and multimedia/ household/software. In the food segment, the large chains Migros and Coop have been selling online for years and are showing themselves keen to experiment with services where customers order online and then collect the goods themselves. Other food retailers (without discount stores), on the other hand, have a very meager presence on the web. Of the nine food stores studied, only one has a web store. The differences indicate the comparative advantages that bricks-and-mortar retailers still have over online stores. Wherever service quality or good advice is still in demand through face-to-face interaction, such as in the drugstore/pharmacy segment, or where the desire of the customer to inspect the quality of the physical product plays an important role, such as in the food segment, bricks-and-mortar retailers still have competitive advantages. Consequently, the growth potential of online sales in the food segment is limited, giv-

The background to the rise of e-commerce

Only few established bricks-and-mortar retailers are exploiting the e-commerce opportunity

Online supply: plenty of perfumeries and communication stores but few drugstores and DIY stores

Cf. Wlfle, Leimstoll (2012): E-Commerce-Report 2012 Eine Studie zur Entwicklung des Schweizer E-Commerce.

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en that consumers' senses will continue to play an important role in the future when shopping for food and these cannot be replaced by a web store.
Homogeneous goods predestined for online sale

E-commerce comes into its own with goods that are homogeneous and thus interchangeable. Advice and quality inspection are of secondary importance with these kinds of products. Retailers compete with regard to the breadth and depth of their product ranges and, above all, on price. Books, videos and music are examples of such products. Since they can also be distributed by data transmission, there is not even the disadvantage of a delivery time. The fall of retailers that were once international flagships speaks volumes. For example, the French offshoot of Virgin Megastores was declared insolvent at the beginning of 2013. The British entertainment giant HMV, which has been in business for 90 years, also had to declare insolvency at the beginning of 2013. Products in the consumer electronics and computer segments are also predestined for online shopping, since price comparisons and product descriptions are all that many consumers need in order to come to a decision. The proportion of online purchases in these segments in 2009 was thus correspondingly high (figure 50).
Figure 51

Figure 50

E-Commerce Expenditure of Private Households


As a percentage of total monthly expenditure by category, 2009

Web Stores of the Largest Retailers


Retailers with five or more branches in Switzerland (clothing retailers from ten branches); figures in brackets: number of retailers; as at December 31, 2012
Supermarkets (food) (2) Parfumeries (7) Communication (4) Multimedia/household/software (11) Sport (18) Pet food/supplies (4) Toys/games/books/music (15) Jewelry and watches (9) Office supplies/stationery (5) Discounters (4) Department stores (4) Home furnishings (22) Opticians/photography (11) Clothing (61) Footwear (23) DIY (5) Food ex Discounter (9) Drugstores/pharmacies (10) 0% 20%

Flights Computers Travel/overnight stays Consumer electronics/photography Cultural services Books/magazines/stationery Transport services Telecommunications Total Clothing and footwear Furniture and household Food Other consumer expenditure 0% 5% 10% 15% 20% 25% 30% 35%

Online shop

40% 60% No online shop

80%

100%

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Source: Credit Suisse Economic Research, GfK, various websites

The emotional appeal of a real shopping experience is hard to reproduce online

Wherever shopping is associated with an appeal to the emotions and the provision of a real experience, bricks-and-mortar retailers can and must play to their strengths. That is why retail space will continue to justify its existence in the future in a variety of segments. These factors play a significant role in the case of clothing and footwear, for example. Traditional retailers have to make the most of this because it is not just they who can offer the customer the opportunity to inspect a product before buying. As the example of Zalando shows, the first online retailers have started to chip away at this comparative advantage possessed by traditional retailers. Online shoppers are increasingly taking advantage of offers to try products at home and return them free of charge. In this respect, there is still room for improvement in what the existing web stores of the largest Swiss clothing and footwear retailers offer. Of the 26 web stores studied, less than ten offer the consumer the option of returning the goods free of charge. Many retailers now practice both e-commerce and traditional retailing in order to consciously exploit the advantages and disadvantages of the different distribution channels. An interesting issue here is the level of integration between the two channels. In multi-channel management, online retailing is practiced separately from traditional retailing. There is a risk here that the company's traditional retail outlets will lose business to its own web store. In cross-channel management, on the other hand, the two distribution channels are combined, allowing the customer to switch between them.8 Consumers can get information on products and also purchase them online, for example, but then collect the product themselves. Alternatively, showrooms can

Success with cross-channel management

Cf. Emrich et al. (2012): Online boomt: Die Voraussetzungen, Handelszeitung dated November 8, 2012.

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serve to inspire and stimulate sales but at the same time be a place where consumers get advice and service for products that they purchase online. As far as cross-channel management is concerned, the experts agree that, while it may be costly to combine the different distribution channels to optimum effect, it also offers great potential. Although the virtual world is capturing an increasingly larger share of the retail market and becoming an indispensable part of it, there is still a need for personality, and ultimately the customer can only get that in traditional retailing. Digitec provides an example of this: launched as a purely online store in 2001, Digitec now has eight physical stores. The desire of consumers to receive personal advice and collect or return their purchases in person led Digitec to open these stores.
Migration to the digital distribution channel

In contrast to shopping tourism, which is likely to subside again once the overvaluation of the franc is corrected, the threat of online shopping is irreversible. This is because the reasons for the growth of e-commerce are structural. In 2011, for example, the revenues generated from online and mail order business were estimated by the Swiss mail order industry association (VSV) at CHF 5.3 bn, 4% higher than in the previous year, while retail sales as a whole fell. Industry experts estimate growth of 7-8% for 2012. The rapid growth of e-commerce puts smaller shops under particular pressure, especially since they have already just had to cope with the boom in large shopping centers and specialist stores in out-of-town locations. The continued higher growth rates of the online channel will sooner or later result in lower revenues for bricksand-mortar retailers. And lower revenues will entail lower demand for retail space in the long term. Although cross-channel strategies require a certain number of physical branches, and although these strengthen customer loyalty, branch closures are unavoidable. An example of this is the Ex Libris chain, which now generates around 30% of its total sales online. In 2012, Ex Libris had to close six branches. It is estimated that a further 20 will follow by the spring of 2014. This is despite the fact that today around 15% of online orders are processed in the branches, the cross-channel strategy has been successfully implemented, and a mobile app has been launched with good prospects of success (Ex Libris won the Swiss E-Commerce Award 2012 in the category of mobile shop solutions). E-commerce represents a growing threat to retail space. Every franc spent in an online store is a franc not spent in a physical store. We have tried to estimate the scale of this bloodletting by means of a bottom-up calculation of retail sales. Each retail segment is assigned the estimated share of sales that will have migrated to the online channel in 15 years' time on the basis of its suitability for online shopping, true to the following motto: What can go digital will go digital. We expect that up to a third of today's retail sales are being processed online in the next 15 years. The retail industry can thus be expected to suffer similar upheavals to those experienced by travel agencies. In the retail property market, the challenge will be to find new groups of tenants for the retail space that becomes free or new ways of using the space no longer required by the retail industry. For commercial property offering logistics space, on the other hand, the impact of online shopping is positive. In order to ship products bought online, logistics space is required in order to be able to deliver the products not just to stores but to individual consumers. In the medium to long term, we therefore expect some of the demand for retail space to be converted into demand for logistics space. The demand for logistics space is likely to be concentrated in out-of-town locations with good transport links. There will be a considerable focus on converting empty buildings previously used primarily for commercial purposes but now, as a result of globalization and deindustrialization, no longer required for these purposes. The Competec group, for example, to which the online retailer Brack Electronics belongs, acquired a former Lego site of 55'000 m2 in the canton of Lucerne and converted it into a state-of-the-art electronics logistics center, which opened in June 2012.

Up to a third of today's retail space is estimated to be threatened by e-commerce

Shifting of demand to logistics space

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Supply
Subdued property planning

The planning for new retail property has always been quite volatile (figure 52). The vulnerability of retailing to demand factors, such as consumer sentiment and the situation in the labor market, as well as the significant importance of large formats, such as specialty stores and shopping centers, are the main reasons for this. Nothing changed last year in this regard. The subdued sentiment among retailers meant that application activity in connection with new retail properties was generally limited. The year's total sum of planning applications at the end of 2012 was slightly greater than CHF 730 mn or about 19% below the average recorded since 1995. The temporary significant increase in submitted applications was only because of a single major project: the building application for the Ebisquare shopping center in the municipality of Ebikon, which now operates under the name "Mall of Switzerland." The situation is similar with regard to permit activity: As the building permit for the shopping center in Ebikon was issued by the municipality at the end of February 2012, the investment volume of projects with building permits soared higher in 2012. However, the permit is not yet legally binding due to an appeal process and investors are not known; as a result, it remains an open question as to whether the project will ever be realized. In December 2012, the year's total value of permits was more than CHF 1'110 mn, almost 50% more than the longstanding average. Without this major project, applications and permits for new retail property projects would have been stable in the previous two years.
Figure 52

Building Applications and Building Permits for Retail Property


New buildings in CHF mn, 12-month moving total

1'500 1'250 1'000 750 500 250 0 1995

Applications with missing permit, share of total (right scale) Applications with missing permit Building applications, total Building permits, total

90% 75% 60% 45% 30% 15% 0%

1997

1999

2001

2003

2005

2007

2009

2011

Source: Baublatt, Credit Suisse Economic Research

Construction of shopping centers has become more difficult

Figure 53 shows how sensitive retail property expansion reacts to large formats. To illustrate this sensitivity, permits for retail properties were divided into five groups: shopping centers, specialty stores, retail floor space in mixed-use buildings, simple retail stores, and gas station shops. Shopping centers were by far the most volatile category. A single shopping center project can make the investment volume of approved building permits soar higher just because of its size and the correspondingly high volume of investment. The current "Mall of Switzerland" is an example of this. Following more than eleven years of planning, the "Mall of Switzerland" if it indeed is ever going to be built is actually a latecomer of the most recent wave of shopping centers, which dominated the first decade of the new millennium. Due to the size and complexity, planning of shopping centers follow its own, longer cycle than the other retail property groups. The search for investors and tenants, as well as all types of appeals, frequently delay the projects. It can happen, for example, that several years pass from the date upon which the municipality grants the building permit until the shopping center actually opens. Another example of this is the Archhfe Center in Winterthur. Concrete plans for this shopping center were de-

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veloped back in 2004. Nine years and numerous project adjustments later, the center will probably open its doors in August 2013. A number of stadium projects with peripheral uses likewise had a long creation phase, including Stade de Bienne, FCS-Park in Schaffhausen and Torfeld Sd in Aarau. Thanks to the kind help of low interest rates, it is also likely that these projects will ultimately be built.
2013: around 3% more retail floor space in shopping centers

Shopping center floor space that will come to market this year and next year is concentrated primarily in the Rhone valley, where there is very rapid population growth, and which quite simply slept through the shopping-center trend until the opening of the Cristal Centre in Martigny in 2011. Since then, the retail property landscape is literally being plowed up with various projects in Monthey, Martigny, Conthey, Sierre, and Brig. Furthermore, existing shopping centers should not be forgotten either; they are also expanding their retail floor space via modernizations and building extensions. This means that in 2013, the shopping center landscape is set to expand by more than 65'000 m2, which is about 3% of the nationwide retail floor space in shopping centers. Therefore, although structural change towards larger formats has eased, it is still cooking on the back burner for the time being. In contrast, there has been a sharp tail-off in the planning of specialty stores, which now represent just half of average investment volume. In relative terms, gas station shops have grown the most by far (figure 53). Whereas their approved investment volume between 1995 and 2000 totaled on average CHF 8 mn per year, since 2008 it was CHF 36 mn annually, more than four times as much. This trend underscores the growing need for flexibility, which gas station shops serve optimally with their formula for success close proximity to clients and long opening hours. Gas station shops are therefore one of the drivers of the current wave of property expansion, even though their contribution when measured in absolute terms is limited. The peak values of approved retail property, such as at the start of 2006, occurred overall not just because of shopping centers; the other groups of retail property also played a role. Indeed, the highs and lows in building permits by retail property type are amazingly well aligned, reflecting the overall cyclical nature of retail property planning.
Figure 53

Strong expansion in gas station shops

Building Permits by Type of Retail Property


New buildings in CHF mn, 12-month moving total

1600 1400 1200 1000 800 600 400 200 0 1995

Gas station shops Retail stores Retail floor space in mixed-use buildings Specialty stores Shopping centers Building permits, total

1997

1999

2001

2003

2005

2007

2009

2011

Source: Baublatt, Credit Suisse Economic Research

Property expansion focusing on mixed-use buildings

Special attention needs to be paid to retail floor space in mixed-use buildings. This type of retail property has dominated property planning for years. About 35% of the retail property approved for construction since 1995 can be attributed to this type of retail property. In the past two years its share has even increased to 39%. In most cases, mixed-use buildings are residential and/or office buildings in which retail outlets or small businesses (shoemakers, beauty salons, hairdressers, etc.), social services, catering trade space, and studios are typically planned on the

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ground floor. The higher share is due to the growing number of large-scale building complexes. Mixed-use buildings are attractive due to dimension and diversification reasons, as well as the correspondingly lower risks. Furthermore, they have the welcome side effect that the overall complex is enlivened, thus making it more attractive. But this alone is not enough of an argument. Retail outlets only find (long-term) tenants if the location and catchment area ensure that there will be sufficient demand at the location. At prime locations with large flows of pedestrians, it is likely that in the future, like today, retail properties in the ground floor will not have any marketing problems. An example of this is the Europa Allee next to Zurich's main train station. Floor space is being created on the 78'000 m2 SBB site for a wide variety of uses. Because of its immediate proximity to Switzerland's busiest train station, it is likely that the retail properties of the project, which are mostly planned in the ground floor, will have no problems finding tenants.
Difficult ground floor use

At less prime locations frequently these also involve street locations the situation is far more difficult. Although some demand results from the need to provide local shopping opportunities regardless of whether they are office or residential properties there is a risk that potential demand is too limited, particularly when you consider that online competition, the shift to large formats, and the general need for more flexibility and long opening hours do not make the framework conditions any easier for such ground-floor uses. Moreover, alternative utilizations via small business, social services (e.g. day care), catering trade spaces, doctor and medical practices, and studios reach their limits at some point, too. A conversion to residential or office property is not a promising alternative in all cases, particularly not at street locations. We expect that in the medium term, less-than-prime locations where local demand is insufficient will have marketing problems for ground-floor uses. In figure 52, we show both the planning applications for retail properties and also the planning applications with missing building permit to date. The lack of approval can usually be attributed to one or several of the following reasons: First, the withdrawal of developers or investors, who exit the project because of financial or other difficulties. Second, inadequate project management or nonperformance of requirements. Third, appeals usually of an urban planning or trafficrelated nature. Such reasons have led to the failure of a few projects in the past. A recent example of this is the specialty store center in the municipality of Vilters-Wangs near Sargans, which failed because of a popular majority. Against the backdrop of urban planning considerations, two major projects were also frozen in the Linth region by the cantons of St. Gallen, Schwyz, and Glarus. These comprised a furniture specialty store in Schnis and the Glaruspark shopping center in Mollis, which would have housed 30'000 m2 of retail trade space. Both of the above are examples of the fact that in light of the growing sensitivity among the population towards overdevelopment, urban and regional planning is having a stronger influence on the planning of retail properties. Our findings that were presented in the Credit Suisse Retail Outlook 2013 on retailing employment trends by location showed that retailing expanded from 1998 until 2008, in particular in peripheral locations that are easily accessible with private motorized transport. In the future, it is likely that there will be increasing political resistance to this growth on greenfield sites. The supply of advertised retail floor space increased in the wake of the financial crisis; it subsequently declined just as rapidly to pre-crisis levels at both new and existing buildings thanks to cautious property planning and the rapid resolution of the crisis (figures 54 and 55). The recovery was short-lived however. Since reaching a low at the end of 2011, the advertised supply of property has started rising again. At the end of 2012, advertised floor space at existing properties climbed to nearly 230'000 m2, representing a year-on-year increase of 53%. Advertised new-building floor space rose within a year by 54% to 28'000 m2. These figures reflect the aforementioned reluctance shown by tenants, who are still wary because of the appreciation of the franc and for whom the increase in sales last year was still not enough of a reason for the increased demand for property.

Increasing share of unapproved planning applications

Growing influence of urban and regional planning

Increase in advertised floor space

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Figure 54

Figure 55

Advertised New-Building Retail Floor Space


Advertised floor space of new projects in m2, by size of property
40'000 35'000 30'000 25'000 20'000 15'000 10'000 5'000 0 2006 2007 2008 2009 2010 2011 2012 < 90 m 90-199 m 200-299 m 300-999 m > 1'000 m Total new-building floor space

Advertised Existing-Building Retail Floor Space


Advertised floor space of existing buildings in m2, by size of property
300'000 250'000 200'000 150'000 100'000 50'000 0 2006 2007 2008 2009 2010 2011 2012 < 90 m 90-199 m 200-299 m 300-999 m > 1'000 m Total existing-building floor space

Source: Meta-Sys AG, Credit Suisse Economic Research

Source: Meta-Sys AG, Credit Suisse Economic Research

Increase in small properties among the advertised newbuilding properties since 2006

While the supply of small properties (up to 200 m2) among the advertised existing-building properties has increased only slightly since 2006, there has been a considerable increase in advertised new-building properties. Advertised new-building properties smaller than 90 m2 have, for example, increased more than fourfold in 2012 compared with 2006. The increase in the new-building supply of small properties illustrates that new small retail properties no longer readily find tenants. After all, it is small properties in particular that are struggling with structural change.

Market Outcome
Trend for vacancies is stable

As with office properties, statistics on vacancies for retail properties are not collected throughout all of Switzerland. We only have data on five cantons and two cities, representing about a third of the market based on employment in Swiss retailing. In the cities and cantons that we know, about 68'000 m2 of retail property was vacant as of June 1, 2012. That represents a slight decline of 4.7% or 3'300 m2 within a one year period (figure 56). Therefore, the stable trend regarding vacant retail properties has continued. Since 2009, vacant properties have hovered at a level of around plus/minus 70'000 m2, which is below the average recorded since 2001 of nearly 77'000 m2.
Figure 57

Figure 56

Vacant Retail Properties by Region


Regional vacancies in 1'000 m2
140 120 100 80 60 40 20 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Canton of Geneva Lausanne City Canton of Basel City Zurich City Canton of Vaud (w/o Lausanne) Canton of Basel Land Berne City Canton of Neuchtel

Trend in Advertised Gross Rents


Smoothed in CHF per m2 p.a.; area-weighted average and median rents
300 290 280 270 260 250 240 230 220 2006 Median (moving four-quarter average) Median w/o Zurich, Vaud and Geneva (moving four-quarter average) Area-weighted average (moving four-quarter average)

2007

2008

2009

2010

2011

2012

Source: Credit Suisse Economic Research, various cantonal agencies

Source: Meta-Sys AG, Credit Suisse Economic Research

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Canton of Vaud: reduction of the excess supply from the previous year

The overall slight decline in vacant properties is particularly attributable to a sharp decline in the canton of Vaud. In comparison with the same period last year, vacant retail trade space has decreased by almost a third. In retrospect, the strong increase from the previous year turned out to be only temporary. Besides the canton of Vaud, noticeably lower vacancies were registered in Berne, the canton of Basel City, and in Lausanne. In contrast, vacant retail properties increased in Zurich as well as in the cantons of Geneva, Neuchtel, and Basel Land. In the wake of the financial crisis, the smoothed advertised rents (median) weakened noticeably from their highs in 2007 and hovered in the years thereafter between 247 CHF per m2 and 255 CHF per m2 (figure 57). However, a sudden change was experienced in the second half of 2012. The smoothed median rent climbed in the fourth quarter of 2012 to 267 CHF per m2, considerably surpassing the high of 2007. The noticeably higher rents are difficult to interpret at first glance. The fact they relate to supply data and that the increase in rents can be observed in all price segments does not make the task any easier. Compared with the median, the slight increase in advertised rents for the area-weighted average is an indication that it was mainly the smaller advertised retail properties that were impacted by rent increases. The reasons why this considerable increase occurred for smaller retail properties, however, need to be discussed. Part of the increase can be explained by a so-called sampling affect. The advertised property extends, in part, to the cantons of Zurich, Vaud, and Geneva. These are the cantons in Switzerland in which rents for retail properties per se are higher than the Swiss median. Consequently, there are more expensive retail locations in the data pool for the calculation of price trends, and advertised rents rise as a result. If the median rent is calculated without the three "expensive" cantons, there is still an increase in rents, but it is smaller. In light of the current expansion of the retail property supply, a temporary, sharply increased shortage can be ruled out as a price driver as well. All that remains is the presumption that the better sales figures recorded by retailers made landlords more confident that they would currently be better able to impose rent increases in the market. After all, since the outbreak of the financial crisis, rents have stagnated at best. It remains to be seen whether retailers see it the same way. We believe it is highly unlikely that this is a turnaround i.e., a progressively dynamic increase in rents. Uncertainties, subdued, underlying sentiment among retailers, and the ongoing structural challenges are all arguments suggesting retailers will not readily accept rent increases.

Noticeably higher advertised rents at the end of 2012

Are higher rents caused only by a sampling effect or are also landlords benefiting from the recovery in sales?

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Outlook for the Retail Property Market in 2013


Subdued demand from retailers

The recovery of retail sales in 2012 must not be overvalued in terms of the demand for retail space, because sentiment among retailers is not as good as retail sales would suggest. Against the background of sustained structural change and the threats from shopping tourism and ecommerce, the retail industry has become cautious. This is holding back demand for retail space, which is likely to stagnate. On the supply side, a cautious approach is being taken to the planning of new retail space. While the planning of new specialist stores has practically come to a standstill, shopping center projects are faced with growing difficulties. As far as we are concerned, there must also be question marks against the numerous projects where retail space is planned in mixed-use buildings. This particular usage of ground floor space is likely to increasingly fall victim to e-commerce in the coming years. The comparative advantages of ecommerce are so great that it is estimated that up to a third of today's retail space is threatened within the next 15 years. Given these challenges, the empty retail space that can be seen still remains at a modest level, although supply did increase markedly in the second half of last year. The rise in rents observed toward the end of the year does not quite fit with this. The noticeable increase in rents may also be attributed to landlords trying to push through higher rents based on the more robust retail figures. However, in view of the subdued sentiment among retailers, they are hardly likely to be willing to accept these rent increases. We therefore expect no further growth in rents; on the contrary, we expect a decline. Demand, Supply and Market Outcome
Demand Background Retailers: The retail sales figures show that consumers were ready to spend money in 2012. However, the recovery of retail sales should not be overvalued in terms of its impact on the demand for retail space. Price reductions are affecting margins, and the industry is suffering from the effects of shopping tourism and e-commerce. Consequently, sentiment among retailers is not as good as might be expected from the retail sales figures. This is holding back demand for retail space, which is likely to remain only modest. However, structural change also creates opportunities as new locations find favor with consumers, just as immigration in certain regions is resulting in a broader consumer base. Supply Planning activity: For around two years now, there has been little new retail space planned. A single large project, the realization of which is still uncertain, resulted in a rise in permits in 2012. The caution with regard to the planning of retail space is a reflection, on the one hand, of the subdued sentiment among retailers and, on the other, of a certain restraint on the part of investors. The latter is also evident in the realization of shopping centers. Although there are still numerous projects in the pipeline, no great increase in retail space is to be expected this year. Simultaneous with a growing number of large-scale projects, retail space in shopping centers has been planned recently, above all, in mixed-use buildings. However, this use of ground floor space in mixed-use buildings is increasingly falling victim to the trend towards large-scale developments and the threat of online shopping. Overall, we expect the planning of retail space to remain at a modest level. Outlook

Market Outcome Rents: After remaining largely stable in 2011 and the first half of 2012, advertised gross rents rose sharply in the second half of the year. Compared with the median, the slight increase in advertised rents for the area-weighted average is an indication that it was mainly the smaller advertised retail properties that were impacted by rent increases. The (Prime locations) noticeable increase in rents can also be attributed to landlords trying to push through (Prime locations) higher rents based on the more robust retail figures. However, in view of the subdued (Other) (Other) sentiment among retailers, they are hardly likely to be willing to accept these rent increases. We therefore expect no further growth in rents; on the contrary, we expect a decline. Source: Credit Suisse Economic Research

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Real Estate as an Investment


Swiss real estate investments have recently acquired the aura of being immune to global economic crises, no matter how severe. It is therefore not a surprise that Swiss real estate investments, with their stable and attractive dividends, have appeared on the radar screens of investors. Rising prices have been and remain the consequence. Last year, not only direct investments delivered high total returns; listed Swiss real estate investment vehicles performed quite well, too. Real estate funds achieved a total return of 6.3% (SXI Real Estate Funds), while real estate corporations (SXI Real Estate Shares) had a total return of 12.3% (figure 58). In most cases, the prices for real estate investments can still be explained by robust fundamentals, and above all, by very low interest rates.

Direct Real Estate Investments


The two value drivers, investment pressure and yield spread, are likely to keep performance high

Last year's total return from direct investments, consisting of increases in value and cash flow yield, made investors very happy; it reached 9.2% (SWX IAZI Investment Real Estate Performance Index). The net cash flow yield admittedly continued to weaken somewhat to 4.4% due to rising real estate values and rather subdued growth in rents. But transaction prices at the end of 2012 were up a considerable 4.8% year-on-year, which is mirrored in lower initial yields (figure 61). Prices are impacted in particular by investment pressure from investors and the yield spread, i.e. the difference in yield between real estate investments and quasi risk-free investments. Government bonds generally serve as the latter, even though, strictly speaking, they no longer qualify as risk-free assets in all countries. The yield spread, which is intended to compensate investors for the higher risk associated with an investment in real estate compared with an investment in government bonds, remains very attractive; indeed, it has even expanded in recent years. Investment pressure, in turn, has declined only marginally in light of low capital market rates. Only the slightly higher risk appetite of investors has made riskier investments somewhat more popular again, thus expanding the range of options.
Figure 58

Comparison of Returns on Swiss Investments in Recent Years


Annual total returns, in percent; IPD 2012: estimation

40% 30% 20% 10% 0% -10% -20% -30% -40%

SXI Real Estate Funds SXI Real Estate Shares Direct investments residential: existing properties (IPD) Direct investments residential: transactions (IAZI) Swiss Performance Index Swiss Bond Index 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: SIX Swiss Exchange, IPD, IAZI, Datastream, Credit Suisse Economic Research

As it is not likely the two value drivers, investment pressure and yield spread, will experience any significant changes during the current year, direct real estate investments will remain a very popular investment segment this year, too. The total returns of the past shouldn't hide the fact

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that a dichotomy exists in the market for investment properties, as is all too well known from the housing market. Year in and year out, real estate owners earn comparatively hefty dividends and benefit from attractive increases in value. But outsiders, who don't hold real estate and are only just now entering the market, must pay very high prices and find themselves earning much lower yields. Because of this deterioration in yields, professional investors and developers in particular are increasingly turning their attention to more difficult properties in riskier segments. These segments offer higher initial yields, but involve larger risks that are not suitable for private investors except in exceptional circumstances.
Valuation returns vary based on the age of the property

Existing properties in the Swiss real estate market are not a source of concern for most investors. Vacancies are low to moderate in most regions, and the vast majority of properties delivered positive valuation returns, as analyses by the Data Pool for Investment Properties (REIDA) show. The median of these gains is 2.1% for pure residential properties (figure 59); for pure office properties it was 1.3% (figure 60). Interesting conclusions can be drawn from a review of the valuation changes by construction period as reported in the financial statements for 2011. Among buildings from the period between 1921 and 1960, as well as between 1961 and 1980, there are numerous examples of properties with very high increases in value in the last financial year, as can be seen in particular in the 90th percentile. It is likely that this is the result of a catch-up effect associated with older properties, which have only caught the attention of investors with some delay. In the median, the smallest increases in value can be found for properties that were built after 2001. This real estate was only just recently recorded in the accounting records at market prices and therefore has limited potential for gains in valuation. In addition, these properties are not necessarily located at the most central locations that could benefit significantly from increases in valuation. The rather large difference over all periods between the 90th percentile and the other percentiles shows that the distribution of the valuation returns for residential properties is skewed to the right, meaning only a very limited number of properties had a negative valuation return.
Figure 60

Figure 59

Valuation Return of Residential Properties


By construction period in percent, 2011 financial statements
10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 90th percentile 50th percentile 10th percentile 70th percentile 30th percentile

Valuation Return of Office Properties


By construction period in percent, 2011 financial statements
10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 90th percentile 50th percentile 10th percentile 70th percentile 30th percentile

All periods Prior to 1920 1921-1960 1961-1980 1981-2000 Since 2001

All periods Prior to 1920 1921-1960 1961-1980 1981-2000 Since 2001

Source: REIDA, Credit Suisse Economic Research

Source: REIDA, Credit Suisse Economic Research

A somewhat different trend is apparent among pure office properties. The differences between the properties in this category are quite large, particularly among those from the period before 1960. At nearly 10 percentage points, the range in the valuation returns between the best (the 90th percentile) and the worst buildings (the 10th percentile) is at first glance enormously high. But this range, in and of itself, expresses only the fact that at the individual property level in the Swiss real estate market, numerous risks exist that are not adequately reflected in portfolios or investment vehicles. The fact that the range in the valuation returns is far smaller among residential properties is attributable to the high investment pressure at the moment and the unusually high level of stability currently prevailing in the housing market.

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Valuations of existing properties haven't fully exhausted their potential....

Revaluations of existing properties are usually made with caution. That means that during periods of strong price increases, those properties that have been in place for a long time have a buffer or a type of fluctuation reserve that protects them from potential corrections in valuation. Accordingly, the market values estimated by real estate assessors for existing properties are frequently below actual sales prices.9 Or to put it another way, given today's low interest rate environment, assessors could in fact make higher valuations without deviating from standard valuation theories. There are a variety of reasons why they don't do this. First, assessors use sustainably achievable values as parameters to ultimately determine a robust real estate value. That's why discount rates are not adjusted one for one to observable market rates. Closely connected with this first reason is the fact that when making their assessments, Swiss assessors place more emphasis on observable characteristics of the property than on macroeconomic conditions.10 And third, in today's period of low interest rates, most valuation methods lead to premiums on the discount rate for real estate- and property-specific risks as well as in part for maintenance and renovation costs that tend to be too high. This is the case when they are reflected in the denominator when discounting. For example, if the discount rate of a valuation is changed from a nominal rate of 5.5% (3% risk-free interest rate plus 2.5% real estate specific risk premium) to 5% due to a decrease of the risk-free interest rate, then the assessed value of the property increases by 10% for a valuation extrapolated into perpetuity. The risk premium of 2.5% in the denominator represents prior the decrease in the discount rate a risk discount in the numerator of 45% on free cash flows. If the real estate specific risk premium of 2.5% remains the same, while the risk-free interest rate is lowered, then it can be shown that the decrease in the discount rate corresponds now to a risk discount of 50% on free cash flows. However the risks on free cash flows have not changed at all. In other words, the real estate specific risk premium in the denominator should not be treated without looking at the height of the risk-free rate, and strictly speaking should also be decreased.11
Figure 62

Figure 61

Yield Spread: Real Estate Yields and Interest Rate


Yields when purchasing in percent
9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2005 2006 2007 2008 2009 2010 2011 2012 yield spread residential Gross yield all segments Switzerland (IAZI) Net yield residential (West & Partner) Net yield office Zurich, prime (PMA) Net yield office Switzerland B class (Colliers) Yield 10-year Swiss government bond

Regional Price Growth for Investment Properties


Estimate average annual price growth 2005-2012
7% 6% 5% 4% 3% 2% 1% 0%
Berne South Switzerland Central Switzerland Lake Geneva West Switzerland East Switzerland Switzerland Zurich region Northwest Switzerland

Source: Colliers, IAZI, PMA, West & Partner, Credit Suisse Economic Research

Source: Credit Suisse Economic Research

and thus prevent crises from happening

The accusation against the assessors that their valuations of existing properties don't reflect market values is justified in part. Yet conservative appraisals are indeed desirable from the perspective of both the owner of the property and the real estate market. In the most unfavorable scenario, any potential value corrections to existing properties during a downturn of the real estate market can create excessive loan-to-value ratios, which would require payment of large amounts of additional money. In the worst case, this could lead to a flood of involuntary sales and a downward spiral in real estate prices. A bit of a safety margin protects against such selfreinforcing effects.

9 More on the dilemma facing assessors cf. Credit Suisse Economic Research (2012): Swiss Issues Real Estate Real Estate Market 2012, Structures and Prospects, p. 59 ff. 10 Cf. Chaney/Hoesli (2012): Transaction-Based and Appraisal-Based Capitalization Rate Determinants. 11 In order for the ratio of risk to rental income to remain the same, the risk premium in the denominator would have to be reduced by the same factor as the risk-free interest rate.

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Question marks about the pace of price increases

Current market trends for first-time buyers are a different story. Although price momentum slowed at the end of last year, growth rates remained considerably above increases in rents and were particularly high in the region around Lake Geneva (figure 62). If you compare the ratio of prices to rents over the course of time (price-to-rent ratio), it becomes apparent that the current ratio for investment properties is hovering at an above-average high level (figure 63). Also other relevant comparable magnitudes, such as growth in GDP or growth in the assessed values of real estate valuations, have been overshadowed by trends in transaction prices. In particular, the valuations that most closely reflect sustainable long-term performance form a rather good reference point. In this respect, a growing question mark surrounding the current increase in prices is warranted. As it is likely that nominal interest rates of Swiss government bonds reached their low point towards the end of 2012, every further increase in prices beyond the growth in rents must be viewed critically in this environment because such a trend increases the extent of a potential correction even further.
Figure 63

Ratio of Prices and Rents for Investment Properties


Deviation from long-term average and price high point in 1990, in number of standard deviations

4.0

Price-rent investment properties / advertised rents Price-rent investment properties / rents for existing properties Price-rent condominiums / rents for existing properties

3.0

2.0

1.0

-1.0

-2.0 1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Source: IAZI, West & Partner, Swiss National Bank, Swiss Federal Statistical Office, Credit Suisse Economic Research

Prices of investment properties are likely to rise further

Nevertheless, it is yet unlikely that price growth will come to a standstill in the current year. Evidence indicating this includes, firstly, the fact that the price-to-rent-ratio has so far distanced itself from its long-term average by just one standard deviation (figure 63). Secondly, investment pressure, particularly among institutional investors, will remain high; meaning a lot of money will continue to flow into the real estate market. Thirdly, the yield spread is still quite large (figure 61), and fourthly, current nominal net cash flow yields of 4.5% in the residential segment are according to IPD (status 2011) near the long-term average since 1930 of 4.4%.12 Yields in real terms are even considerably above the long-term average of 2.2%. That means there is leeway for prices to move higher respectively a further decline in the net cash flow yield can be expected. As long as interest rates remain low, ongoing increases in prices are likely. We believe that in the next several years, average price growth of about 2-4% is realistic. Such a tempo is admittedly well below recent growth rates, but it is still likely to make investors happy.

12 Cf. West & Partner (2012): Immo-Monitoring 2012/2, p. 67 ff.

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The scenario "interest rate normalization" is the most dangerous development

What will happen when interest rates return to normal in the future? The scenario that is particularly interesting is what would happen if interest rates were to return relatively quickly to their pre-crisis levels, in other words, an unruly increase in rates was looming. This question is a theme throughout our entire study, and we ask it here too, regardless of the likelihood that such a scenario will actually occur, which we currently consider to be very low. Fundamentally, an increase in interest rates leads, first of all, to a technical correction in property assessments via a higher discount rate. As a result, future cash flow or rental income represents a lower present value. For real estate owners, that means that without a single transaction or rent adjustment, the market value of the property declines. Depending on the extent to which properties are already recorded in the accounting records using market values, such a development will impact balance sheets to a greater or lesser extent. Secondly, as interest rates rise, it is likely that investment pressure will gradually ease; making it more likely that market values will increasingly revert to their sustainable valuations. But as the value of most of the older properties has been increasing for years, the majority of investors should be able to deal with these decreases. Since yields have declined in all segments, price declines must be expected in all segments, too. To be sure, the market is clearly not at a similar boiling point like it was at the end of the 1980s, when higher amounts of debt were used. But nevertheless, that order of magnitude should be kept in mind. According to IAZI, prices for investment properties decreased in the 1990s from peak to trough by 32% in nominal terms and even 47% in real terms. Thirdly, rising interest rates lead to higher funding costs. That will impact in particular investors who work with high leverage and short-term refinancing. The negative effects of interest rate increases are mitigated by the fact that in such an interest rate scenario, the economy's performance is also improving; demand for commercial property in particular is likely to increase and market power for renting is higher. Investors who purchased expensive condominiums in order to rent them could be caught flatfooted by a price decrease caused by interest rates. At the moment, the return on equity appears excellent only thanks to the use of debt in amounts that private investors would hardly be able to obtain for other purposes. The extent to which private investors are willing to accept even lower initial yields than institutional investors is an indication of three things. Either private investors are simply underestimating the maintenance costs and administrative burdens associated with direct real estate investments, or they are underestimating the risk associated with real estate due to the high level of stability in recent years, or they expect the period of low interest rates to be longer than institutional investors anticipate. Speaking about a Swiss market for investment properties doesn't adequately take into account the very different regional price trends and the correspondingly different risk of a correction. Our valuations identify by far the strongest price momentum in the Lake Geneva area (figure 62). That means that at first glance, the probability of a correction appears the highest in the region around Lake Geneva. But the fundamental data there, i.e. rents, have risen the most, too, reflecting local and regional shortages. However, the larger supply of office space in Geneva's office property market has already led to a correction in rents, even though this cannot be precisely identified yet in the supply data. Moreover, should someday the housing-market shortages in the region around Lake Geneva diminish somewhat, corrections in market rents will probably be unavoidable. Larger dangers lie in wait in rural and peri-urban municipalities, too. There is enough building land in those locations and a lot of construction is accordingly taking place. But demand pressure for rental apartments or latent excess demand is not as pronounced as it is, for example, in the immediate vicinity of Zurich or Lake Geneva where, despite everything, an invisible safety net is in place.

Leverage embellishes the return on equity for private investors

Risk of a correction varies by region

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Indirect Swiss Real Estate Investments


Real Estate Funds
Premiums remain high, but are fundamentally justified

Last year's total return on the stock market for listed Swiss real estate funds, at 6.3%, was once again significant (figure 58). Premiums barely changed year-on-year. At 23.9% as at the end of 2012, they continued to be well above the long-term average of about 10%.13 The correction in premiums last autumn, when they slid below 20%, was just temporary and probably attributable to the capital increases by various funds, which weighed on prices. There was only a weak connection between the level of interest rates and premiums last year. After all, it makes no difference for the attractiveness of the fund and the amount of the premium whether interest rates are very low (2010/11) or extremely low (2012). In that respect, it appears as if premiums have reached an upper limit. In light of abnormally low interest rates, premiums, thus, are in no way too high. Among other things, they reflect the fact that the direct yield (distribution per unit certificate measured against the market price) for listed funds, at 2.9% on average, is still high compared with the returns of other asset classes with similar risk. Looking at the ratios of real estate funds more closely, the soundness of individual securities is apparent. Given the aforementioned good fundamentals in the Swiss real estate market, this is not a surprise. But hand on heart: There's not much you can do wrong with existing properties at the moment; what is more difficult, on the other hand, is the acquisition of new properties. Figure 64 shows the trend in discount rates in recent years for listed Swiss real estate funds. Although they have been declining, they have not declined as much as market interest rates. Lower discount rates for real estate appraisals primarily lead to accounting-related remeasurement gains and therefore increase the fund's net assets.
Figure 64

Falling discount rates lead to remeasurement gains

Discount Rates of Real Estate Funds and Capital-Weighted Average


Discount rates, by year of transaction, rates differently defined (real, nominal)

5.6% Median 5.4% 5.2% 5.0% 4.8% 4.6% 4.4% 4.2% 4.0% 2008 2009 2010 2011 2012
Source: Annual reports of the real estate funds, Credit Suisse Economic Research

According to the annual reports of the real estate funds listed on the SIX14, unrealized capital gains total CHF 424 mn or 33% of their total profit (yellow column) of CHF 1'268 mn (figure 66). Measured using the existing property base as per the end of the year, this is a plus of 1.5%. This increase is less than the increase in the assessed value in IPD's sample (3.2% for residential properties in 2011) and also less than the momentum in transaction prices ac-

13 A fund is said to be trading at a surcharge or premium if its stock market price is higher than the property value per fund unit (net asset value or NAV). 14 Includes the 22 real estate funds that were already listed prior to 2012.

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cording to IAZI (4.8% in 2012 and 8.3% in 2011), showing ultimately that discount rates have been lowered cautiously.
Net revenue is largely distributed

Unrealized capital gains resulting from appreciation in real estate investments are generally not distributed because they do not impact cash. If you divide the dividends paid as per the most recent financial statements by net revenue (adjusted for depreciation), a payout ratio of 93% results across all funds under review. Net revenue can therefore be more helpful when assessing real estate funds than total profit, which also includes both realized and unrealized capital gains/losses. The net revenue for real estate funds in total was CHF 812 mn or 2.9% of the market value of the properties. Another remarkable aspect about the funds' balance sheets is the extraordinarily low ratio of debt, at about 17% on average, which lowers their vulnerability to interest rate increases considerably (figure 65). Only three funds exceed the 25% threshold; the legally prescribed limit is 50%. The borrowing ratios would be robust even if the Swiss real estate market came under pressure. A "soft" correction in property values by 10% in total, which is based on the previous appreciation of existing properties, or a "moderate" correction of the values by 15% in total would both only increase the borrowing ratio minimally from 17% to 19% and 20%, respectively, which are unproblematic amounts.
Figure 66

Figure 65

Aggregate Balance Sheet for Real Estate Funds


In CHF mn, most recent financial period
Assets 0 5'000
Other liabilities

Aggregate Income Statement for Real Estate Funds


In CHF mn, most recent financial period
Expenses / profit 0 Revenue
Total profit Fund management, administration, custodian bank, assessor, audit, etc. Taxes

Liabilities & equity

Other assets Real estate

500

Real estate expenses Maintenance, repairs, depreciation, provisions Mortgage and lease interest expense Unrealized capital gains and losses

10'000 15'000 20'000 25'000

Mortgage-backed liabilities

1'000
Net asset value (before estimated liquidation taxes)

1'500

Realized capital gains and losses Other income

2'000

Rental income

Source: Annual reports of the real estate funds, Credit Suisse Economic Research

Source: Annual reports of the real estate funds, Credit Suisse Economic Research

Real Estate Corporations


2012 was a strong year on the stock market for real estate companies

The large listed Swiss real estate companies have completed a successful 2012. At 12.3%, their performance on the stock market was strong by Swiss standards (figure 58). Real estate companies were rewarded for their activities in lucrative lines of business (such as the promotion of condominiums) and for having chosen the right focus (e.g. centrally located commercial properties). Still, the various real estate corporations pursue quite different strategies, as figure 67 shows. Moreover, it is likely the real estate companies' performance on the stock market in 2012 benefited from the excellent performance of equities, which typically has a far greater impact on the total return for real estate corporations than for real estate funds. Premiums rose slightly year-on-year, reaching 14% as at the end of 2012.

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Figure 67

Selected Ratios for the Largest Real Estate Companies


According to annual reports 2011 PSP Usage Mix Office Retail Parking Residential Other Share of net revenue *** Rental income Income from property sales (net) Other income Debt ratio Debt-to-equity ratio 46% 60% 56% 53% 56% 93% 3% 4% 68% 15% 17%* 53% 12% 35%** 71% 23% 6% 83% 12% 4% 67% 15% 5% 0% 13% 36% 40% 6% 1% 17% 55% 9% 7% 18% 11% 36% 17% 0% 10% 37% 40% 8% 6% 8% 38% Swiss Prime Site Allreal Mobimo Intershop

Source: Annual reports of the real estate companies, Credit Suisse Economic Research. * 16% from retailing and 1% from other income; ** 33% from general contracting and 12% other income; *** without revaluations and prior to discounts on general operating expenses.

Moderate debt-to-equity ratio in Swiss real estate companies

At 55% on average on a capital-weighted basis, the debt-to-equity ratio at Swiss real estate companies is significantly higher than at real estate funds (figure 67). Rising interest rates therefore have a stronger impact via higher borrowing costs on the earnings of real estate companies than on real estate funds, unless the companies have utilized the low-interest environment to lock-in interest rates for the very long term. But short-term risks are more likely to exist on the asset side, particularly with regard to commercial properties. Especially the change in the office property market from a landlord's market to a tenant's market will have an impact on results in the medium term, given that its share represents at least a third at all companies. The promotion business is likely to be affected in the medium term, too, due to the overvalued condominiums in many locations. But in light of comfortable margins, there is still some leeway there. Companies also have the advantage that their property appraisals are usually not overextended, although they are probably somewhat more dynamic than at real estate funds. In this respect, several new accounting standards that must be applied starting this year are a topic of conversation (see the following box).

IFRS 13: Revolution or triviality? At the start of this year, the five largest Swiss real estate companies will start to apply the accounting principle IFRS 13 (Fair Value Measurement) when performing the fair value accounting for their properties; this new approach replaces the previous standard IAS 40. The aspect of IFRS 13 that is particularly worth mentioning is the prescribed concept entitled "highest and best use." This states that the accounting measurement of a property must be made according to its highest and best use, i.e. taking into account the complete utilization of all usage potential for the property and the maximization of yields therefrom provided this is feasible from a physical, legal and financial perspective. Such an alternative assessment could occur, for example, if zoning regulations were to allow an industrial building to be replaced with an office property with higher yields. Investment vehicles and assessors are relaxed about the introduction of IFRS 13. There is no reason for concern because, firstly, measurements will be adjusted upwards and, secondly, an alternative use may only be considered and measured if market information or other obvious reasons indicate it is warranted. And yet, if you apply the concept of "highest and best use" literally, then in light of the advanced stage in the real estate cycle, additional appreciation in appraisals would be inevitable. It must nevertheless also be mentioned that not all properties can suddenly be measured using the individual "highest and best use" principle because the market in aggregate wouldn't allow it. In other words, the price effects of such changes in usage if they were to occur frequently would of course have to be taken into account.

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From an economic perspective, the introduction of the "highest and best use" principle means that the last hidden reserves in the existing real estate base will be revealed. These reserves are typically taken into account by the highest bidders for a property. Such investors naturally don't pay an inflated price (for a given use); rather, they simply pursue a different form of "highest and best use," such as, for example, the common practice of converting rental apartments into condominiums. It is precisely this conversion option that could and should be reflected in appraisals in some cases. "Highest and best use" has the advantage of greater transparency, which is particularly good for investors. But on the other hand, fluctuations in value will increase over the course of the cycle. This can in both a positive and a negative sense lead to self-reinforcing effects that appear, for example, when properties have to be sold amid an environment of falling appraisal values, which then increases the pressure on prices even further.

International Real Estate Investments


International real estate investments offer alternatives to the Swiss market

In light of low initial yields, the advanced stage of the real estate cycle and early indications of a slowdown in rent momentum in the Swiss commercial real estate market, an increased diversification into foreign real estate investments offers interesting opportunities from both a return and a risk perspective. In particular, the growing correlation in the performance of financial assets throughout the world makes the diversification potential of global direct real estate investments appear all the more appealing. The example of Switzerland has recently shown quite nicely that real estate is primarily dependent on the domestic economy, which rarely performs the same in different parts of the world. This and the ongoing low interest rate environment should lead to steady, robust investor demand for higher yielding investments such as real estate. Commercial real estate in the US, Australia, Japan, Germany and selected emerging markets, as well as German and US residential real estate, are particularly attractive. Moreover, despite their high valuations, the earnings potential of real estate trusts listed on the stock exchange (REITs) doesn't appear to be exhausted yet, either. In the current low interest rate environment, the valuations of commercial real estate are admittedly more expensive, but they're still attractive. Most large office property markets offer average net initial yields of more than 4% for first-class properties. The initial yield of 3.75% in Zurich is relatively low compared internationally. But compared with the yield of below 2% on ten-year US Treasuries or even below 1% on long-term government bonds in Hong Kong and Switzerland these lower income yields still appear appealing. In nearly all of the world's large office property markets, the spread to the respective benchmark bond is at historically high levels (figure 68). We do not expect that there will be any significant movement this year in initial yields on first-class real estate anywhere in the world. In light of the attractive yield spreads, it is likely that investment demand for commercial real estate will remain robust this year throughout the world. US real estate will probably be especially in demand because in addition, the availability of credit there has improved considerably and average rents in all sectors have passed through the cyclical low. Nationwide occupancy costs already stabilized at the end of 2010, and last year, rents in the retailing sector found a floor too. In the wake of a slowly improving economy, we believe moderate increases in rents in all sectors are likely in the US during 2013, which should provide further support for total returns. It is likely that investment demand in Europe will remain focused primarily on the core countries in the North. The relatively high spreads on the periphery will be overshadowed by negative prospects for rental markets. We expect that rents in Spain, Greece, Portugal, and to a lesser extent Italy, will continue to suffer under a recessionary environment and, in some cases, from the aftermath of the construction boom in prior years. In addition, due to the currency union, these countries must regain their competitiveness with deflationary policies, which entails stagnating or even falling salaries, prices and rents. By contrast, we see potential in Germany for further increases in rents for first-class real estate, particularly in the retailing sector. In developed Asian countries, the growth in rents for office property slowed significantly in 2012, partly even turning negative (e.g. Hong Kong). But as economic momentum in the region is likely to

Low but still attractive initial yields

US offers good prospects for direct investments

Divergent rent trends in Europe, bottoming out in Asia

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pick up again and short-term risks on the supply side are largely limited, we believe that rents will increase again slightly this year in most cities. However, the initial yields in Hong Kong and Singapore are historically so low that the risk of a price correction there is higher. We currently prefer the Japanese and Australian commercial real estate sector for direct investments in the region.
Figure 68

Initial Yields and Spreads for First-Class Office Real Estate


Left scale: per cent; right scale: basis points

8% 7% 6% 5% 4% 3% 2%

Net initial yield on first-class office properties Spread to 10-year government bond yield (right scale) Average spread since Dec 2000 (right scale)

600 500 400 300 200 100 0

London City

New York

Amsterdam

Stockholm

Munich

Berlin

Zurich

Tokyo

Los Angeles

Melbourne

San Francisco

Singapore

Dublin

Milan

Source: PMA, Bloomberg, Credit Suisse Economic Research

Global REITs: upside potential exists

Besides direct investments, many global indirect real estate investments also offer interesting opportunities for Swiss investors. Listed real estate investments performed quite well in 2012. Worldwide, real estate equities gained slightly more than 30% last year, beating the MSCI World Index by more than 14 percentage points. More volatile real estate securities such as those from emerging markets (+54%) and the Asian region without Japan (+47%) achieved an outperformance, while traditional safe-haven investments such as Swiss real estate stocks (+12.3%) and funds (+6%) returned less (figure 69). It is not surprising that momentum in Switzerland has tapered off somewhat following the very strong performance in prior years. The valuations of real estate equities around the world are no longer cheap now. Nevertheless, there is still upside potential for real estate trusts listed on a stock exchange (REITs) and equities of real estate holding companies. The dividend yield of global REITs is attractive, averaging about 4.3% (as of mid-January), and direct market prospects as mentioned above are solid. From a regional respective, US REITS in particular are worth mentioning. The total return index for US REITs has admittedly reached its high from before the financial crisis in 2007. There are, however, significant differences to the situation back then: The balance sheets of US equity REITs today are much healthier (e.g. lower indebtedness), rental income is starting from cyclically low levels and monetary policy is likely to remain supportive for the foreseeable future. An important impediment to buying foreign real estate is currency risk. Compared with most currencies, the Swiss franc (CHF) has steadily appreciated over recent years and decades, resulting in correspondingly lower CHF returns on foreign investments. At the moment, however, the Swiss franc is clearly overvalued from a purchasing power parity perspective when compared with many currencies particularly the US dollar (USD) and the euro (EUR) (figure 70). Meaning that should risks in the financial market decline in the near future and risk appetite increase, the Swiss franc is more likely to depreciate than appreciate. It is unlikely, however, that any depreciation would be significant because foreign interest rates are likewise low. Moreover, compared with the euro, the SNB's exchange rate floor of 1.20 which we consider credible offers "cost-free" protection against an appreciation of the Swiss franc for the time being. In addition, active hedging strategies can be considered for exposures abroad. The costs for ex-

Currency risk is an impediment, but hedging is currently cheap

London WE

Hong Kong

Brussels

Sydney

Houston

Madrid

Boston

Paris

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change rate hedges on the forward market are cheap at the moment because interest rate differentials between safe investments of different currencies are at historically low levels.
Figure 69 Figure 70

Performance Index
Total returns on real estate equities in local currencies, index: 1.1.2007 = 100
180 160 140 120 100 80 60 40 20 2007 USA Asia w/o Japan Emerging markets Europe Japan Switzerland

Exchange Rate: Actual vs. Purchasing Power Parity


USD/CHF
3.0 USD/CHF exchange rate Exchange rate estimated with purchasing power parity -1/+1 standard deviation

2.5

2.0

1.5

1.0

2008

2009

2010

2011

2012

2013

0.5 1982

1986

1990

1994

1998

2002

2006

2010

Source: MSCI, Datastream, Credit Suisse Economic Research

Source: Bloomberg, Credit Suisse Economic Research

Outlook for Real Estate as an Investment in 2013


The illusion of a safe haven

We already wrote last year that the prospects for Swiss real estate investments won't change significantly. We can repeat this assessment for the current year, too. Prices for real estate investments are high and likely to increase even further. The timing of the correction still appears to be far in the future. Several factors suggest this: first, the still unforeseen rise in interest rates, second, the limited signs of speculation, third, low vacancies, and fourth, the ongoing leeway for yields to fall. However, the extent of a potential correction, particularly in direct investments, continues to increase. The focus of the overvaluation discussion is still concentrated on owner-occupied residential property. But it should not be forgotten that the Swiss real estate crisis that occurred in the 1990s was triggered by investment properties. The 20.9% share of real estate at pension funds, despite the good price performance in recent years, is at the lower end of the range of the optimal share, depending on risk appetite, of 15% to 30%, according to the CS Pension Fund Index.15 Due to the higher extent of a potential correction and the low yields in Switzerland, increases in the real estate share offer the best return opportunities. Such increases should preferably take place abroad, where attractive alternatives exist. The yield spreads versus benchmark interest rates are at historic highs worldwide for both direct and indirect investments (i.e. REITS). Moreover, the interest rate environment is likely to remain supportive for the time being. We believe the greatest opportunities exist in the US because the prospects there for increases in rents are more favorable and the availability of credit has improved dramatically.

Switching to global real estate markets is an opportunity

15 Cf. Credit Suisse Economic Research (2007): Swiss Issues Real Estate Real Estate Market 2007, Facts and Trends, p 53 ff.

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Cantonal Real Estate Markets in Summary

Table of Contents
Location Factors and Real Estate Facts Aargau Appenzell Ausserrhoden Appenzell Innerrhoden Basel City Basel Land Berne Fribourg Geneva Glarus Graubnden Jura Lucerne Neuchtel Nidwalden Obwalden Schaffhausen Schwyz Solothurn St. Gallen Thurgau Ticino Uri Valais Vaud Zug Zurich Explanations 68 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100 102 104 106 108 110 112 114 116 118 120

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Canton of Aargau: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

AG Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 + ++ = = ++ +

ZH ++ + + ++ ++

LU + ++ = = = =

BL = + + + +

Third Most Attractive Canton The canton of Aargau is the third-ranking canton in terms of locational quality. The ace up its sleeve is its accessibility to transportation. In addition, the tax burden, in particular for legal entities, is below-average for Switzerland. Compared to the canton of Zurich, Aargau scores less well in terms of education and the taxation of natural persons.

Inter-Cantonal Migration 2005-2010


Migrants to and from other cantons
20'000 18'000 16'000 14'000 12'000 10'000 8'000 6'000 4'000 2'000 0 -2'000 In-migrants Out-migrants Net migration

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Growth of Housing Stock 2001-2010


Per km2

ZH BL ZG SO BS BE GR VS VD GL SG SZ UR SH NW AI NE AR FR JU OW TG GE TI LU

More Domestic Migration than Any Other Swiss Canton From 2005 to 2010, the level of migration to the canton of Aargau was high from both within Switzerland and abroad. In the peak year of 2008, 8'600 people moved to the canton, three-quarters of them from outside Switzerland. However, Aargau is also attractive to those already living in Switzerland: Between 2005 and 2010, it was the canton with the highest level of migration from other cantons. Aargau recorded net migration of over 5'000 people from the canton of Zurich. The availability of housing and affordable real estate prices also make the canton of Aargau attractive to migrants from other neighboring cantons. Lucerne is the only canton with which there is a negative migration balance of any significance: almost 300 people.

Growth along the Transportation Arteries Population growth varied from one part of the canton to another: Population growth was strongest in the Fricktal and Mutschellen regions and weakest in Brugg/Zurzach. The above-average population growth overall was absorbed by a corresponding increase in the housing stock. The growth in the housing stock on the hectare raster layer allows Aargau's growth areas to be identified. They are located along the transportation arteries in the Rheinfelden region, the Oberes Freiamt region, the Baden area, east of Lake Hallwil and in the Mutschellen region, which has become significantly more attractive to Zurich commuters since the Uetliberg Tunnel opened.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Company Start-Ups
Share of newly established companies relative to number of existing companies
10% 8% 6% 4% 2% 0% 2001 2002 2003 2004 2005 Traditional industry Construction Transportation, postal services Financial services Entertainment, hotels and catering Total CH 2006 2007 2008 2009 2010 High-tech industry Trading and sales Information, communications, IT Corporate services Administrative and social services Total AG

Below-Average Company Start-Up Rate The canton of Aargau has a high degree of industrialization at 38%. Electrical and mechanical engineering are among the sectors that employ the most people in the canton. New companies are also starting up in other sectors, particularly financial services, information technology and corporate services. Overall, however, the start-up rate in the canton is below average. The regions of Baden, Mutschellen and Fricktal had the highest start-up rates. The new campus of the University of Applied Sciences Northwestern Switzerland in Brugg/Windisch and the canton's attractive corporate tax policy mean the conditions are favorable for an increase in the start-up rate.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

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Canton of Aargau: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 595 1.7% 1.1% 1.9% 274 1.8% 1.46% 4.6% 2.4% 0.83 2009 603 1.4% 0.8% 1.2% 278 1.4% 1.32% 0.3% -0.8% 0.85 Canton of Aargau 2010 2011 611 618 1.4% 1.1% 0.6% 0.5% 1.4% 1.5% 282 1.5% 1.50% 6.5% 2.8% 0.87 287 1.6% 1.54% 8.8% 6.0% 0.92 2012 625* 1.2%* 2013 632* 1.1%* 2008 7'708 1.4% 1.3% 1.2% 3'999 1.1% 0.94% 5.3% 4.6% 0.95 2009 7'792 1.1% 1.0% 0.9% 4'038 1.0% 0.87% 2.6% -0.7% 0.99 Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 4'083 1.1% 0.91% 7.3% 3.0% 1.02 4'131 1.2% 0.94% 9.4% 7.1% 1.10 2012 8'037* 1.1%* 2013 8'116* 1.0%*

291* 1.5%* 1.61% 2.8% 2.6% 0.95

296* 1.7%*

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

High Level of Construction Activity in Aargau Extensive construction activity in Aargau allows the canton to absorb both high levels of international migration and substantial numbers of internal migrants from neighboring cantons. Measured in terms of housing stock, permission has repeatedly been granted for the construction of many residential units during the last ten years in the regions of Fricktal and Freiamt in particular. While the lower Fricktal is popular as a commuter town for people working in Basel, Freiamt plays an important role for house hunters who find living in Zurich or Zug too expensive. But other regions are also seeing dynamic levels of construction. Construction activity in the Mutschellen region, for example, is expected to be high in 2013 due to the approval of new residential units corresponding to 2.2% of the region's total housing stock in 2012. Construction Activity Dampening Price Growth The ratio between purchase prices and annual rents is well below the Swiss average in every region of the canton of Aargau, with the exception of Mutschellen and Baden. And even in these two neighboring regions with their orientation toward Zurich the ratio is relatively modest. The dynamic construction of new condominiums throughout the canton has had a dampening impact on prices, and made ownership more affordable relative to renting than in the Swiss average. This effect is particularly marked in the Aarau region, where relatively high rents can be achieved compared with purchase prices. However, the risk of vacancy is also higher due to the high number of rental apartments constructed.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 Baden Fricktal 2005 2006 Aarau 2007 2008 2009 Freiamt Mutschellen 2010 2011 2012 Total Approved units Brugg/Zurzach 5'500 5'000 4'500 4'000 3'500 3'000 2'500 2'000 1'500

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Mutschellen
20

2007 Price/Rent Ratio Switzerland 2007


25

Baden Freiamt Fricktal Brugg/Zurzach


5 15

10

Aarau
0

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Attractive Prices Act as a Draw The canton's appeal lies ultimately in its low prices relative to the neighboring cantons of Zurich, Zug and Basel. The greatest discrepancy in prices exists between the south of the Freiamt region and Zug. But even in the highly accessible town of Baden, which is not merely a commuter town but a town with extensive infrastructure and a high standard of living, the price of an average condominium remains below average. Baden's rents, on the other hand, are above the national average, as is the price for the dream of a singlefamily dwelling.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Wettingen Aarau Baden Wohlen Oftringen Switzerland SFD Condo Rent Moderate Upscale Moderate Upscale Moderate Upscale 10'202 14'187 8'613 11'987 8'790 12'232 7'766 10'806 6'726 9'355 7'992 11'119 7'291 10'978 6'036 6'455 6'000 4'800 9'089 9'711 9'030 7'230 221 222 237 205 185 232 211 225 241 204 197 237

7'325 11'027

Source: West & Partner

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Canton of Appenzell Ausserrhoden: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

AR Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 + ++ = = = +

AI ++ ++ =

SG + ++ = = = =

TG + ++ = = + +

Second Lowest Corporate Tax Rates In terms of locational quality, the canton of Appenzell Ausserrhoden ranks 12th and is thus around average among the Swiss cantons. Tax rates are attractive, but scores for education and accessibility to transportation are average. In terms of company taxation, Appenzell Ausserrhoden has the second-lowest tax burden in Switzerland.

Age Cohort Growth 2006-2011


Growth in five-year cohorts from 2006, in percent
20% 15% 10% 5% 0% -5% -10%
AR CH

00-04

05-09

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Population Density
Population per km2, 2010

60-64

High Out-Migration Rate among Young Adults The 30-40 age group is under-represented in Appenzell Ausserrhoden. On the other hand, there is a correspondingly large proportion of people of pre-retirement age. The number of people under 20 years of age as a percentage of the number of 20-64 year olds is above the Swiss average of 33.2%, which indicates a young population. The strong growth in the under-five age cohort shows that the canton is attractive to families. This can be attributed to a high birth rate and an increase in the number of young families moving to the canton. The cohorts between 15 and 19 have decreased significantly in size. A shortage of educational institutions and jobs can cause such patterns of migration.

Scattered Settlement Pattern Dominates the Landscape The canton's population of around 55'000 is distributed over an area of 243 km2. That corresponds to a population density that is around average for a Swiss canton. The canton is characterized by a large number of scattered settlements and the absence of densely populated centers. Only Herisau, the canton's capital, is somewhat more densely populated. New apartments and single-family dwellings are also widely distributed. The absence of a clear center of employment encourages this development. Housing in Appenzell's Hinterland and Mittelland districts are thus attractive to people who work in St. Gallen or Herisau. In contrast, those who work in the St. Gallen Rhine Valley tend to prefer to live in the Vorderland district.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Corporate Tax Burden


2012, synthetic indicator, CH = 100
140 120 100 80 60 40 20 0
Tax index CH

Low Corporate Tax Burden The canton of Appenzell Ausserrhoden has the secondlowest tax burden for companies. This is made up of a tax on profits and a tax on capital. Only in Nidwalden, companies are taxed less overall. Lucerne is currently the canton with the lowest rate of tax on profits. Holding companies are not subject to tax on profits and pay a reduced rate of tax on capital. This holding privilege, as it is called, is criticized by the EU, and consequently the federal government is now considering amendments to it as part of its Corporate Tax Reform III. However, if the tax regime were to be changed, Ausserrhoden would not be as badly affected as larger cantons.

Source: Braingroup, Credit Suisse Economic Research

NW AR LU OW SZ AI ZG UR GL TG SH SG AG GR BL SO VS FR NE TI ZH BE JU BS VD GE

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Canton of Appenzell Ausserrhoden: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 53.1 0.8% 0.9% 0.8% 26.7 0.4% 1.55% 4.9% 2.1% 0.94 Canton of Appenzell Ausserrhoden 2009 2010 2011 2012 53.1 53.0 53.3 53.3* 0.0% -0.2% 0.5% 0.0%* 0.6% 0.4% 0.5% 0.2% -0.4% 1.4% 26.7 0.3% 1.11% -4.1% -1.1% 0.90 26.8 0.3% 1.22% 1.1% 1.0% 0.88 27.1 1.1% 1.99% 7.8% 7.6% 0.93 27.4* 1.1%* 1.67% 8.5% 3.6% 0.99 2013 53.3* 0.0%* 2008 7'708 1.4% 1.3% 1.2% 3'999 1.1% 0.94% 5.3% 4.6% 0.95 2009 7'792 1.1% 1.0% 0.9% 4'038 1.0% 0.87% 2.6% -0.7% 0.99 Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 4'083 1.1% 0.91% 7.3% 3.0% 1.02 4'131 1.2% 0.94% 9.4% 7.1% 1.10 2012 8'037* 1.1%* 2013 8'116* 1.0%*

27.7* 1.2%*

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Construction Exacerbating the Problem of Vacancy Appenzell Ausserrhoden's small real estate market is often put to the test by single major projects that have a substantial impact relative to the existing housing stock. For example, an increase in the construction of rental apartments in Herisau since 2009 has caused the previously falling vacancy rate in Appenzell Ausserrhoden to rise sharply to 2%. Another substantial increase in the housing stock is on the cards for 2013. New residential units representing more than 1.5% of existing housing stock were approved in 2011. The high proportion of old and in some cases listed houses adds in combination with construction activity to the vacancy problem. This gives rise to a cut-throat market in which older properties lose out.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
2.0% 500

1.5%

375

1.0%

250

0.5%

125

0.0% 2004 2005 2006 St.Gallen/Rorschach Toggenburg 2007 2008 2009 Total Appenzell A.Rh. 2010 2011 2012 Appenzell I.Rh. Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Small Market for Condominiums Appenzell Ausserrhoden is one of the few cantons in which the relationship between house prices and rents has barely changed at all over the last five years. In real terms, this means that the price for a condominium has risen roughly in line with the rent for a comparable apartment. With respect to condominiums, Appenzell Ausserrhoden was on average one of the most affordable regions in the whole of Switzerland in the third quarter of 2012. However, the comparison is much harder in Appenzell Ausserrhoden than in other cantons due to the stronger preference for single-family dwellings and correspondingly small market for condominiums. A total of 88 condominiums were advertised for sale in the third quarter of 2012, compared with 290 single-family dwellings and 736 rental apartments. Divergence in Prices for Condominiums and Houses The stronger focus on single-family dwellings gives rise to below-average prices for condominiums, even in the most sought-after municipalities such as Herisau or Teufen. The limited demand for condominiums is also reflected in the performance of their prices, which have reacted strongly to major waves of expansion in the past. In Teufen, on the other hand, the price for a medium-sized single-family dwelling is substantially higher than both the other municipalities and the national average. The lower prices seen overall in the canton match the relatively low level of personal income.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 St.Gallen/Rorschach
20

2007 Price/Rent Ratio Switzerland 2007


25

Appenzell I.Rh.

15

Toggenburg

10

Appenzell A.Rh.
0

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Herisau Teufen Speicher Heiden Gais Switzerland SFD Condo Rent Moderate Upscale Moderate Upscale Moderate Upscale 5'952 6'887 6'500 6'008 8'284 9'581 9'039 8'361 5'073 6'445 5'009 5'118 5'391 7'644 9'696 7'541 7'711 8'119 188 216 175 195 182 232 193 219 176 196 183 237 8'540 11'884

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Appenzell Innerrhoden: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

AI Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 ++ ++ =

AR + ++ = = = +

SG + ++ = = = =

TG + ++ = = + +

Ranks behind Ausserrhoden The canton of Appenzell Innerrhoden is ranked 16th in terms of locational quality. The canton's tax burden is roughly equal to that in Ausserrhoden. In contrast to its neighboring canton, however, the level of education and accessibility are below the national average. Its locational appeal is thus not as great as Ausserrhoden but similar to the canton of St. Gallen.

Age Structure of Population


Percentage of the population by age
100 90 80 70 60 50 40 30 20 10 0 2.0% 1.0% 0.0% AI CH 1.0% 2.0% Males Females

Young Population Thanks to High Birthrate The population in the canton of Appenzell Innerrhoden is the youngest in Switzerland. The number of people under 20 years of age as a percentage of the number of 20-64 year olds is higher here (40.3%) than in any other canton. Appenzell Innerrhoden also has an above-average percentage of people in the 20-30 age groups. The young population is attributable less to migration than to the high birthrate in the canton, which is among the highest in the country. However, past migration figures also show that the 15-39 age groups are most likely to leave the canton.

Source: Swiss Federal Statistical Office

Opportunity/Risk Profile of Sector Structure


15 largest sectors in 2013, circle size = share of jobs
high
Healthcare Wholesale trade Electronic equipment and watches Wood industry Finishing trade Retail trade Hotel industry Agriculture and forestry Construction and industry Services Public sector

Opportunity-risk profile

Public administration Education Construction of buildings Auto trade Restaurant industry Textiles

Fabricated metal products

Agriculture 15%

-5%

0% 5% 10% Employment: deviation from the Swiss average

Primary Sector Dominates Sector Structure The canton of Appenzell Innerrhoden has a below-average sector rating. This is due, on the one hand, to the significance of the primary sector, where value added is low. On the other hand, the canton has a shortage of significant, high value-added service sectors or high-tech companies with good prospects. In addition, Appenzell Innerrhoden has numerous important sectors with an unfavorable profile, such as retailing, hotels and restaurants. The metal fabrication and textile manufacturing industries also have low opportunity-risk profiles. Of those sectors for which the opportunities outweigh the risks, only the wood industry in Appenzell Innerrhoden offers more employment than the national average.

Source: Credit Suisse Economic Research

Tax Receipts by Category


Average for 2008-2010
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

low

Income tax

Wealth tax

Tax on earnings

Tax on capital

Other taxes

Source: Swiss Federal Tax Administration

Unusual Revenue Structure The canton of Appenzell Innerrhoden had tax receipts of between CHF 40 and 50 mn in the years from 2008 to 2010. That corresponds to around one-third of the canton's total revenues. When the tax receipts are broken down into different tax categories, it is noticeable how low the percentage of income tax is (only 55%). Wealth tax receipts, at around 9% of the total, are more significant when compared to the rest of Switzerland, whereas income from the tax on capital is of only marginal significance. The percentage of total receipts accounted for by other taxes is comparatively high in Appenzell Innerrhoden, at 30%. In particular, the receipts from motor vehicle tax, at around 10% of total tax receipts, are unmatched anywhere else in Switzerland.

GL SH UR BE NW NE FR TG BL LU SO VD JU OW AG ZH AR SZ VS AI BS GE GR TI ZG SG

Swiss Issues Real Estate Real Estate Market 2013

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Canton of Appenzell Innerrhoden: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 15.6 0.5% 0.6% 0.6% 6.9 0.9% 0.96% 4.7% 6.0% 1.05 Canton of Appenzell Innerrhoden 2009 2010 2011 2012 15.7 15.7 15.7 15.9* 0.8% -0.2% 0.3% 1.0%* 0.2% 0.3% 0.4% 2.1% 0.9% 1.1% 7.0 1.9% 1.25% -1.8% 3.0% 1.05 7.1 0.6% 1.04% 7.4% -0.7% 1.09 7.2 1.3% 0.71% 9.3% 7.4% 1.18 7.2* 0.9%* 0.86% 10.5% 8.0% 1.27 2013 16.1* 1.0%* 2008 7'708 1.4% 1.3% 1.2% 3'999 1.1% 0.94% 5.3% 4.6% 0.95 2009 7'792 1.1% 1.0% 0.9% 4'038 1.0% 0.87% 2.6% -0.7% 0.99 Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 4'083 1.1% 0.91% 7.3% 3.0% 1.02 4'131 1.2% 0.94% 9.4% 7.1% 1.10 2012 8'037* 1.1%* 2013 8'116* 1.0%*

7.3* 0.9%*

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

New Construction Planned with a Sense of Proportion Appenzell Innerrhoden's real estate market is more stable than that of Appenzell Ausserrhoden. New housing is planned conservatively to match growth in the population and employment. Few major projects have been initiated during the last ten years. With the exception of individual large multifamily dwellings, most planning involves single-family dwellings. For example, in the municipality of Appenzell, exactly one apartment in a multi-family dwelling has been approved for each approved single-family dwelling over the last five years. However, urban sprawl in the canton is limited compared with neighboring cantons despite the strong focus on single-family dwellings, thanks to the fact that much of the new construction is concentrated in Appenzell.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
2.0% 100

1.5%

75

1.0%

50

0.5%

25

0.0% 2004 2005 2006 St.Gallen/Rorschach Toggenburg 2007 2008 2009 Total Appenzell A.Rh. 2010 2011 2012 Appenzell I.Rh. Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Rental Market Catching Up In 2007, the ratio between prices and rents in Appenzell Innerrhoden was more or less comparable with that of neighboring regions. But although prices for condominiums in Appenzell Innerrhoden tended to develop more dynamically than in the St. Gallen/Rorschach region, for example, the price/rent ratio for 2012 was lower and even fell short of the average for Switzerland. This is because the rental market has performed well during this period and rents have made relatively strong gains. However, both the rental market and the market for condominiums remain of secondary importance overall. Seven apartments were advertised for sale in the third quarter of 2012, compared with 15 single-family dwellings.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 St.Gallen/Rorschach
20

2007 Price/Rent Ratio Switzerland 2007


25

Appenzell I.Rh.

15

Toggenburg

10

Appenzell A.Rh.
0

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Prices Starting to Decouple from Income Both the regional focus on the municipality of Appenzell and the dominance of the single-family dwelling are reflected in prices at the municipal level. Only the price of single-family dwellings in Appenzell is above average. This is also where the price difference relative to a medium-standard condominium is the greatest. The upward trend in prices is more marked in comparison to the neighboring regions and average income levels have been unable to keep pace, which has started to result in demand-driven overheating in the ownership segment.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Appenzell Rte Schwende Oberegg Gonten Switzerland SFD Condo Rent Moderate Upscale Moderate Upscale Moderate Upscale 8'468 11'787 7'129 6'960 5'081 5'798 9'923 9'677 7'065 8'065 6'700 10'089 6'300 5'782 4'409 5'291 9'489 8'704 6'637 7'970 225 212 205 170 183 232 228 213 207 171 184 237

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Basel City: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

BS Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = + ++ +

BL = + + + +

AG + ++ = = ++ +

SO = = = = + =

Regional Center with Good Accessibility The canton of Basel City ranks sixth in Switzerland in terms of locational quality. Thanks to its role as a regional center, the city canton benefits from good accessibility and the availability of highly skilled workers. The tax burden is relatively high, especially for companies. Due to its lower taxes, the canton of Aargau is more attractive overall.

Cross-Border Commuters
Quarterly figures of cross-border commuters by sector and country of origin
40'000 35'000 30'000 25'000 20'000 15'000 10'000 5'000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Germany France Other Construction and industry Services

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Increasing Number of Cross-Border Commuters Situated close to the French and German borders, Basel City is an attractive job market for people living in France and Germany. Large numbers of cross-border commuters from France and Germany work for companies in Basel City, primarily in the services sector. While the number of crossborder commuters from France has remained constant over the last nine years, the number from Germany has increased by over 4'000. They now account for 48% of cross-border commuters to the canton. While the number of cross-border commuters to Switzerland has risen by 5.5% a year since 2003, the equivalent figure for Basel City is only 1.73%. For cross-border commuters, the appreciation of the Swiss franc has brought substantial real wage increases, which is reflected in stronger growth rates since 2010. Pharmaceutical Industry a Cluster Opportunity or Risk? The economy of the canton of Basel City has a good opportunity-risk profile. The pharmaceutical industry, in which over 10% of the approximately 135'000 employees work, plays a very important role. The high concentration of employees in a small number of companies is second only to that in the canton of Uri. The prospects for the pharmaceutical industry are good, and it offers Basel and the region considerable growth potential. The dominant position of a sector, which is highly dependent on research success and drug approvals, does, however, represent a cluster risk for the canton. Other sectors in the canton with a good opportunity-risk profile besides the pharmaceutical industry are the health-care, logistics and management consulting/ headquarters sectors. Border Location Encourages Shopping Tourism As a result of its proximity to the French and German borders, Basel City does not only have a large number of cross-border commuters; there are also many opportunities for cross-border shopping. Over 80% of the canton's population reaches within 10 minutes' driving time a supermarket in France or Germany. Numerous discount stores and retail chains have opened branches in the border towns of St. Louis, Weil am Rhein, Lrrach and GrenzachWylen. Since the appreciation of the Swiss franc, shopping tourism has grown, as demonstrated by the sharp rise in the number of export certificates submitted for the purpose of reclaiming VAT. Euros spent abroad are lost to Swiss retailers, and this is reflected in both a decline in their sales and job losses.

Opportunity/Risk Profile of Sector Structure


15 largest sectors in 2013, circle size = share of jobs
high
Homes Architects, engineers Wholesale trade Finishing trade Public administration Retail trade Restaurant industry Banks Education Land transport
Agriculture and forestry Services Public sector

Logistics

Consultancy/ Headquarters Pharmaceutical products

Opportunity-risk profile

Healthcare Insurance

low

-6%

-4%

-2% 0% 2% 4% 6% 8% Employment: deviation from the Swiss average

10%

12%

Source: Credit Suisse Economic Research

Catchment Areas of Supermarkets Close to the Border


Driving time to the nearest (food) supermarket close to the border

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

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Canton of Basel City: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 182.2 0.8% 1.7% 0.4% 108.7 0.1% 1.19% 1.5% 4.1% 1.02 2009 183.4 0.7% 1.7% 0.4% 109.0 0.3% 0.89% 1.7% -0.1% 1.03 Canton of Basel City 2010 2011 2012 185.0 186.2 187.1* 0.8% 0.7% 0.5%* 1.5% 1.5% 0.5% 0.3% 109.3 0.3% 0.72% 5.8% 0.4% 1.06 109.6 0.3% 0.48% 9.2% 4.6% 1.14 109.8* 0.2%* 0.46% 8.0% 5.7% 1.21 2013 187.9* 0.4%* 2008 7'708 1.4% 1.3% 1.2% 3'999 1.1% 0.94% 5.3% 4.6% 0.95 2009 7'792 1.1% 1.0% 0.9% 4'038 1.0% 0.87% 2.6% -0.7% 0.99 Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 4'083 1.1% 0.91% 7.3% 3.0% 1.02 4'131 1.2% 0.94% 9.4% 7.1% 1.10 2012 8'037* 1.1%* 2013 8'116* 1.0%*

110.2* 0.3%*

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Relief Only Expected in the Long Term The extraordinarily low level of construction activity in the canton of Basel City stands in stark contrast to the neighboring regions of Basel Land. Relief is only expected in the medium to long term: The transit site in the Dreispitz industrial development district is to be expanded by the end of 2014. Further development is planned for the long term. The North Basel Urban Development Initiative is planning developments involving up to 700 residential units by 2025. The "3Land" development project is particularly visionary. The cities of Basel, Weil am Rhein, and Huningue are planning the long-term development of Basel's port site and are outlining the development of new residential and working districts on 175 hectares on both sides of the Rhine over the coming decades. Minor Market Distortions in Basel City In 2012 it cost 34 years of rent to purchase a medium-sized condominium in the canton of Basel City. Although this is above-average for Switzerland, it is not excessive compared with other major urban centers and indicates a relative balance between the ownership and rental markets. A shortage of rental apartments has caused rents to rise, while purchase prices have performed roughly in line with the Swiss average. The rental market in Basel City is very important, as is typical for urban centers. We estimate that rental apartments make up 87% of the canton's housing stock. Nevertheless, demand for condominiums is high due to low interest rates and as a result, their share of the real estate market is growing at a correspondingly rapid pace. To Some Extent Signs of Decoupling from Income If available, medium-sized condominiums in the city of Basel cost 20% more than the Swiss average at CHF 8'809 per square meter. Prices have been more stable than in other urban centers. Nevertheless, they have started to show signs of decoupling from income and have now reached a point where their sustainability is in doubt. Rental apartments have also become more expensive. Rents in the city of Basel were almost 12% above the national average in 2012.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2004 Basel-Stadt 2005 Total 2006 2007 2008 2009 2010 2011 2012 Approved units Unteres Baselbiet Oberes Baselbiet 540 480 420 360 300 240 180 120 60 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 2007 Price/Rent Ratio Switzerland 2007
25

Basel-Stadt

20

15

Unteres Baselbiet
10

Oberes Baselbiet

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Basel Riehen Bettingen Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 11'694 16'265 11'403 15'865 8'315 11'561 8'809 13'267 7'755 11'674 6'445 9'704 259 233 220 276 235 221

Switzerland

7'992 11'119

7'325 11'027

232

237

Source: West & Partner

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Canton of Basel Land: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

BL Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = + + + +

BS = + ++ +

AG + ++ = = ++ +

SO = = = = + =

City of Basel as a Location Factor The canton of Basel Land ranks 11th in terms of locational quality and is thus in the middle of the field. It benefits from high levels of education and good accessibility to transportation thanks to its proximity to the city of Basel. It does not score well in terms of its tax burden. The attractiveness of Basel Land as a location is lower than that of other cantons in Northwestern Switzerland. Large Variations in Accessibility The municipalities in this highly diverse canton vary greatly in terms of how well they are linked to the road and rail networks. The districts of Sissach, Liestal and Arlesheim have above-average accessibility due to the fact that they are not far from the city of Basel and the cantonal capital, Liestal. In Laufen and Waldenburg, links to the main transportation arteries are not as good, and they are also further from the main centers of population. Consequently, their accessibility is average to below average. The municipalities in the district of Arlesheim that have become conglomerated with the city of Basel have the highest level of accessibility, while the exclave of Roggenburg on the French border is not easy to reach by either individual or public transportation.

Accessibility to Transportation
Index of motorized individual transportation and public transportation, CH = 0

BL > 2.5 1.6 - 2.5 1.1 - 1.5 0.9 - 1.0 0.6 - 0.8 0.4 - 0.5 0.1 - 0.3 -0.2 - 0.0 -0.4 - -0.3 -0.7 - -0.5 -0.9 - -0.8 -1.2 - -1.0 < -1.2

Base l

Li esta l

Del mo nt

Source: Credit Suisse Economic Research

Inter- and Intra-Cantonal Migration 2005-2010


Number of people by districts in the canton of Basel Land
2'000
Intra-cantonal

1'500 1'000 500 0 -500 -1'000 District of Arlesheim District of Laufen District of Liestal

Inter-cantonal Total internal migration

District of Sissach

District of Waldenburg

Significant Migration at the Edge of the City The canton of Basel Land has seen net in-migration since 1995. Whereas inter-cantonal migration has fluctuated considerably between net in-migration and net out-migration, there has been annual net immigration of over 1'000 people from abroad since 2007. Most of this international migration is seen in the district of Arlesheim; it does not affect the other districts very much. In-migrants from other cantons also come mostly to the district of Arlesheim, which borders the city of Basel. On the other hand, internal migrants within the canton are leaving this district of Arlesheim for the more rural districts of Laufen and Sissach. The district of Liestal has more Swiss out-migrants than in-migrants.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Company Start-Up Rate Basel Land


Share of newly established companies relative to number of existing companies
12% 10% 8% 6% 4% 2% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Traditional industry Construction Transportation, postal services Financial services Entertainment, hotels and catering Total BL High-tech industry Trading and sales Information, communications, IT Corporate services Administrative and social services Total CH

Respectable Company Start-Up Rate The sector structure of the canton of Basel Land is not very specialized. Companies involved in trading and sales or providing corporate services account for the largest share of jobs. These companies have a good opportunity-risk profile, which should be favorable to company start-ups. The start-up rate in the canton is about average for Switzerland and clearly higher than in the neighboring cantons. There are high startup rates in financial and corporate services as well as IT and communications. Since start-ups generally have a good opportunity-risk profile, this improves the competitiveness of the sector portfolio of the canton of Basel Land.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

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Canton of Basel Land: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 272 0.8% 0.7% 1.0% 2009 273 0.6% 0.6% 0.8% Canton of Basel Land 2010 2011 2012 274 275 277* 0.4% 0.3% 0.6%* 0.4% 0.4% 0.9% 0.7% 2013 278* 0.5%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

130 1.1% 0.49% 2.7% 1.3% 1.01

131 0.7% 0.53% 2.5% -3.2% 1.03

132 0.9% 0.46% 5.0% 3.4% 1.05

133 0.8% 0.43% 5.4% 5.0% 1.09

134* 0.7%* 0.44% 2.3% 2.7% 1.11

135* 0.9%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Low Level of Construction Activity Relative to Demand The level of construction activity in the canton is low considering the high demand for apartments in some places, especially in the Unteres Baselbiet region. Migrants from other countries and cantons are looking for somewhere to live near the city of Basel, where housing is limited due to scarcity of housing. Many house hunters therefore find themselves having to look further afield within the canton and accept long commutes. Construction activity in adjacent regions is at a comparable level in order to cope with these movements. Laufental is the only region in which the planning of a large number of residential units in Laufen in 2008 boosted the expansion of the housing stock in 2011. This prompted a swift reaction in the vacancy rate, which rose from its previously very low level. Focus on Ownership Over the last five years the prices of condominiums in the Unteres Baselbiet region have risen by 3.7% p.a. This puts the regional growth rate for prices between those of the city of Basel and the Oberes Baselbiet region, but still well below the national average of 5.7%. Prices relative to rents are higher than average, and have been for five years. Above all, the focus of inter-cantonal migrants from the city of Basel, who are leaving their rented apartments to acquire property in the Unteres Baselbiet region, is on the ownership market. In the Oberes Baselbiet region and Laufental, on the other hand, prices are still more closely linked to rents.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
2.0% 2'000

1.5%

1'500

1.0%

1'000

0.5%

500

0.0% 2004 Laufental 2005 Total 2006 2007 2008 2009 2010 2011 2012 Unteres Baselbiet Oberes Baselbiet

0 Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 2007 Price/Rent Ratio Switzerland 2007
25

Unteres Baselbiet

20

15

Oberes Baselbiet
10

Laufental

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

High Prices Near the City of Basel Proximity to the city of Basel affects prices in the individual municipalities of the canton of Basel Land. Prices in Allschwil, for example, are not substantially different to those in the city of Basel next door, while in the sought-after municipality of Binningen they are much higher. The price of condominiums falls the further you are from the city, as evidenced by the price level for the municipality of Pratteln. Overall, however, the focus is more on single-family dwellings, particularly in the Oberes Baselbiet and Laufental regions.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Allschwil Reinach Muttenz Pratteln Binningen Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 10'540 14'665 10'718 14'910 10'339 14'387 8'710 12'123 14'097 19'619 7'992 11'119 8'155 12'281 7'509 11'296 8'273 12'452 6'027 9'067 8'700 13'089 7'325 11'027 254 265 245 225 272 232 270 287 263 236 286 237

Source: West & Partner

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Canton of Berne: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

BE Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = = = =

LU + ++ = = = =

AG + ++ = = ++ +

JU

Canton of Contrasts The canton of Berne ranks 18th in terms of locational quality. Particularly in terms of its tax burden, Berne is less attractive than Lucerne and Aargau. On the other hand, Berne beats Jura on all five measures. In terms of education and accessibility, Berne is around average, although there are considerable differences between its regions.

Locational Quality of Berne's Economic Regions


Synthetic index, CH = 0
So lot hurn Zug
BE > 1.4 1.0 - 1.4 0.6 - 1.0 0.3 - 0.6 0.0 - 0.3 -0.3 - 0.0 -0.6 - -0.3 -1.0 - -0.6 -1.4 - -1.0 < -1.4

Neuch tel

Bern

Lu zer n Sa rnen Sta ns

Fr ibo urg

High Locational Quality of the Capital's Region In the case of a large, heterogeneous canton such as Berne, it makes sense to go down to the regional level to examine locational quality. Upon doing so, it becomes clear that the locational quality of the capital region and the regions directly adjacent to it is above average. This is due, in particular, to their good accessibility and the population's relatively high level of education. In terms of tax burden, the capital region and Biel/Seeland are above average. Bernese Jura is below average in terms of both its tax burden and the other measures of locational quality. The Bernese Oberland and Emmental are also below average in terms of locational quality.

Source: Credit Suisse Economic Research

Company Start-Ups 2001-2010


Share of newly established companies relative to number of existing companies
8% 7% 6% 5% 4% 3% 2% 1% 0%

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Overnight Stays in the Bernese Oberland Region


Left scale: in 1'000; right scale: growth in overnight stays since 2005
4'500 4'000 3'500 3'000 2'500 2'000 1'500 1'000 500 0 -500 2005 2006 2007 2008 2009 2010 2011
Switzerland EU-East Switzerland EU-East EU 15/EFTA Gulf states EU 15/EFTA Gulf states BRIC Other BRIC Other

ZG GE SZ OW TI ZH VD NW BS BL FR CH AI SH TG SG AR Bern AG NE LU VS Biel/Seeland SO Thun JU GL BE GR UR

Low Company Start-Up Rate The above-average locational quality of the regions of Berne and Biel/Seeland is also reflected in the higher number of start-ups. However, even in these regions the start-up rate is below average for Switzerland. Overall, the canton of Berne is clearly below average in terms of its start-up rate, ranking third last among all cantons for the average 2001-2010. Public administration clearly plays a very important role in the canton of the capital city, but the start-up scene is less than dynamic. The highest start-up rates in the canton are seen in the information, communications and IT and financial services sectors.

450% 400% 350% 300% 250% 200% 150% 100% 50% 0% -50%

Gulf States as Growth Opportunity The Bernese Oberland region is known for tourism, recording around 3.7 mn overnight stays annually in recent years. The number of overnight stays fell as a result of the slump in the global economy in 2009, and they fell again following the appreciation of the Swiss franc in 2011. There was a particularly large fall in numbers of tourists from EU-15/EFTA countries, who account for around one-third of all overnight stays. The hotel sector is the biggest employer in the Berner Oberland-Ost, Saanen/Obersimmental and Kandertal regions. The strong growth in numbers of tourists from the Gulf states and the BRIC countries (Brazil, Russia, India and China) represents an opportunity for hotels in Bernese Oberland.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

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Credit Suisse Global Research

Canton of Berne: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 971 0.7% 0.8% 0.9% 2009 976 0.5% 0.6% 0.7% Canton of Berne 2010 2011 980 985 0.4% 0.5% 0.5% 0.5% 0.7% 0.8% 2012 990* 0.6%* 2013 995* 0.5%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

517 0.9% 1.10% 1.9% 1.9% 0.79

521 0.8% 1.06% 2.4% -1.2% 0.82

525 0.8% 1.17% 4.6% 1.5% 0.83

529 0.8% 1.25% 7.8% 5.0% 0.87

533* 0.7%* 1.18% 2.4% 2.7% 0.90

536* 0.6%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Canton Divided into Two Areas Demand in the canton focuses on two main areas. Conventional residential space is in demand around the capital and in neighboring regions, where the majority of building permits in 2012 is allotted to rental apartments and singlefamily dwellings. The rural nature of the Berne agglomeration means that the run on condominiums is less pronounced than in Zurich, for example. Burgdorf is the only region where planning is balanced between rental apartments and condominiums. The highly tourist-oriented southern regions, on the other hand, are seeing an increase in the construction of second homes as a result of the second homes initiative, the implementation of which was still in doubt at the start of 2013 for legal reasons.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 Biel/Seeland Oberes Emmental Grenchen Aaretal 2006 2007 2008 2009 2010 Thun Total Oberaargau Saanen/Obersimmental 2'000 1'000 0 2011 2012 Biel/Erlach/Seeland Erlach/Seeland Kandertal Approved units 5'000 4'000 3'000

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Prices Also Reflect Division of the Canton Individual tourist destinations distort prices for entire economic regions. In the Saanen/Obersimmental region it costs 43 times the annual rent for a comparable apartment to purchase a condominium. This price level is primarily influenced by the tourist town of Gstaad. These are mainly second homes whose prices are likely to continue to rise as a consequence of the approaching building freeze in connection with the second homes initiative. Conventional demand for rental apartments is limited. In the region around the capital, on the other hand, there is a large rental market, demand-driven overvaluation of property is limited and the ratio between prices and rents is in line with the national average.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Saanen/Obersimmental Kandertal Berner Oberland-Ost Bern Thun Aaretal Biel/Seeland Grenchen Burgdorf Schwarzwasser Erlach/Seeland Oberaargau Jura bernois Oberes Emmental 0 10 20 30 40 2007 Price/Rent Ratio Switzerland 2007
25

20

15

10

50

Source: West & Partner, Credit Suisse Economic Research

No Overheating in the Canton The price of a medium-sized condominium in the city of Berne is only slightly above average for Switzerland. Single-family dwellings are slightly more expensive but not excessively, given the premium on space in an urban setting. With the exception of the effects described above in the Saanen/ Obersimmental region, none of Berne's economic regions have seen any systematic decoupling of prices from average income. Overheating is therefore less of an issue in Berne compared with other major urban centers.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Bern Biel/Bienne Thun Kniz Ostermundigen Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 9'887 13'755 6'266 7'169 8'716 9'981 8'073 11'232 7'500 10'432 7'992 11'119 7'755 11'674 5'209 6'291 6'273 7'844 9'467 9'444 246 198 211 213 214 232 250 203 207 213 215 237

6'873 10'341 7'325 11'027

Source: West & Partner

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Canton of Fribourg: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

FR Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = = =

BE = = = =

VD = + = =

NE = +

High Tax Burden Reduces Attractiveness The canton of Fribourg has moved up steadily to 21st in the locational quality ranking. The relatively high tax burden reduces the attractiveness of the canton in terms of locational quality, and the education and accessibility components of the assessment cannot compensate for this. The two neighboring cantons Berne and Vaud are about average for Switzerland. High Accessibility in the Northern Part of the Canton The municipalities of Fribourg vary greatly in terms of accessibility. The Mittelland municipalities of the Morat and Sense regions benefit from proximity to Berne and the associated short driving times. The municipalities around the city of Fribourg also have good accessibility. The municipalities in the Fribourg Pre-Alps are less accessible. The areas in the south of the canton and bordering on Vaud also have below-average accessibility. The planned upgrading of regional transportation links between Fribourg and Bulle will improve accessibility here. The A12 highway crosses the canton, linking Vevey and Berne.

Accessibility to Transportation
Index of motorized individual transportation and public transportation, CH = 0
Neuch tel
FR > 2.6 1.6 - 2.5 1.1 - 1.5 0.9 - 1.0 0.6 - 0.8 0.4 - 0.5 0.1 - 0.3 -0.2 - 0.0 -0.4 - -0.3 -0.7 - -0.5 -0.9 - -0.8 -1.2 - -1.0 < -1.3

Bern

Fr ibo urg

Lausanne

Source: Credit Suisse Economic Research

Inter-Cantonal Migration 2005-2010


Migrants to and from other cantons
11'000 10'000 9'000 8'000 7'000 6'000 5'000 4'000 3'000 2'000 1'000 0 -1'000 In-migrants Out-migrants Net migration

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Growth of Housing Stock 2001-2010


Per km2

VD BE NE GE VS JU SO TI BL GR TG SG SH AG GL NW UR OW AI ZG AR LU SZ BS ZH

High Level of Internal Migration The canton of Fribourg recorded the second-highest level of internal migration in Switzerland; Aargau was the only canton to have a higher level. The highest number of in-migrants came from Fribourg's neighboring cantons, especially Vaud. The high number of children among the migrants shows that the canton is an attractive place for families to live. The under-10 and 25-54 age groups in the canton are growing significantly faster than in Switzerland as a whole. This is reflected in the age structure of the population of Fribourg, which has a particularly large proportion of young people. The number of people of retirement age as a percentage of the working population is lower in Fribourg than in any other canton.

Highest Population Growth in La Gruyre Despite a relatively high tax burden, Fribourg is a financially attractive place to live when compared with other regions. The combination of strong population growth and a shortage of housing around Lake Geneva is causing people to move. Consequently, population growth has been strong in the Glne/Veveyse region along the canton's border to Vaud and in La Gruyre. These two regions recorded stronger population growth between 2000 and 2010 than any other economic region in Switzerland. The map showing the growth of the housing stock gives a clear illustration of this trend. Growth is also strong in the La Sarine region, which includes the cantonal capital. Population growth was less dynamic in the Morat and Sense regions.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

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Canton of Fribourg: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 269 2.0% 0.9% 2.2% 2009 274 1.7% 0.8% 1.6% Canton of Fribourg 2010 2011 278 285 1.7% 2.2% 0.6% 0.9% 2.0% 1.7% 2012 289* 1.6%* 2013 294* 1.6%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

125 2.1% 1.04% 1.1% 1.7% 0.98

127 1.8% 0.82% 1.7% -0.5% 1.02

130 1.9% 0.89% 6.4% 3.4% 1.06

132 1.8% 0.77% 11.7% 8.0% 1.15

134* 1.4%* 0.77% 3.9% 5.9% 1.21

136* 1.6%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Fribourg Deals with Overspill from the Canton of Vaud Located between the dynamic region around Lake Geneva and the urban center of Berne, Fribourg's regions can position themselves as interesting places to live where housing is both available and affordable. As a result, the canton's real estate market has been electrified since 2004 to match the rapid growth of the population. Housing stock grew by a very high 2.1% in 2008, and the rate of growth stabilized only slightly below 2% in the years that followed. The planning of new residential areas has slowed across the board since 2010, which is why the housing stock is also not expected to grow as rapidly this year. Glne/Veveyse was the only region where planners were still endeavoring to counter population pressure by creating more housing in 2010 and 2011.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 La Sarine 2005 2006 2007 Sense 2008 2009 2010 La Gruyre La Broye 2011 2012 Total Approved units 500 0 1'500 1'000 2'500 2'000

Murten (Morat)

Glne/Veveyse

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Availability of Building Land Impacts Prices The ratio between prices and rents is low throughout the canton. Prices are not just low relative to those around Lake Geneva, but also when compared to regional rent levels. The canton therefore stands out on account of the favorable price/performance ratio in its property ownership segment. The low rise of prices can mainly be attributed to land prices, as well as the canton's swift and comprehensive response to the sharp rise in demand. The pressure on land prices is relatively low due to the fact that the canton of Fribourg, like the canton of Valais, has the largest reserve of building land relative to its size in the whole of Switzerland.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Glne/Veveyse
20

2007 Price/Rent Ratio Switzerland 2007


25

La Sarine La Gruyre Murten (Morat) La Broye


5 15

10

Sense
0

10

15

20

25

30

Source: West & Partner, Credit Suisse Economic Research

Rents Relatively High The even distribution of dynamic construction activity throughout the canton results in uniform prices among the canton's five largest municipalities. Rents on the other hand are relatively high: While the price of condominiums in the city of Fribourg is 24% below the national average, rents are only 13% cheaper. There are only few exceptions to this modest level in the canton. Prices are even limited in Chtel-SaintDenise, which is slightly more expensive and is bordered by the lakeside municipalities of Vaud.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Fribourg Bulle Villars-sur-Glne Marly Ddingen Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 6'750 6'460 6'516 6'702 6'258 9'394 8'987 9'065 9'323 8'703 5'555 5'409 6'091 5'245 5'700 8'370 8'141 9'178 7'896 8'578 201 190 210 200 208 232 199 183 212 201 210 237

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Geneva: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

GE Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = ++ + +

VD = + = =

ZG ++ ++ + ++ ++ ++

ZH ++ + + ++ ++

Most Attractive Canton in Western Switzerland Despite having the highest corporate tax burden in Switzerland, the canton of Geneva comes fifth in the locational quality ranking. Geneva is thus the highest-ranking canton in Western Switzerland. The ace up its sleeve is the availability of highly skilled workers, although Geneva also scores above the Swiss average in terms of accessibility to transportation. Commercial Center and Agricultural Canton The canton of Geneva's population of 460'000 is distributed unevenly over an area of 282 km2. There is high population density throughout the urban area of the municipality of Geneva, with a population of over 8'000 per km2. The population density in concentric rings around the center falls the greater the distance from the center. While population density is still quite high in the municipalities of Meyrin and Lancy, it falls closer to the border and in the exclave of Cligny. There are large areas of agricultural land in these parts of the canton, and the government's strategy stipulates that these are to be preserved. The reserves of building land are dwindling, and there is little scope for further re-zoning. Geneva's strong population growth is thus having an impact on the cantons of Fribourg, Valais and Vaud as well as France. Locational Factor Expenditure-Based Taxation The canton of Geneva had tax receipts of around CHF 87 mn for the year 2009 from expenditure-based taxpayers. That corresponds to 1.6% of the canton's total tax revenues. By comparison, revenues from withholding tax amounted to around 13% of fiscal revenues in 2010. The canton of Geneva has the fourth-highest number of people taxed by expenditure in Switzerland, and they are particularly wealthy: The average tax revenue per person subject to expenditurebased taxation in Geneva is over CHF 200'000. The introduction of a minimum tax base, which is being discussed at the federal level, would also have an impact on the canton of Geneva. If this form of taxation were entirely abolished, as has already been decided in other cantons, it would result in people leaving Geneva. Leading Financial and Commercial Center Geneva is Switzerland's second most important financial center after Zurich and one of the ten most important in the world. In contrast to Zurich, asset management is the most important business line in Geneva. 16% of all employees in the banking sector were working for private banks and 43% at foreign-owned banks, which often have their Swiss headquarters in Geneva. In addition to these financial institutions, Geneva has around 400 trading companies, making it the world's largest center of commodity trading. Geneva is the market leader in commodity trade finance, a sector with a promising future. The corporate taxation regulations that have been discussed are particularly relevant to Geneva as a business location; any barriers to competition would be an indication of what could be expected in the future.

Population Density
Population per km2, 2010

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Expenditure-Based Taxpayers by canton


Number of expenditure-based taxpayers and tax receipts, 2010, GE: 2009
1'400 1'200 1'000 800 600 400 200 0 Number of flat-rate taxpayers (left scale) Tax revenue per flat-rate taxpayer (right scale) 245'000 210'000 175'000 140'000 105'000 70'000 35'000 0

Source: FDC, FFA, Credit Suisse Economic Research

Geneva as a Financial Center


Companies and employees, 2008
Employees 3'186 2'329 2'077 471 136 814 Banks Independent asset managers Financial intermediaries Insurance companies 5'242 623 3'037 2'023 Companies Lawyers, notaries 20'627 Accountants

Source: Geneva Financial Center, 2012

VD VS TI GE GR BE LU TG ZG NW SG FR SZ OW NE AI AR BS AG JU BL SH
1'260

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Canton of Geneva: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 445 1.8% 1.6% 0.5% 2009 452 1.6% 1.4% 0.6% Canton of Geneva 2010 2011 458 460 1.2% 0.6% 1.2% 1.1% 0.7% 0.4% 2012 466* 1.3%* 2013 472* 1.2%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

216 0.5% 0.20% 9.8% 10.4% 1.50

217 0.6% 0.22% 6.6% 3.6% 1.63

219 0.8% 0.23% 12.4% 5.3% 1.77

220 0.5% 0.25% 13.0% 8.2% 1.97

221* 0.6%* 0.33% 11.2% 4.7% 2.18

223* 0.7%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Small Steps Toward Relief The shortage of building land in the canton of Geneva means that the anticipated expansion of housing stock over the next few quarters will remain limited. However, small progress has been made, with permits for the building of 1'657 residential units in 2012 approaching the most recent high seen in 2009. The submission of a large number of applications in 2012 should help maintain the high level of approved units in 2013 and at least partially relieve the pressure on the real estate market, even if only in the future. This is because the planning process from application to obtaining a permit and starting building is long and hard in Geneva. As a result, construction activity for house hunters who do not want to wait for future projects is even higher in the regions surrounding the lake.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 Genve 2005 2006 2007 2008 2009 2010 Nyon 2011 2012 Total Morges/Rolle 2'000 1'750 1'500 1'250 1'000 750 500 250 0 Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Strong Increase in Prices and Rents The 64% rise in prices in Geneva over the last five years is the largest increase seen in any Swiss economic region. In 2012, a medium-standard condominium cost 42 times the annual rent for a comparable apartment, or more than CHF 13'000 per square meter. But although prices have risen faster than in the city of Zurich, the price/rent ratio is well below Zurich's figure of 46 times annual rent. This is a consequence of the rental market. The shortage of space in Geneva and the city's focus on international financial and trading companies and their employees (who are prepared to pay a lot for rented apartments) have caused both the price of ownership and rents to rise substantially in Geneva.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 2007 Price/Rent Ratio Switzerland 2007
25

Genve

20

15

Nyon
10

Morges/Rolle

10

20

30

40

50

Source: West & Partner, Credit Suisse Economic Research

Prices No Longer Sustainable Prices for owning your own property in the municipalities of Geneva are no longer sustainable. The deviation in the price of a medium-standard condominium from the Swiss average ranges from 30% to 100%. Prices have significantly decoupled from income. This is no longer sustainable for middle class households. Despite low interest rates for mortgages, high prices in the city of Geneva lead to financial burdens over and above the 33% golden rule of financing, even for higher-income households.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Genve Vernier Lancy Meyrin Carouge Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 18'960 26'381 16'637 23'148 18'000 25'039 17'024 23'684 18'411 25'613 7'992 11'119 15'255 22'963 9'318 14'022 11'700 17'607 9'700 14'593 13'036 19'622 7'325 11'027 334 279 293 282 315 232 320 281 296 284 316 237

Source: West & Partner

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Canton of Glarus: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

GL Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 + ++

SG + ++ = = = =

SZ ++ ++ = = +

GR + + = =

Peripheral Location a Disadvantage The canton of Glarus ranks 19th in terms of locational quality. While it is above average in Switzerland in terms of the tax burden, its scores are below average when it comes to the level of education and accessibility. While Graubnden is similarly positioned, neighbors St. Gallen and Schwyz come in some way ahead of Glarus.

Net Migration 1990-2010


Total number of people
500 400 300 200 100 0 -100 -200 -300 -400 -500 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Inter-cantonal International Total

Net Inter-Cantonal In-Migration For the First Time Again The canton of Glarus has had a positive migration balance each year since 2007, primarily due to international migration. In 2010, the canton recorded net in-migration from other cantons for the first time since 1991, which indicates an increase in its attractiveness relative to other cantons. The highest net in-migration from another canton in the last five years is from Graubnden (a positive balance of only 10 migrants). The most popular destination for out-migrants from Glarus is the canton of Zurich (165 migrants), followed by St. Gallen and Aargau. Within the canton, most of the population movement between 2005 and 2010 was from the municipality of Glarus Sd to Glarus and Glarus Nord.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Age Cohort Growth 2006-2011


Growth in five-year cohorts from 2006, in percent
20% 15% 10% 5% 0% -5% -10%
GL CH

00-04

05-09

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Exports by Destination Country


Left scale: exports in CHF mn; right scale: growth since 2004 in %
1'000 800 600 400 200 0 -200 2004 2005 2006 2007 2008 2009 2010 2011
EU 15/EFTA BRIC EU east Gulf states Total CH (right scale) America Asia Other Total GL (right scale)

60-64

High Percentages of Young and Old The population of the canton of Glarus fell slightly in the years from 2001 to 2006. Since then, the population has risen by around 3%, particularly as a result of immigration from abroad. The canton's population growth has thus been significantly lower than the average for Switzerland. The canton's age structure is notable for having large numbers of people in the under-30 and over-50 age groups. The economically important 30-50 age group is underrepresented. This age group is particularly important to a region, since it can benefit from its experience in employment. The canton seems to be particularly attractive to people of pre-retirement age.

100% 80% 60% 40% 20% 0% -20%

Strong Euro Dependency in Exports The canton of Glarus has a degree of industrialization of over 47%, making it the most industrialized canton in Switzerland. The canton's exports in 2011 were worth CHF 580 mn. The strongest exporting industry is mechanical engineering, which accounts for 45% of the canton's exports, followed by the electrical engineering and textile industries. The canton's most important trading partners are Germany, the USA and other EU countries. The significant appreciation of the Swiss franc against the euro and the associated crisis in the eurozone countries have resulted in a clear drop in the value of the canton's exports. Exports have fallen by 15% since 2004, whereas for Switzerland as a whole they have risen by 35%.

Source: Swiss Federal Customs Administration, Credit Suisse Economic Research

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Canton of Glarus: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 38.4 0.3% 0.8% 1.0% 2009 38.5 0.3% 0.8% 1.0% Canton of Glarus 2010 2011 38.6 39.2 0.2% 1.6% 0.7% 1.4% 1.4% 0.8% 2012 39.3* 0.2%* 2013 39.4* 0.2%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

20.8 0.7% 2.08% 3.4% 4.1% 0.85

21.0 1.0% 1.81% -7.4% -1.2% 0.82

21.2 0.9% 1.82% 7.2% 5.1% 0.82

21.4 1.0% 1.28% 5.0% 3.3% 0.85

21.5* 0.6%* 1.38% -1.8% 5.7% 0.84

21.7* 0.8%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Construction Activity with Marked North-South Divide The marked north-south divide in the canton of Glarus divides the real estate market in two parts. Hardly any new apartments are being built in the municipality of Glarus Sd. Further down the valley, construction activity increases the nearer you get to the Zurich metropolitan area. The housing stock in the municipality of Glarus has risen by an average of 0.6% each year since 2000. The corresponding figure of 0.9% for Glarus Nord is almost on a par with the Swiss average (1%). Construction activity in Glarus Nord is focused on the locations of Mollis and Nfels, where 60% of the municipality's new apartments have been built. This reflects their function as hubs within Glarus Nord, as well as the relatively convenient connection heading toward Zurich.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 2006 Glarner Hinterland Linthgebiet March/Hfe 2007 2008 2009 2010 2011 2012 Glarner Mittel- und Unterland Total Approved units 240 210 180 150 120 90 60 30 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Low Prices Offer Opportunities The structural problems and the relative inaccessibility of its urban centers also have a positive effect for the canton of Glarus. Prices for owning property have remained affordable, and like the canton's rents are well below the Swiss average. The substantially below-average price/rent ratio has barely changed relative to 2007 due to the low price momentum during the last two years. In the Glarner Hinterland region in particular, the home ownership rate of 62% means that the rental market is of secondary importance. Only 13 of the 110 economic regions have higher rates of home ownership. Nevertheless, the Linthtal 2015 construction project and corresponding migration of workers have also injected some life into the rental market in Glarus Sd. Prices Also Reflect the Divide Prices for single-family dwellings also reflect the canton's north-south divide. However, they remain affordable even in Glarus Nord at CHF 6'137 per square meter. The fact that prices remain low gives the canton of Glarus modest potential for further immigration. Prices for home ownership in the Zurich metropolitan area have risen so sharply in recent years that purchasing property is becoming increasingly difficult due to the significant amount of capital required. Those looking to fulfill the dream of their own four walls therefore have to pay the price of longer commutes.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Linthgebiet
20

2007 Price/Rent Ratio Switzerland 2007


25

March/Hfe

15

Glarner Hinterland

10

Glarner Mittel- und Unterland


0

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Glarus Nord Glarus Glarus Sd Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 6'137 5'726 4'629 8'535 7'968 6'439 4'509 4'636 4'036 6'785 6'970 6'081 184 186 161 196 188 163

Switzerland

7'992 11'119

7'325 11'027

232

237

Source: West & Partner

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Canton of Graubnden: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

GR Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 + + = =

TI + =

SG + ++ = = = =

GL + ++

Topography Impairs Locational Quality Graubnden ranks 20th in terms of locational quality. The canton's biggest disadvantage is its poor accessibility to transportation. In terms of the tax burden, the canton is relatively attractive, while the education level is close to the Swiss average. Overall, Graubnden is slightly more attractive than Ticino.

Population Growth 2001-2011


Average annual population growth in percent
Schwyz

Gla rus

Altdorf

GR < -2% -1.9% - -1% -0.9% - -0.5% -0.4% - 0% 0.1% - 0.5% 0.6% - 1% 1.1% - 2% 2.1% - 3% 3.1% - 4% > 4%
Bellinzo na

Chur

Strong Out-Migration to Other Cantons The population of Graubnden grew by 4.4% between 2001 and 2011 significantly less than the average for Switzerland of 9.6%. Only Graubnden's Rhine Valley region recorded growth on a similar scale. The population actually fell in the regions of Davos, Schanfigg, Mittelbnden and Surselva. The low growth in the population can be attributed, not least, to significant out-migration to other cantons. Between 2005 and 2010, over 1'000 people left the canton in direction of Zurich, 550 of whom went to St. Gallen. The canton only had net in-migration from the cantons of Appenzell Ausserrhoden and Jura. However, the inter-cantonal out-migration is compensated by the high level of international immigration since 2007.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Second Homes
Share of second homes to housing stock per municipality (estimation)
s au Schwyz Altdorf Chur Gla rus

GR < 10% 10% - 20% 20% - 30% 30% - 50% > 50%

Bellinzo na

Source: Credit Suisse Economic Research

High Percentage of Second Homes In 146 of the 176 municipalities in Graubnden, second homes make up over 20% of housing stock. Moreover, in 69 municipalities, second homes account for over 50% of housing stock. However, a popular initiative demanding that second homes in a municipality should not account for more than 20% of housing stock has been approved. Realistically, that means that the construction of new, non-serviced second homes will be prohibited indefinitely in those of the canton's municipalities where tourism plays a role. This will result in a shortage of supply and thus rising prices. The construction industry, including finishing trade and building construction, have benefited strongly from the building of second homes up to now, and in the absence of this demand, employment will fall in the medium term. Steady Fall in Overnight Stays Graubnden has recorded between 5.2 and 6.2 mn overnight stays annually in recent years, but the trend has been downward since the peak year of 2008. Around 50% of the guests come from Switzerland and 40% from the EU15/EFTA countries, particularly Germany. Overnight stays of guests from these countries have fallen by 11.7% since 2005. The rise in overnight stays of tourists from the eastern EU countries, the BRIC countries and the Gulf states has in no way compensated for this fall. 10% of employees in the canton of Graubnden work in the hotel industry. The importance of tourism to the canton becomes even greater when other tourism-related industries such as the restaurant industry and retailing are taken into account.

Overnight Stays in Graubnden


Left scale: in 1'000; right scale: growth in overnight stays since 2005
8'000 7'000 6'000 5'000 4'000 3'000 2'000 1'000 0 -1'000 2005 2006 2007 2008 2009 2010 2011
Switzerland EU east Switzerland EU east EU 15/EFTA Gulf states EU 15/EFTA Gulf states BRIC Other BRIC Other

200% 175% 150% 125% 100% 75% 50% 25% 0% -25%

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

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Canton of Graubnden: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 190 0.9% 1.2% 1.3% 2009 192 0.7% 1.0% 1.0% Canton of Graubnden 2010 2011 2012 193 193 194* 0.4% 0.4% 0.6%* 0.8% 0.9% 0.8% 1.0% 2013 195* 0.5%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

153 1.4% 0.77% 4.8% 3.1% 1.10

154 1.0% 0.79% 3.1% -0.5% 1.14

156 1.0% 0.77% 8.7% 0.9% 1.19

158 1.1% 0.92% 7.0% 12.4% 1.25

160* 1.3%* 0.98% 5.1% 6.5% 1.32

162* 1.3%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Effects of the Second Homes Initiative Many construction projects were being pushed through in tourist-oriented municipalities with the aim of obtaining planning approval before the end of 2012. With the exception of the Surselva region, this was not yet reflected in the number of approvals by the end of 2012 due to the lodging of appeals. A total of 1'300 residential units were approved for construction in the Surselva region in 2012, more than four times the long-term average. The situation is similar in other regions of the canton. The initiative committee has appealed against many of the applications. The Swiss Federal Supreme Court will have to decide to what extent the committee is entitled to appeal, and how many of the approved units can be built. This has not yet happened as of the start of 2013.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 2006 Oberengadin Domleschg/Hinterrhein Schanfigg Mittelbnden 2007 2008 2009 Davos Sarganserland Total Surselva 2010 2011 2012 Bndner Rheintal Prttigau Engiadina bassa Approved units 3'500 3'150 2'800 2'450 2'100 1'750 1'400 1'050 700 350 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Muted Demand for High-End Properties Three of the four most expensive Swiss municipalities in terms of real estate (St. Moritz, Celerina/Schlarigna and Pontresina) are located in the district of Oberengadin. This concentrated, high-price segment explains why Oberengadin has the second-highest price/rent ratio after Zurich. Demand for prestigious vacation homes has been high in the past, particularly from abroad, pushing prices higher than can be measured using conventional methods. However, economic uncertainty in the Eurozone and the appreciation of the Swiss franc against the euro should limit demand from other European countries for premium properties in the short term.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Oberengadin Mittelbnden Davos Engiadina bassa Prttigau Surselva Schanfigg Bndner Rheintal Mesolcina Sarganserland Domleschg/Hinterrhein
0 5 10 15 20

2007 Price/Rent Ratio Switzerland 2007


25

10

20

30

40

50

Source: West & Partner, Credit Suisse Economic Research

Extremes Between the Rheintal and Tourist Destinations Prices in Graubnden's largest municipalities reflect the structural differences between the Rheintal and the tourist destinations. Chur occupies an attractive mid-point between the two price extremes, representing a flourishing location for SMEs and colleges. This is where the price of a condominium is on a par with the Swiss average. In Landquart, on the other hand, both apartments and houses are substantially cheaper. The highest figures are found in St. Moritz. However, in the real world properties will be changing hands for much more than these recorded values.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Chur Davos Landquart Domat/Ems St. Moritz Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 10'419 14'503 15'371 21'387 7'016 9'768 7'427 10'342 15'734 21'890 7'992 11'119 7'255 10'919 10'255 15'437 5'991 5'582 9'015 8'400 209 256 199 202 334 232 200 259 201 204 336 237

15'427 23'230 7'325 11'027

Source: West & Partner

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Canton of Jura: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

JU Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012

NE = +

BE = = = =

SO = = = = + =

Lowest Rank Due to Peripheral Location and Tax Burden Since the first reassessment of locational quality under new criterias in 2004, the canton of Jura has finished at the bottom of the rankings. Jura scores particularly badly compared to its neighbors Berne, Solothurn and Basel Land. The tax burden on natural persons is the second highest in Switzerland. Only Neuchtel is more unattractive on this measure. Weak Population Growth The canton's population grew by 1.9% from 2006 to 2011. The average population growth for Switzerland in this period was 5.9%. Only in Appenzell Ausserrhoden, population growth was lower than in Jura. The canton suffers from intercantonal out-migration, especially to the cantons of Basel Land, Neuchtel and Aargau. Young adults are most affected by this out-migration, which can be explained by the lack of suitable training and study places. The more marked growth of the over-30 and under-10 age cohorts indicates that the canton is attractive to families. Jura is also a popular place to live for people of pre-retirement age.

Age Cohort Growth 2006-2011


Growth in five-year cohorts from 2006, in percent
20% 15% 10% 5% 0% -5% -10%
JU CH

00-04

05-09

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Opportunity/Risk Profile of Sector Structure


15 largest sectors in 2013, circle size = share of jobs
high
Homes Wholesale trade Healthcare Public administration Machinery Education Electronic equipment and watches

60-64

Opportunity-risk profile

Finishing trade Retail trade Restaurant industry Auto trade

Construction of buildings Agriculture

Tobacco Fabricated metal products

Agriculture and forestry Construction and industry Services Public sector

-10%

-5%

0% 5% 10% 15% Employment: deviation from the Swiss average

20%

Watch Industry as Cluster Opportunity and Risk The canton of Jura has an average to promising sector profile. However, there is a certain amount of risk associated with this assessment because it is strongly dependent on the electronics and watch industry. Around 18% of the canton's employees work in this high value-added industry. The other sectors of above-average importance, metal products and agriculture, have a markedly less favorable profile. Without the electronics and watch industry, the economy's opportunity-risk profile would be clearly below average. Care homes and health care also have a good opportunity-risk profile. The wholesale sector, which has been of little importance thus far, could also secure growth for the canton in the future.

Source: Credit Suisse Economic Research

Exports by Destination Country


Left scale: exports in CHF mn; right scale: growth since 2004 in %
1'600 1'400 1'200 1'000 800 600 400 200 0 2004 2005 2006 2007 2008 2009 2010 2011
EU 15/EFTA Gulf states Other Asia BRIC Total JU (right scale) America EU east Total CH (right scale)

low

80% 70% 60% 50% 40% 30% 20% 10% 0%

Wide Variety of Export Destinations The canton of Jura exported goods worth CHF 1 bn in 2011. The most important trading partners continue to be the EU15/EFTA countries, which account for almost 50% of exports. The strongest growth in the last eight years has been seen in exports to the Gulf states, which have increased by a factor of 14. These countries now account for almost 10% of exports by value. Exports to Asia and the USA have also more than doubled. The mechanical engineering industry accounted for the largest portion of exports in 2011, followed by electrical engineering and electronics and watches. Exports of watches contributed to a boom in watch production in the canton, but the sector also represents a significant cluster risk in the canton's economic structure.

Source: Swiss Federal Customs Administration, Credit Suisse Economic Research

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Canton of Jura: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 69.7 0.4% 0.6% 1.1% 2009 70.0 0.4% 0.3% 0.3% Canton of Jura 2010 2011 70.0 70.5 0.0% 0.7% 0.4% 0.5% 0.6% 0.8% 2012 70.7* 0.3%* 2013 70.9* 0.3%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

35.2 0.9% 2.00% 3.5% 0.9% 0.87

35.4 0.5% 1.77% 0.0% 0.0% 0.90

35.6 0.5% 1.96% 4.0% -1.9% 0.91

35.9 0.9% 1.88% 8.7% 7.9% 0.98

36.3* 1.0%* 1.92% 1.1% 3.2% 1.00

36.7* 1.1%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Change in Trend in Types of Housing Construction activity in Jura is high for the region. Until mid2010, many more single-family dwellings than apartments in multi-family dwellings were regularly being planned. The tide turned in 2011, with more apartments in multi-family dwellings regularly being approved. The Delsberg district accounts for 236 of the 280 apartments in multi-family dwellings approved in the canton in 2012. This is injecting some life into the real estate market in the east of the canton, which can present itself as an affordable place to live compared to the surrounding, substantially more expensive regions. The building of new apartments and the ongoing construction of the Transjurane highway (A16) should add to Jura's appeal as a place to live in the future.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
2.0% 500

1.5%

375

1.0%

250

0.5%

125

0.0% 2004 Jura bernois 2005 2006 2007 2008 2009 2010 Total 2011 Jura 2012 La Chaux-de-Fonds Laufental

0 Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Second Most Affordable Rents in Switzerland Jura has a relatively low price/rent ratio. Purchasing a medium-standard condominium cost 26 times the annual rent for a comparable apartment in 2012. But because rents are even more affordable relative to the likewise low purchase prices, the ratio is higher than the ratios for similar regions such as La Chaux-de-Fonds and Bernese Jura. Low rents are one of the factors behind the failure to renovate old and in some cases vacant properties in central locations. At the end of the day the rental income that can be achieved is much lower than in other parts of Switzerland, while the cost of renovation is roughly the same. This limits the returns on renovation.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Laufental
20

2007 Price/Rent Ratio Switzerland 2007


25

Jura

15

La Chaux-de-Fonds

10

Jura bernois
0

10

15

20

25

30

Source: West & Partner, Credit Suisse Economic Research

Low Prices for Single-Family Dwellings The situation in the canton of Jura is also difficult with respect to condominiums and not just rental apartments. Land prices are in some cases so low that there is little incentive to buy an apartment. The price per square meter of a medium-standard single-family dwelling in Porrentruy is around 6% lower than the same figure for an apartment at CHF 4'242. This price level is also almost half the Swiss national average. Prices for single-family dwellings have not moved much in recent years. The overall, nominal price level for the canton as a whole is currently just over 10% higher than in the year 2000.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Delmont Porrentruy Bassecourt Courroux Courrendlin Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 5'024 4'242 4'266 4'435 4'589 6'987 5'903 5'935 6'174 6'381 4'755 4'500 4'227 4'155 4'427 7'163 6'770 6'370 6'252 6'659 170 161 160 170 157 232 171 163 161 171 159 237

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Lucerne: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

LU Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 + ++ = = = =

OW ++ ++ = +

NW ++ ++ = = = +

AG + ++ = = ++ +

High-Ranking Neighbors The canton of Lucerne ranks around average in terms of locational quality but is outperformed by the neighboring cantons of Obwalden, Nidwalden, Schwyz, Zug and Aargau. In terms of taxation, the canton is above average in terms of attractiveness, while its education and accessibility scores are about average.

Growth of Housing Stock 2001-2010


Per km2

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

High Level of In-Migration from Zug The population of the canton of Lucerne grew by around 9% between 2001 and 2011, in line with the Swiss average. The regions of Sursee/Seetal and Lucerne experienced the strongest growth. Both of these regions felt the effects of population pressure from the canton of Zug. Migration from Zug, which accounts to 1'000 people in the last five years, was higher than from any other canton, followed by Nidwalden and Schwyz. The strongest flows of migration occurred with the canton of Aargau. The growth of the housing stock reflects this development: On the borders with Zug and Freiamt and around Lake Sempach, the number of apartments and single-family dwellings increased markedly. In contrast, the regions of Willisau and Entlebuch have low levels of construction activity and population growth. Highly Diversified Tourism Markets In the Lake Lucerne region, which is noted for tourism, the fall in overnight stays experienced in other tourism regions throughout Switzerland between 2010 and 2011 was less marked. The fall in the year 2009 as a result of the global economic crisis was felt much more strongly in Central Switzerland than the current slump, which has been caused by the exchange rate. One reason for this is the heterogeneous structure of the guests who come to the Lake Lucerne region, with overnight stays of guests from EU15/EFTA countries accounting for less than 30% of the total. 11% of overnight stays are accounted for by guests from the BRIC countries (Brazil, Russia, India and China). These have risen by over 120% since 2005 and there is still much potential for growth. Lowest Rate of Tax on Profits The canton of Lucerne introduced Switzerland's lowest rate of tax on earnings in 2012. It is thus the first large canton to pursue a low corporate tax strategy, putting it in direct competition with its neighbors in Central Switzerland. When it comes to tax on capital, however, cantons such as Nidwalden and Appenzell Ausserrhoden are even more attractive and have lower corporate taxes overall. The tax offensive, launched with an initial reduction in 2010, appears to be bearing fruit: In 2010 the number of company start-ups in the canton increased by over 40%. The start-up rate, which is below average for Switzerland, can be expected to increase in the future as a result of the recent tax cut.

Overnight Stays in Lucerne and Lake Lucerne Area


Left scale: in 1'000; right scale: growth in overnight stays since 2005
4'000 3'500 3'000 2'500 2'000 1'500 1'000 500 0 -500 2005 2006 2007 2008 2009 2010 2011
Switzerland Gulf states EU east EU 15/EFTA Other BRIC BRIC Switzerland Gulf states EU east 240% EU 15/EFTA Other

210% 180% 150% 120% 90% 60% 30% 0% -30%

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Corporate Tax Burden


Synthetic indicator 2012, CH = 100
140 120 100 80 60 40 20 0
Tax index CH

Source: Braingroup, Credit Suisse Economic Research

NW AR LU OW SZ AI ZG UR GL TG SH SG AG GR BL SO VS FR NE TI ZH BE JU BS VD GE

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Canton of Lucerne: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 370 1.4% 1.0% 1.4% 2009 374 1.1% 0.7% 1.2% Canton of Lucerne 2010 2011 378 382 0.9% 1.1% 0.6% 0.6% 1.2% 1.3% 2012 386* 1.1%* 2013 390* 1.0%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

171 1.2% 0.79% 3.1% 4.8% 0.83

174 1.3% 0.62% -0.6% -2.0% 0.82

176 1.4% 0.68% 8.2% 4.3% 0.86

178 1.3% 0.80% 6.6% 5.3% 0.91

181* 1.4%* 0.74% 7.1% 3.7% 0.95

183* 1.3%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Strong Growth in the Sursee/Seetal Region There is a balance between supply and demand in the canton of Lucerne that is unparalleled anywhere else in Switzerland. Builders in the Lucerne region exercised caution with respect to the planning of new apartments in 2007 and 2008. This led to a decrease in vacancy rates, which exceeded 1% for the canton in 2006 for the first time since the year 2000, after which they fell back to the low level of 0.6% in 2009. Inspired by the low level of vacancies, falling interest rates because of the recession and surprisingly robust immigration, planning activity picked up again in 2009 (counter to the general trend in Switzerland) and reached a provisional peak in 2012. The Sursee/Seetal region, which experiences elevated population pressure stemming from Zug, is expected to substantially expand its housing stock in 2013. Well-Balanced Rental and Ownership Markets The Lucerne region's price/rent ratio is above average but not excessively high for a central region. Both the ownership market and the rental market are intact. There is admittedly also a slight imbalance between ownership and rental in Lucerne. This is because interest rates have boosted demand for condominiums despite the fact that a lot of rental apartments are being constructed. However, this does not spell disaster for the rental sector because the increased numbers of international immigrants move into rental apartments upon their arrival. The price of ownership is still largely proportionate to income in the canton, and large-scale overheating is therefore not an issue.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 Luzern 2005 2006 2007 2008 Willisau 2009 2010 2011 2012 Approved units Entlebuch Total Sursee/Seetal 3'600 3'200 2'800 2'400 2'000 1'600 1'200 800 400 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Luzern
20

2007 Price/Rent Ratio Switzerland 2007


25

Sursee/Seetal

15

Entlebuch

10

Willisau
0

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Attractive Residential Locations Near the Lake The economic region of Lucerne ranks 23rd among the 110 regions with respect to the price of condominiums, which is also precisely where it ranks in terms of locational quality. Its high locational quality is boosted by attractive residential locations in the vicinity of the lake. In light of the above, the premium of 15% relative to the national average for a medium-standard condominium in the city of Lucerne does not seem excessive. Prices become much more affordable the further you get from the city and the lake, and in Emmen they are even substantially below the national average.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Luzern Emmen Kriens Horw Ebikon Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 9'024 12'555 7'540 10'484 7'895 10'987 9'218 12'826 8'081 11'239 7'992 11'119 8'427 12'681 6'200 9'326 7'300 10'993 8'255 12'422 6'882 10'356 7'325 11'027 245 213 208 225 215 232 248 225 207 227 217 237

Source: West & Partner

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Canton of Neuchtel: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

NE Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = +

VD = + = =

BE = = = =

FR = = =

Second Last in Terms of Locational Quality Neuchtel ranks second to last in the national ranking of locational quality. Its greatest disadvantage is the relatively high tax burden. But it is also below average in terms of accessibility. Neighboring cantons perform slightly better on both measures. Neuchtel scores above the Swiss average only in terms of availability of highly skilled workers.

Cross-Border Commuters
Quarterly figures by main occupational groupings
14'000 12'000 10'000 8'000 6'000 4'000 2'000 0 Skilled trades and related occupations Technicians and others of a similar standing Graduate-level professions Executives Total NE Total CH (right scale) 350'000 300'000 250'000 200'000 150'000 100'000 50'000 0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Exports by Destination Country


Left scale: exports in CHF mn; right scale: growth since 2004 in %
14'000 12'000 10'000 8'000 6'000 4'000 2'000 0 -2'000 2004 2005 2006 2007 2008 2009 2010 2011
EU15/EFTA Asia Gulf states Total NE (right scale) America BRIC Other Total CH (right scale)

2012

Sharp Rise in Numbers of Cross-Border Commuters In the third quarter of 2012, the number of cross-border commuters working in the canton of Neuchtel rose to over 10'000 for the first time. That figure has almost tripled since the year 2000, while the average figure for Switzerland is around twice as high. In addition to strong growth, there have been structural changes with regard to the jobs available. Technicians are the largest occupational grouping in 2012, accounting for 35% of jobs, having more than doubled in size in the last 12 years. Correspondingly, the share of jobs in skilled trades, services and sales has fallen. The rising number of technicians is attributable to the thriving watch industry, which recruits a significant share of its employees from abroad.

140% 120% 100% 80% 60% 40% 20% 0% -20%

Above-Average Export Growth Thanks to Watches The exports of the canton of Neuchtel passed the CHF 10 bn mark for the first time in 2011. The exports go to a wide variety of destination countries: 38% to the EU-15/EFTA countries, 26% to America and 23% to Asia. There is also strong growth in exports to the BRIC countries, although these still account for only 6% of total exports by value. Electronics and watches account for over a third of total exports, followed by the pharmaceutical industry. In recent years, the canton's exports have grown by 66%, significantly more than in the rest of Switzerland. Since 2009, strong Asian demand for watches has resulted in above-average growth in exports.

Source: Swiss Federal Customs Administration, Credit Suisse Economic Research

Growth of Resource Potential per Head 2008-2013


Based on the aggregate tax base, in %
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: Federal Department of Finance

Tax Burden Suppresses Resource Potential The canton of Neuchtel has a resource potential of CHF 28'000 per head for 2013. The resource potential forms the basis of the inter-cantonal financial equalization system and reflects the level of a canton's tax base per head compared to the Swiss average. Economic efficiency is slightly below average for Switzerland, which means the canton is categorized as low in terms of resource potential and thus qualifies for equalization payments. The growth of the canton's tax base per head has been below average over the last five years. The high tax burden reduces the canton's attractiveness as a place to live and do business. A gradual reduction of the tax on earnings rate to 5% by the year 2016 is designed to make the canton a more attractive business location.

SZ OW ZG BS SH AI AR TG TI VD SO NW LU CH GR VS AG FR GE UR SG NE BE BL GL ZH JU

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Credit Suisse Global Research

Canton of Neuchtel: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 171.1 0.7% 0.9% 0.8% 2009 171.8 0.4% 0.7% 0.2% Canton of Neuchtel 2010 2011 2012 172.1 173.1 173.9* 0.1% 0.6% 0.4%* 0.7% 1.0% 0.5% 0.5% 2013 174.5* 0.4%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

88.6 0.7% 1.19% 7.1% 3.9% 0.98

88.9 0.4% 1.05% 3.2% 0.5% 1.05

89.3 0.4% 1.26% 2.2% -2.1% 1.05

89.8 0.5% 1.19% 6.9% 8.9% 1.11

90.2* 0.5%* 1.18% 2.5% 3.0% 1.14

90.8* 0.6%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Low Growth in Housing Stock offside the Lake The growth of exports and the creation of jobs in the watch industry create good underlying conditions for the real estate market. However, there is a significant lack of momentum. The housing stock has grown at only half the average national rate in recent years, and planning for new apartments (particularly in Val-de-Travers) remained conservative in 2012. While the real estate market in La Chaux-de-Fonds demonstrates slightly stronger growth, it is prevented from reaping the full benefit of increased employment by the fact that many of the new jobs are held by cross-border commuters. This has an impact on the local rental sector. New projects continue to focus on the Neuchtel region in the vicinity of the transport infrastructure, the city and the lake.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2004 2005 2006 2007 2008 2009 Total 2010 2011 2012 Approved units Val-de-Travers La Chaux-de-Fonds Neuchtel 800 700 600 500 400 300 200 100

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Ownership Increasingly Popular The price/rent ratio for the Neuchtel region was balanced in 2012 thanks to the relatively modest prices in the area. This balance is also reflected in the equal weighting of types of housing in planning. The planning for 2009 and 2010 focused on rental apartments and single-family dwellings. Since 2011, however, more condominiums are being planned in response to their growing popularity for reasons of affordability and attractive hillside locations. Both real estate prices and rents are low in Val-de-Travers and the La Chaux-de-Fonds region. There is a lack of demand on the rental market in La Chauxde-Fonds in particular, which results in high vacancy rates in the rental sector.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 2007 Price/Rent Ratio Switzerland 2007
25

Neuchtel

20

15

Val-de-Travers
10

La Chaux-de-Fonds

10

15

20

25

30

Source: West & Partner, Credit Suisse Economic Research

Problems on the Rental Market in La-Chaux-de-Fonds The remoteness of Val-de-Travers, one of the smallest regional real estate markets, has given it the lowest rents in the whole of Switzerland. Even in the more developed city of La-Chaux-de-Fonds, rents are very low. With low interest rates, affordable house prices and the relatively old housing stock in the region, the incentives to move into a rented apartment in La-Chaux-de-Fonds are limited. Correspondingly the rental market has structural problems.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities La Chaux-de-Fonds Neuchtel Val-de-Travers Le Locle Peseux Switzerland SFD Condo Rent Moderate Upscale Moderate Upscale Moderate Upscale 5'677 6'427 4'435 4'694 6'960 7'897 8'942 6'174 6'535 9'684 4'482 6'255 4'218 3'355 6'227 6'741 9'422 6'348 5'044 9'378 163 220 155 145 198 232 164 225 157 147 199 237

7'992 11'119

7'325 11'027

Source: West & Partner

Swiss Issues Real Estate Real Estate Market 2013

93

Credit Suisse Global Research

Canton of Nidwalden: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

NW Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 ++ ++ = = = +

OW ++ ++ = +

UR ++ ++

SZ ++ ++ = = +

Lowest Corporate Tax Rates Nidwalden ranks fourth among Swiss cantons in terms of locational quality. The tax burden is well below average, while the scores for the level of education and accessibility to transportation are average. In Central Switzerland, Nidwalden is the second most attractive canton after Zug and just ahead of Schwyz.

Age Cohort Growth 2006-2011


Growth in five-year cohorts from 2006, in percent
20% 15% 10% 5% 0% -5% -10%
NW CH

00-04

05-09

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Distribution of Net Assets


Assessed net assets: assets minus liabilities before social security deductions, 2009
10% 8%
VD

60-64

Young People Leaving for Neighboring Cantons The population of the canton of Nidwalden grew by around 1'200 between 2006 and 2011, which was below average for Switzerland in percentage terms. The high level of immigration from abroad since 2007 contributed significantly to this growth. Throughout this period, Nidwalden experienced net inter-cantonal out-migration. Most outmigrants left for the neighboring cantons of Lucerne and Obwalden. While international migration was distributed evenly across all age groups, inter-cantonal out-migration primarily involved the 15-39 age groups. This can be explained by the lack of suitable training and study places in the canton as well as the lack of availability of suitable jobs.

ZH BE

6% 4% 2%
OW AI

AG SZ ZG NW AR GE SG TI VS

BS TG SO

GR LU BL FR

0%

SH GL NE UR JU 0% 2%

Highest Concentration of Wealth in Switzerland The canton's 26'000 taxpayers make up 0.5% of all taxpayers in Switzerland but account for 1.6% of the net assets. Nidwalden's population thus has an above-average share of Switzerland's private wealth. The canton has the third-lowest tax burden for private individuals, with both income tax and wealth tax rates among the most attractive in Switzerland. Assets are subject to a flat-rate tax, which makes Nidwalden particularly attractive to high net-worth individuals. This explains the above-average concentration of wealth in the canton. Only in the cantons of Schwyz and Zug do taxpayers have a similarly high concentration of wealth.

Percentage of net assets

4% 6% Percentage of taxpayers

8%

10%

Source: Swiss Federal Tax Administration

Corporate Tax Burden


Synthetic indicator 2012, CH = 100
140 120 100 80 60 40 20 0
Tax index CH

Source: Braingroup, Credit Suisse Economic Research

License Box as Alternative Tax Regime The canton of Nidwalden again has a lower corporate tax burden than any other canton in 2012, followed by the cantons of Appenzell Ausserrhoden and Lucerne. Not only does Nidwalden have impressively low rates of tax on earnings and tax on capital; it is also innovative in developing new forms of taxation. For example, the canton introduced what is known as the license box in 2011, which has the effect that companies are subject to a lower tax rate on license income. The main beneficiaries of this innovation are companies that issue international licenses to affiliated companies as well as research-intensive companies, which can now sell intellectual property rights and patents to foreign subsidiaries tax-efficiently. Similar systems are in force in Belgium and the Netherlands and recognized by the EU.

NW AR LU OW SZ AI ZG UR GL TG SH SG AG GR BL SO VS FR NE TI ZH BE JU BS VD GE

Swiss Issues Real Estate Real Estate Market 2013

94

Credit Suisse Global Research

Canton of Nidwalden: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 40.8 1.1% 0.7% 1.1% 2009 40.9 0.1% 0.4% 0.9% Canton of Nidwalden 2010 2011 2012 41.0 41.3 41.6* 0.3% 0.7% 0.8%* 0.7% 0.6% 0.8% 0.3% 2013 42.0* 0.8%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

19.7 0.9% 1.05% 0.5% 10.5% 0.91

19.9 1.0% 0.84% -4.1% -1.9% 0.88

20.0 1.0% 0.90% 8.5% -0.5% 0.89

20.2 0.9% 0.99% 12.4% 6.9% 0.97

20.5* 1.3%* 1.57% 6.0% 10.2% 1.05

20.7* 1.2%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Applications Remain High The relatively small size of Nidwalden's real estate market results in the uneven expansion of the housing stock. Individual large-scale projects such as the approval of 130 staff apartments on the Brgenstock have a correspondingly significant positive effect, resulting in an increase in the amount of residential space planned in 2011 in combination with other projects. In 2012 the planning of new construction in the form of building permits was scaled back slightly, but the number of applications remained elevated which is why more projects are likely to be tackled again in 2013. 2012 mainly saw the approval of small-scale multi-family dwelling projects throughout the canton, as well as around 50 singlefamily dwellings that are popular with wealthy immigrants.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
3.0% 2.5% 300 2.0% 1.5% 1.0% 100 0.5% 0.0% 2004 Sarneraatal 2005 Uri 2006 2007 2008 Total 2009 2010 2011 2012 Approved units Innerschwyz Nidwalden/Engelberg 0 200 400

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Peripheral Location Hinders Price Growth The price/rent ratio in Nidwalden is higher than the national average. This is due to higher prices in lakeside locations (Hergiswil in particular) combined with the effect of tourism on account of the fact that Engelberg in the canton of Obwalden belongs to the economic region of Nidwalden. The increase in the price of condominiums over the last five years has generally not been quite as dramatic as elsewhere, and is even slightly below the Swiss average. The peripheral location of the canton south of Lake Lucerne slows down price growth and protects Nidwalden against a situation like that in the canton of Zug, where the sustainability of growth is increasingly in doubt.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Nidwalden/Engelberg
20

2007 Price/Rent Ratio Switzerland 2007


25

Innerschwyz

15

Uri

10

Sarneraatal
0

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Substantial Price Differences between Municipalities The desire for a single-family dwelling near the lake is reflected in substantially higher prices relative to condominiums in some cases, particularly in Stansstad and Hergiswil. However, prices fall steeply in the direction of Stans and Buochs the further you get from Lucerne. Ennetbrgen, on the other hand, offers attractive hillside locations and prices are correspondingly higher than in Buochs as a result. On the whole, prices are still at sustainable levels relative to the average household income.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Stans Hergiswil Buochs Stansstad Ennetbrgen Switzerland SFD Condo Rent Moderate Upscale Moderate Upscale Moderate Upscale 8'000 11'135 14'710 20'471 7'790 10'839 13'516 18'806 9'847 13'703 7'992 11'119 6'673 10'052 9'627 14'496 6'800 10'230 9'136 13'756 8'709 13'104 7'325 11'027 221 242 224 257 245 232 223 244 225 257 246 237

Source: West & Partner

Swiss Issues Real Estate Real Estate Market 2013

95

Credit Suisse Global Research

Canton of Obwalden: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

OW Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 ++ ++ = +

NW ++ ++ = = = +

LU + ++ = = = =

UR ++ ++

Low Taxes Improve Attractiveness In comparison to other cantons, Obwalden is slightly above average in terms of locational quality. While Nidwalden is well placed in the upper mid-range of the rankings, Lucerne is only slightly above average and Uri clearly below average. Fiscal competition over recent years has turned Central Switzerland into a comparably homogeneous taxation zone, at least at the cantonal level. Growth between the Lakes The canton's population grew by over 9% between 2001 and 2011. This is an average rate of growth for a Swiss canton over the period. The strongest growth was recorded in the municipalities of Alpnach and Sachseln, which are both attractive places to live due to their lakeside locations. There are further centers of growth on the northern shore of Lake Sarnen and in Engelberg. The growth of housing stock reflects these developments at the square kilometer level. The increase in population is attributable to international migration, involving over 2'000 people during this period. In contrast, the canton recorded net inter-cantonal outmigration; most recently to the canton of Lucerne, in particular.

Growth of Housing Stock 2001-2010


Per km2

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Opportunity/Risk Profile of Sector Structure


15 largest sectors in 2013, circle size = share of jobs
high
Wholesale trade Healthcare Homes Food processing Electrotechnical equipment

Opportunity-risk profile

Finishing trade Machinery Education Retail trade Public Restaurant administration industry -4% Building construction Land transport Hotel industry Agriculture 8% 10%
Agriculture and forestry Construction and industry Services Public sector

-6%

-2% 0% 2% 4% 6% Employment: deviation from the Swiss average

Heterogeneous Sector Landscape Obwalden has a balanced sector profile. The most important sector is finishing and engineering in construction, a sector which has an average opportunity-risk profile and accounts for over 8% of the workforce in the canton. The next most important sector is agriculture, which has an unfavorable opportunity-risk profile. Another important sector with an unfavorable profile is the hotel industry. On the other hand, the electrical engineering industry has an extremely favorable opportunity-risk profile and also accounts for almost 7% of the jobs in the canton. The canton also has good potential for growth in the future in food processing and the wholesale trade. The absence of high value-added service sectors dampens the canton's future prospects to a certain extent.

Source: Credit Suisse Economic Research

Growth of Resource Potential per Head 2008-2013


Based on the aggregate tax base, in %
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

low

Source: Federal Department of Finance

Low Taxes Encourages Growth of Resource Potential The canton of Obwalden has a resource potential of around CHF 25'000 per head for 2013. This puts the canton's economic efficiency below the average Swiss level of CHF 30'000. The canton of Obwalden is thus categorized as low in terms of resource potential and, as such, receives equalization payments from the cantons with a high resource potential. Since this resource potential was first calculated in 2008, Obwalden has been the canton with the secondhighest growth rate. The low-tax strategy for both companies and individuals has led to an increase in in-migration of high net-worth individuals and highly productive companies. This has resulted in an increase in taxable income, wealth and corporate earnings in the canton and thus a sharp increase in resource potential.

SZ OW ZG BS SH AI AR TG TI VD SO NW LU CH GR VS AG FR GE UR SG NE BE BL GL ZH JU

Swiss Issues Real Estate Real Estate Market 2013

96

Credit Suisse Global Research

Canton of Obwalden: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 34.5 1.3% 0.8% 2.1% 2009 35.1 1.7% 1.0% 1.6% Canton of Obwalden 2010 2011 35.6 35.9 1.3% 0.8% 0.8% 0.7% 1.2% 0.7% 2012 36.3* 1.2%* 2013 36.8* 1.2%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

19.0 2.0% 0.87% 1.2% 7.5% 0.88

19.3 1.7% 0.70% -5.5% -1.2% 0.85

19.5 1.3% 0.76% 6.4% 2.0% 0.86

19.6 0.6% 0.84% 13.6% 8.4% 0.95

19.9* 1.5%* 0.69% 3.9% 9.9% 1.01

20.2* 1.3%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

No Last-Minute Applications in Engelberg With the number of apartments approved for construction amounting to 2.3% of total housing stock, planning activity for new housing was very high in 2011 in particular. Housing stock is therefore likely to have grown significantly in 2012. This planning boost will also put a number of apartments on the market in 2013. Apart from a few major projects in Alpnach and Sachseln, planning is very evenly distributed within the canton. Obwalden was spared the massive increase in planning applications for second homes resulting from the launch of the second homes initiative in March 2012. No last minute planning applications for second homes were submitted in Engelberg either, where the new Titlis Resort with 135 apartments is being built.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 2006 Berner Oberland-Ost Nidwalden/Engelberg 2007 2008 Sarneraatal Entlebuch 2009 2010 2011 2012 Total Approved units 420 350 280 210 140 70 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Moderate Growth in Prices Despite Low Taxes The canton has a balanced price/rent ratio. Ownership prices have not risen as rapidly as in the neighboring canton or in comparison to the national average due to the canton's distance from major urban centers and its relatively recent implementation of a low-tax strategy compared with Nidwalden. The fact that Obwalden has nevertheless also become a popular destination for wealthy immigrants is reflected in the range of building costs for single-family dwellings, which has widened considerably since 2006 and shows that much more is being invested in new houses on average than was the case prior to 2006. Rents relative to prices are high for condominiums, particularly in Sarnen and Kerns. Homogeneous Price Structure Prices in the canton are not as varied as in the neighboring canton of Nidwalden. Still, prices drop noticeably the further you get from Lucerne as you follow the line from Alpnach via Sarnen toward Sachseln. Straying off this line can increase travel time in some cases dramatically, further reducing the price per square meter for condominiums in the immediate vicinity. Engelberg is the only large municipality where the prices of condominiums are above average on account of its attraction to tourists.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Nidwalden/Engelberg
20

2007 Price/Rent Ratio Switzerland 2007


25

Berner Oberland-Ost

15

Sarneraatal

10

Entlebuch
0

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Sarnen Kerns Alpnach Sachseln Engelberg Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 9'548 13'290 8'855 12'316 8'444 11'748 8'540 11'884 8'935 12'439 7'992 11'119 6'882 10'356 5'691 6'500 8'570 9'778 7'036 10'593 7'718 11'615 7'325 11'027 225 206 199 210 233 232 227 207 190 212 235 237

Source: West & Partner

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97

Credit Suisse Global Research

Canton of Schaffhausen: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

SH Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = ++ = = = +

ZH ++ + + ++ ++

TG + ++ = = + +

AG + ++ = = ++ +

On the Edge of the Zurich Conurbation Schaffhausen ranks ninth in terms of locational quality, just behind the canton of Thurgau. While the corporate tax burden is favorable, the scores for education and accessibility to transportation are average. The neighboring cantons of Aargau and Zurich come in some way ahead thanks to their high accessibility scores.

Age Cohort Growth 2006-2011


Growth in 5-year cohorts from 2006, in percent
20% 15% 10% 5% 0% -5% -10%
SH CH

00-04

05-09

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Catchment Areas of Supermarkets Close to the Border


Driving time to the nearest (food) supermarket close to the border

60-64

Trend Reversal in Internal Migration The population of the canton of Schaffhausen grew by 4.4% between 2006 and 2011, which was below the average growth rate for Switzerland. The canton experienced many years of net inter-cantonal out-migration; but in the last two years more people have come to Schaffhausen from other cantons than have left. The highest level of in-migration is from Zurich and Valais, while there is still a high level of outmigration to Berne, Thurgau, Basel City and Lucerne. International immigration has also increased appreciably in Schaffhausen since 2007. The under-10 and over-35 age cohorts have grown particularly sharply. The canton can thus claim to be attractive to families.

Less than 30 Minutes from a German Supermarket The canton of Schaffhausen, large parts of which lie north of the Rhine, is almost entirely surrounded by Germany. Consequently, the nearest shopping center is often on the other side of the border. It is possible to drive to the closest supermarket over the border in less than 30 minutes' driving time from every municipality in the canton. In numerous municipalities close to the border, it takes less than 15 minutes. There are a significant number of German supermarkets and thus a variety of shopping options in Gottmadingen and Singen. People living in the western part of the canton can get to these supermarkets quickly. Shopping tourism has increased sharply since the dramatic appreciation in the value of the Swiss franc.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Growth of Resource Potential per Head 2008-2013


Based on the aggregate tax base, in %
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: Federal Department of Finance

Above-Average Resource Potential for the First Time The canton of Schaffhausen has a resource potential of CHF 31'000 per head for 2013, which is just above average for Switzerland. For the first time since the introduction of the new system of fiscal equalization (NFA), the canton is thus considered to be high in terms of resource potential and has to make equalization payments to the cantons with belowaverage resource potential. The canton's economic efficiency has thus increased by over 20% since 2008, which is the fifth-highest rate of growth in Switzerland. Between 2012 and 2013, the canton of Schaffhausen recorded the secondbiggest increase of any canton. This relative improvement can be attributed to the profits of the companies based in the canton from 2007 to 2009, which were little affected by the financial crisis.

SZ OW ZG BS SH AI AR TG TI VD SO NW LU CH GR VS AG FR GE UR SG NE BE BL GL ZH JU

Swiss Issues Real Estate Real Estate Market 2013

98

Credit Suisse Global Research

Canton of Schaffhausen: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 75.3 1.0% 1.3% 1.4% 2009 75.7 0.5% 0.9% 0.5% Canton of Schaffhausen 2010 2011 2012 76.4 77.1 77.6* 0.9% 1.0% 0.6%* 1.0% 0.9% 1.0% 0.9% 2013 78.0* 0.5%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

37.9 1.0% 1.46% 4.3% 2.0% 0.78

38.1 0.6% 1.02% 5.3% -3.5% 0.82

38.5 0.9% 1.08% 7.0% -3.9% 0.84

38.9 1.0% 1.04% 3.8% 10.8% 0.87

39.4* 1.4%* 1.07% -3.1% 1.7% 0.85

39.9* 1.3%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Increased Demand for New Residential Space The reversal in the trend for inter-cantonal migration in 2010 triggered a sudden increase in the planning of residential construction projects. This, combined with Schaffhausen's aging housing stock, resulted in increased demand for new rental apartments and condominiums. Consistently high levels of planning activity in 2011 and 2012 are expected to cause the housing stock to grow by around 1.3% in 2013. At the same time, a shift in types of housing is taking place with more of a focus on multi-family dwellings and large-scale developments instead of single-family dwellings, allowing an increase in density. The highest level of increase in density was achieved in Neuhausen am Rheinfall, with 15 apartments in multi-family dwellings approved for every approved singlefamily dwelling during the last five years. Prices Have Recovered Slightly Schaffhausen's price/rent ratio is roughly average for Switzerland and still seems balanced despite the fact that it has risen dramatically since 2007. This is because prices of condominiums started to catch up somewhat in 2007 after previously stagnating for two years, whereas rents have not yet completed the process of adjustment to the same extent. The turnaround in population growth, the canton's attraction to families and its growing economy should provide further boosts to prices and rents. The canton's real estate market is at very little risk of demand-driven overheating. On the contrary, care must be taken to ensure that large-scale development does not lead to excess supply.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 Weinland 720 600 480 360 240 120 0 2005 2006 2007 2008 2009 2010 2011 2012 Schaffhausen Total Untersee/Rhein Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 2007 Price/Rent Ratio Switzerland 2007
25

Untersee/Rhein

20

15

Schaffhausen
10

Weinland

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Cantonal Price Differences Represent an Opportunity Schaffhausen is one of the more affordable cantons in terms of real estate. The estimated cost of a medium-standard condominium in Neuhausen am Rheinfall is CHF 4'900 per square meter, which is 33% below the national average and above all well below the price level of the neighboring canton of Zurich to the south. As in the neighboring canton of Thurgau, growing price discrepancies between the cantons create opportunities to continue to benefit from positive net internal immigration.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Schaffhausen Neuhausen a. Rhf. Thayngen Beringen Stein am Rhein Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 6'766 5'685 5'581 6'008 5'790 9'419 7'910 7'768 8'361 8'052 5'682 4'900 4'973 5'355 5'791 8'548 7'378 7'489 8'059 8'719 184 189 178 189 185 232 184 202 180 191 187 237

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Schwyz: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

SZ Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 ++ ++ = = +

ZG ++ ++ + ++ ++ ++

ZH ++ + + ++ ++

LU + ++ = = = =

Strong Competition from Neighbors The canton of Schwyz ranks seventh in terms of locational quality. Its key advantage is the comparatively low tax burden. On the other hand, Schwyz puts in a poor showing in terms of the level of education of its population. The neighboring cantons of Zug and Zurich are clearly superior in terms of education and accessibility.

Dependency Ratio 2011


Ratio of people of working age to people of retirement age
35% 30% 25% 20% 15% 10% 5% 0%
FR ZG SZ TG AG OW VD ZH GE LU NW SG CH VS AI GL SO GR AR NE UR BE JU SH BS BL TI

Schwyz: One of the "Youngest" Cantons Schwyz, one of Switzerland's founding cantons, has a comparatively young population. There are four people of working age for every person of retirement age. The average ratio for Switzerland is less favorable. The municipalities of Schwyz are attractive places to live for the working population and families. The analysis of the age structure is central to the financing of the federal pension systems. Cantons and municipalities have a different focus: Cantons with an aging population have low growth in terms of their income and thus their tax base. Infrastructure requirements are also different: An aging population needs health-care and nursing facilities, while a young population wants schools, good transportation links for commuting and day nurseries.

Source: Swiss Federal Statistical Office

Distribution of Wealth in Schwyz


Taxable assets in 2009
SZ Number of millionaires ( 1 - 100 !
( 100 - 200 !

Freienbach Zug Kssnacht

Lachen

Tuggen
( ! ( !
( !

( ! ! (! (
( !

( ! ( !
( !

( !

( 200 - 600 !

! (

600 - 1'000

( !

Luzern per taxpayer


< 150'000 150'000 - 250'000 250'000 - 500'000 500'000 - 750'000 750'000 - 1'000'000 1'000'000 - 2'000'000 e n > 2'000'000

( > 1'000 !

( ! ( ! ( ! ( ! ( !

! (
Weggis

( !
( ! ( !

( !

Unteriberg ( !
( ! ( ! ( !

( !

Schwyz
( !

( !

Muotathal

Source: Tax Administration (Canton of Schwyz), Credit Suisse Economic Research

Ausserschwyz Region a Wealth Magnet Schwyz is a canton of extremes. This can be seen from the distribution of wealth among the canton's regions: The three municipalities of the Hfe district account for around twothirds of the taxable private wealth in the canton. Freienbach alone is responsible for 27% of the canton's total, and in Wollerau one in four taxpayers has taxable assets worth over a million Swiss francs. The less affluent half of Schwyz's 30 municipalities account for around 4% of the canton's taxable private assets. The magnetic appeal of Schwyz for high networth individuals is thus actually exerted only by a few places in the canton: the district of Hfe and the municipalities around Lake Lucerne, where the scenery is spectacular. The mountainous and generally peripheral parts of the canton are affected by this at most only indirectly. High Start-Up Rate throughout the Canton The sector structure is subject to constant change. Start-up activity plays a central role in this because start-ups help to freshen up the economy. The canton of Schwyz has become established as a popular location for start-ups, and all of its regions have an above-average start-up rate. The March and Hfe districts lead the way in this respect on an equal footing with the canton of Zug, which has the highest rate of any canton. The inner part of the canton benefits from the shortage of space in the canton of Zug and the direct motorway link. In addition to smaller start-ups, a number of larger companies have recently moved to the region. Thanks to the strategic change of use of land by the highway between Kssnacht and Brunnen, the inner part of the canton is also ideally equipped to welcome additional larger companies.

Company Start-Ups 2001-2010


Share of newly established companies relative to number of existing companies
8% 7% 6% 5% 4% 3% 2% 1% 0%

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

ZG March/Hfe GE SZ OW Einsiedeln TI ZH VD NW Innerschwyz BS BL FR CH AI SH TG SG AR AG NE LU VS SO JU GL BE GR UR

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Canton of Schwyz: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 144.2 1.9% 1.0% 2.0% 2009 145.1 0.7% 0.6% 1.3% Canton of Schwyz 2010 2011 146.7 147.9 1.1% 0.8% 0.6% 0.5% 1.5% 1.3% 2012 149.4* 1.0%* 2013 150.9* 1.0%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

67.6 2.1% 0.68% 6.8% -0.1% 0.78

68.6 1.5% 0.76% 3.9% 2.4% 0.82

69.6 1.3% 0.92% 8.6% 7.3% 0.85

70.5 1.4% 0.70% 7.9% 7.9% 0.90

71.8* 1.7%* 0.79% 4.5% 12.4% 0.93

72.9* 1.6%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Dynamic Construction Activity in the District of March Housing planning has been quite fast-paced at times in the past. A total of 1'600 apartments and houses were approved in 2010, and 2011 was also a strong year. The housing stock should therefore experience further strong growth in 2013 despite a fall in the number of permits issued in 2012. Housing planning in the March/Hfe region in particular has been high relative to the volume of housing stock for two years running. But while the canton's attraction for wealthy individuals is highly centered around the three municipalities in the district of Hfe, construction activity is focused on the district of March. In 2011, 80% of all apartments approved for construction in the entire economic region were registered in March, and 30% of those were in the rapidly growing municipality of Lachen. Unequal Distribution of Wealth and Prices The canton's extremes, such as the uneven geographical distribution of wealth, are reflected in the price landscape. The March/Hfe economic region already has an excessively high price/rent ratio on account of a sharp rise in prices, particularly in the municipalities of the Hfe district. Municipalities in the economic regions of Innerschwyz and Einsiedeln that are less developed in terms of accessibility by transport have seen less dramatic price increases. In the Einsiedeln region in particular, the ratio between prices and income remained just below the average for Switzerland in 2012. The price of condominiums in the region rose 4.6% p.a. over the last five years, compared with 6.6% in March/Hfe. Scarcity Raises Prices for Single-Family Dwellings The heterogeneity of prices in the canton of Schwyz can be observed between different municipalities, and also between different types of housing. Single-family dwellings are in demand, but only few are being built compared with condominiums. Just under 20 single-family dwellings were approved in Freienbach in 2012, compared with 80 apartments in multifamily dwellings. Prices for single-family dwellings are high as a result. The price of single-family dwellings per square meter in Einsiedeln is 58% higher than for condominiums, and the same is true in the more pricey municipality of Freienbach.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 2006 Total 2007 2008 2009 2010 2011 2012 Innerschwyz Einsiedeln March/Hfe 1'600 1'400 1'200 1'000 800 600 400 200 0 Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 2007 Price/Rent Ratio Switzerland 2007
25

March/Hfe

20

15

Innerschwyz
10

Einsiedeln

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Freienbach Einsiedeln Schwyz Kssnacht Arth Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 15'161 21'097 10'476 14'574 8'629 12'006 12'774 17'781 9'419 13'103 7'992 11'119 9'736 14'652 6'627 6'355 6'409 9'970 9'570 9'644 265 221 219 249 217 232 267 223 221 252 251 237

8'618 12'963 7'325 11'027

Source: West & Partner

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Canton of Solothurn: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

SO Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = = = = + =

BL = + + + +

BE = = = =

AG + ++ = = ++ +

Mittelland Canton at the Intersection of National Transportation Arteries The canton of Solothurn ranks 14th in terms of locational quality and benefits from above-average accessibility. The tax burden for natural persons is more attractive in Solothurn than in the neighboring cantons of Basel Land and Berne but less attractive than in Aargau.

Accessibility to Transportation
Index of motorized individual transportation and public transportation, CH = 0

SO > 2.5 1.6 - 2.5 1.1 - 1.5 0.9 - 1.0 0.6 - 0.8 0.4 - 0.5 0.1 - 0.3 -0.2 - 0.0 -0.4 - -0.3 -0.7 - -0.5 -0.9 - -0.8 -1.2 - -1.0 < -1.5

Base l Li esta l Aar au Del mo nt

So lot hurn

Big Difference in Accessibility between East and West The geography of the canton of Solothurn is very diverse, particularly in the northern part. Consequently, the canton's municipalities vary greatly in terms of accessibility. The municipalities in the northwestern part of the canton are the least accessible, particularly the northern exclaves of the Dorneck district and Thierstein. Toward the west, accessibility improves with increasing proximity to the main transportation arteries and the cantonal capitals of Basel and Liestal. The municipalities in the Olten region have the highest accessibility scores, while the municipalities by the Passwang ridge and Grenchen are merely average in terms of accessibility.

Source: Credit Suisse Economic Research

Regional Household Income 2009


Nominal household income per head 2009, in CHF

Base l Li esta l Aar au Del mo nt

SO < 35'000 35'000 - 40'000 40'000 - 45'000 45'000 - 50'000 50'000 - 55'000 > 55'000

So lot hurn

Source: Credit Suisse Economic Research

Highest Income in the Basel Area The highly heterogeneous nature of the canton is also reflected in differences of income between its regions. The municipalities in the northern exclave of Dorneck have the highest household income (CHF 55'000), while the municipalities of the Thal district have the lowest. Household income in the southern part of the canton and in the Thierstein district is in line with the Swiss average. The opposite picture is obtained when looking at freely disposable income in the different municipalities rather than household income. The municipalities in Basel's catchment area are financially less attractive places to live than those in the southern part of the canton. The most affordable places to live are the municipalities in the mountainous areas of the districts of Thierstein and Dorneck. Regional Divide in Terms of Growth Potential Solothurn is a middle-ranking canton with good prospects in the medium and long term. In the long term, the canton's above-average accessibility will stand it in good stead. In the medium term, it stands to benefit from its favorable industry profile. The prospects of the Grenchen region are particularly good thanks to its watch industry. The future looks less promising for the Thal region both in the medium and long term. The low level of education and shortage of highly skilled labor weaken the prospects for growth, as does the considerable importance of agriculture. The overall picture with regard to growth potential varies greatly from region to region.

Growth Potential for Value Creation


Synthetic indicators 2012, CH = 0
3.0 III 2.0 Oberes Baselbiet Grenchen 1.0 FR 0.0 Jura bernois -1.0 -2.0 IV -2.0 Oberaargau Thal BE SO Solothurn Burgdorf Laufental Swiss average 0.0 Locational Quality 1.0 2.0 II 3.0 Aarau Olten/Gsgen/Gu BL Basel-Stadt Fricktal Bern AG Lorzenebene/ Ennetsee Unteres Baselbiet I

Opportunity-risk profile

Biel/Seeland

-1.0

Source: Credit Suisse Economic Research

Swiss average

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Canton of Solothurn: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 252 0.6% 0.8% 1.1% 2009 253 0.4% 0.7% 0.4% Canton of Solothurn 2010 2011 255 257 0.8% 0.6% 0.6% 0.5% 0.9% 1.1% 2012 258* 0.6%* 2013 260* 0.5%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

122 1.0% 1.80% 5.0% 2.4% 0.77

123 0.7% 1.65% -0.5% -1.0% 0.79

124 1.0% 1.95% 6.8% 0.9% 0.80

126 1.0% 2.09% 3.4% 6.0% 0.81

127* 1.0%* 1.98% 5.6% 3.2% 0.85

128* 1.1%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Single-Family Dwellings in Retreat Thanks to their good transport connections, the towns and villages along the main routes between Grenchen and Olten are attractive places to live not just for employees of the local businesses but also for those commuting between the east and west. While the level of construction activity has remained constant, its structure has changed significantly since 2003. The total number of apartments in multi-family dwellings approved each year has risen steadily from 370 units in 2003 to 960. The number of approved single-family dwellings has fallen during the same period. The many projects involving multi-family dwellings currently in planning include roughly equal numbers of rental apartments and condominiums. Only in the region of Thal, where expansion is expected to be unusually extensive, are condominiums in the majority. Relatively Low Price/Rent Ratio With annual growth of 3.5%, prices in the canton underwent very modest growth between 2007 and 2012. Since prices did not grow much faster than rents in many places, the price/rent ratio is universally low. Only in the Laufental region (which also includes communities from the canton of Basel Land) where developments are strongly influenced by the higher prices of the neighboring canton of Basel Land, the price/rent ratio is coming close to the national average. The discrepancies are substantial in the region of Solothurn: While rents are high in comparison to prices for ownership in the city itself, and the vacancy rate is low at 0.4%, vacancies for the region as a whole have been high at 1.5% to 2.0% since 2004. Overvaluation Not an Issue The regions of Thal and Solothurn are among the ten most affordable economic regions in Switzerland with respect to house prices. However, lower prices are also appropriate in light of the fact that income is below average for Switzerland. Overvaluation is thus not an issue, and the dream of a singlefamily dwelling is still realistic in many places. In Olten, for example, a single-family dwelling costs 18% more per square meter than a condominium and 24% less than the national average for medium-standard single-family dwellings.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
2.0% 1'600 1'400 1.5% 1'200 1'000 1.0% 800 600 0.5% 400 200 0.0% 2004 2005 Laufental Total Approved units 2006 2007 2008 Solothurn Thal 2009 2010 0 2011 2012 Grenchen Olten/Gsgen/Gu

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Laufental
20

2007 Price/Rent Ratio Switzerland 2007


25

Grenchen
15

Thal
10

Olten/Gsgen/Gu
5

Solothurn
0

10

15

20

25

30

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Olten Solothurn Grenchen Zuchwil Biberist Switzerland SFD Condo Rent Moderate Upscale Moderate Upscale Moderate Upscale 6'105 6'427 5'411 6'435 5'815 8'490 8'935 7'529 8'955 8'097 5'182 4'973 4'736 4'591 4'518 7'800 7'481 7'133 6'911 6'800 195 205 170 195 183 232 190 204 171 193 184 237

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of St. Gallen: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

SG Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 + ++ = = = =

ZH ++ + + ++ ++

GR + + = =

TG + ++ = = + +

Typical Eastern Switzerland Profile The canton of St. Gallen ranks 15th in terms of locational quality. Like most cantons in Eastern Switzerland, the tax burden is relatively low, while the education level is around average for Switzerland. St. Gallen is also about average in terms of accessibility to transportation.

Distribution of Employees among Companies


Herfindahl index 2008; higher values = higher concentration
0.018 0.016
FR NW BS UR UR

0.014
AR GE OW

0.012
SG ZH SZ AG GR LU TG ZG BL VS TI SO BE NE VD SH GL AI JU

0.010 0.008 0.006 0.004 0.002 0

Broad-Based Business Structure The figure on the left illustrates the dependency of the cantons on individual companies. Dependency is measured using the Herfindahl index. High values mean a high concentration of employees in a few companies and vice versa. Uri is the canton with the highest concentration in Switzerland and St. Gallen the lowest. This is reflected in the large number of companies in the canton, where more than 210'000 people work. The canton has a large number of small and medium-sized companies and is thus largely unreliant on individual large employers. This gives the canton's economy a certain amount of security, particularly at a time when production is being relocated abroad.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Exports by Destination Country


Left scale: exports in CHF mn; right scale: growth since 2004 in %
15'000 12'500 10'000 7'500 5'000 2'500 0 2004 2005 2006 2007 2008 2009 2010 2011 EU 15/EFTA BRIC EU east Total SG (right scale) America Asia Other Total CH (right scale) 60% 50% 40% 30% 20% 10% 0%

Little Diversification in Terms of Export Markets The canton of St. Gallen's exports in 2011 were worth CHF 10.7 bn, corresponding to 5.4% of the total for Switzerland. The most important trading partners are the EU-15/EFTA countries, which take almost 60% of St. Gallen's exports. Exports to the BRIC countries have grown most since 2004 and accounted for almost 10% of the canton's exports in 2011. The low level of diversification in terms of export markets was felt when exports slumped in 2009. The canton's exports fell by 18%, significantly more sharply than those of Switzerland as a whole. The canton's most important export sectors is mechanical engineering, followed by the electronics and watch industry and metal products.

Source: Swiss Federal Customs Administration, Credit Suisse Economic Research

Tax Burden
Synthetic indicators 2012, CH = 100
140 130 120
ZH TI SO GR AG UR ZG OW SZ NW AI GL TG SH SG LU AR GE BS VD BE FR VS BL JU NE

Legal persons

110 100 90 80 70 60 50 50 60

70

80

90 100 Natural persons

110

120

130

140

Diminishing Attractiveness in Terms of Taxation The tax burden is both a factor determining the attractiveness of a location as well as a source of income for the state. The taxation strategy of the canton of St. Gallen is slightly asymmetric: While the tax burden on natural persons is average, the burden on legal persons is below average. The canton is very similar to the canton of Schaffhausen in this respect. In the last four years, the canton has become less attractive in terms of taxation relative to other cantons. Natural persons are now taxed less in six additional cantons than in St. Gallen. Withholding tax now also represents an important source of revenue, accounting for around 10% of the canton's tax receipts from 2008 to 2010.

Source: Braingroup, Credit Suisse Economic Research

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Canton of St. Gallen: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 472 1.1% 1.2% 1.3% 2009 476 0.7% 0.7% 0.9% Canton of St. Gallen 2010 2011 479 483 0.6% 0.9% 0.6% 0.7% 1.1% 1.1% 2012 487* 0.8%* 2013 491* 0.7%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

228 1.3% 1.44% 3.9% 4.5% 0.85

231 1.0% 1.38% 1.1% -0.6% 0.87

233 1.1% 1.47% 6.3% 3.2% 0.89

236 1.2% 1.46% 6.4% 6.5% 0.93

239* 1.2%* 1.46% 4.5% 5.3% 0.97

242* 1.3%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Small, Spread Out but Growing Real Estate Markets Construction activity is high in the canton of St. Gallen, but not too high as evidenced by the fact that new units are being taken up well by the market. However, St. Gallen's real estate markets are small, focused on the widely distributed centers of the job market and strongly reliant on the performance of the companies based there. The housing markets in St. Galler Rheintal and the Werdenberg and Sarganserland regions are also influenced by the job market in the Principality of Liechtenstein: Of the 35'253 people employed in Liechtenstein in 2011, 9'442 were commuters living in Switzerland. The expansion of the housing stock in these regions is correspondingly high.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 2006 St.Gallen/Rorschach Total St. Galler Rheintal 2007 2008 2009 Toggenburg Sarganserland Werdenberg 2010 2011 2012 Wil Linthgebiet Approved units 3'500 3'000 2'500 2'000 1'500 1'000 500 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Imbalance in Linthgebiet The canton's price/rent ratios vary as widely as the real estate market. In the Linthgebiet region, the importance of property ownership in comparison to the rental market combined with rapidly rising prices in the part of the region oriented toward Zurich (Rapperswil-Jona) resulted in a high price/rent ratio in 2012. Purchasing a medium-standard condominium costs almost 35 times the annual rent for a comparable apartment. In the Werdenberg and St. Galler Rheintal region, on the other hand, not only have prices risen less sharply, but rents have also gone up due to increased demand and the corresponding construction of new rental apartments, resulting in a low ratio.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Linthgebiet St.Gallen/Rorschach Sarganserland
15 20

2007 Price/Rent Ratio Switzerland 2007


25

Wil
10

Toggenburg St. Galler Rheintal Werdenberg


0 5

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Prices Reflect the Popularity of Single-Family Dwellings In Switzerland, buyers had to pay an average of CHF 7'325 per square meter for a typical condominium in the third quarter of 2012. This average national price for condominiums is only exceeded in two of the canton's municipalities: Mrschwil near Lake Constance and Rapperswil-Jona at the upper Lake Zurich. On the other hand, the popularity of and high demand for single-family dwellings in the canton are reflected in relatively high prices. Prices for single-family dwellings are above average for Switzerland in St. Gallen's three largest municipalities.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities St. Gallen Rapperswil-Jona Wil Gossau Uzwil Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 8'226 11'445 9'935 13'826 8'008 11'142 6'685 6'339 9'297 8'813 6'355 9'563 197 225 210 197 182 232 199 214 228 199 187 237 8'473 12'748 6'818 10'267 5'736 4'764 8'637 7'170

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Thurgau: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

TG Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 + ++ = = + +

ZH ++ + + ++ ++

SG + ++ = = = =

SH = ++ = = = +

Attractively Positioned in the Region Thurgau comes in eighth in the cantonal ranking of locational quality, just ahead of neighboring Schaffhausen. Zurich ranks second, while St. Gallen comes in some way behind the Lake Constance canton. Thurgau has an attractive tax regime and above-average accessibility and is around average for Switzerland in terms of education.

Level of Densification
Selected municipalities; floor space, recreational and green spaces, m2 per head
250 200 150 100 50 0
Recreational areas and green spaces Building floor space Average total building floor space for municipalities studied

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Catchment Areas of Supermarkets Close to the Border


Driving time to the nearest (food) supermarket close to the border

Zrich Dietikon Schlieren Winterthur Opfikon Horgen Thalwil Kloten Adliswil Wallisellen Regensdorf Volketswil Dbendorf Uster Blach Wetzikon (ZH) Wdenswil Illnau-Effretikon Richterswil Pfffikon ... Arbon Kreuzlingen Frauenfeld Amriswil Weinfelden

Zurich's "Kulturland Initiative": Opportunities and Risks A popular initiative in the canton of Zurich that makes rezoning and development much more difficult presents neighboring cantons with a challenge. Thurgau has enough reserves of building land to last for decades according to our estimate. Thurgau can thus absorb some of the Zurich's unwanted demand particularly for single-family dwellings. This ought to bring the canton of Thurgau more to the upper mid-market segment's attention. To ensure growth of satisfactory quality, a suitable development strategy is required. Otherwise, there is a risk of unsustainable development and the loss of countryside, green spaces and recreational areas. In addition, planning is also made more complicated by discretionary cost blocks (e.g. schools).

Source: Credit Suisse Economic Research

Retail Outlets across the Border The catchment areas of retailers across the border extend deep into the canton of Thurgau. It is possible to reach a German supermarket from virtually all of the canton's municipalities within 30 minutes. In municipalities close to the border, everyday shopping can be done in Germany almost as quickly as in Switzerland. Since the appreciation of the Swiss franc, cross-border shopping has increased significantly. For 2012, we estimate the outflow of purchasing power from Switzerland as a whole at CHF 5 to 6 bn. Since the franc has not appreciated further since the SNB set the lower limit for the euro exchange rate, we expect the situation to stabilize at a high level. In addition to established retailers, shopping tourism also poses a threat, primarily to new projects such as the fashion outlet center planned in Wigoltingen. Service Sector Growing in Thurgau Thurgau's sector structure is typical for a canton without a large center: Retailing, construction and agriculture are the most important employers. The canton also has some industry: metal products, mechanical engineering and food processing. An analysis of start-ups allows conclusions to be drawn about the structure of the economy in the future. The majority of start-ups are companies in financial or corporate services or communications and IT. For the first half of the decade, the start-up rate was in line with the Swiss average, but it has weakened in recent years.

Company Start-Up Rate Thurgau


Share of newly established companies relative to number of existing companies
14% 12% 10% 8% 6% 4% 2% 0% 2001 2002 2003 2004 2005 Traditional industry Construction Trading and sales Information, communications, IT Corporate services Administrative and social services Total TG 2006 2007 2008 2009 2010 High-tech industry Energy supply Transportation, postal services Financial services Entertainment, hotels and catering Total CH

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

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Canton of Thurgau: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 242 1.5% 1.2% 1.6% 2009 245 1.2% 0.8% 1.4% Canton of Thurgau 2010 2011 248 252 1.2% 1.4% 0.8% 0.9% 1.5% 1.8% 2012 255* 1.1%* 2013 257* 1.0%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

113 1.5% 1.62% 1.4% 1.3% 0.80

114 1.3% 1.47% 2.1% 1.0% 0.82

116 1.6% 1.37% 5.7% 4.7% 0.83

118 1.8% 1.45% 5.0% 4.8% 0.86

120* 1.5%* 1.43% 5.1% 4.7% 0.90

122* 1.6%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Housing Stock Expanding Rapidly The large-scale planning of new residential units in the canton reached its peak in 2012, and should translate into strong growth in housing stock in 2013 and beyond. In the rapidly growing region of Untersee/Rhein in particular, housing stock will continue to grow by around 2% in 2013. The canton's population grew by an average of 3'155 people each between 2008 and 2011. Based on the assumption of 2.1 people per household, this represents 1'502 new households. An average of 1'827 units were added to the housing stock each year during the same period. Allowing for a little bit of leeway between these two figures, the market is therefore much more balanced than had been supposed at the start of the construction boom. Excess supply would only become a danger if the rapid population growth were to slow down. Intact Markets Act as Magnets The price/rent ratios for all three of Thurgau's economic regions are either in line with or slightly below the national average. Both the rental and the ownership markets are intact and have thus far escaped exorbitant price increases. The price/income comparison and appraisals of sustainability also give almost no cause to fear an overheated market in Thurgau. Regions within easy reach of Zurich should therefore become more of a focus for house hunters from the neighboring canton, relieving the pressure on its market with its scarce building land and localized overheating. An appropriate regional planning strategy is required to usefully channel this potential for growth.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2'500 2'000 1'500 1'000 500 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Oberthurgau Thurtal Total Untersee/Rhein Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 2007 Price/Rent Ratio Switzerland 2007
25

Untersee/Rhein

20

15

Thurtal
10

Oberthurgau

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Homogeneous Price Landscape Thurgau's price landscape is homogeneous for the most part. The only significant price differences are between the urban centers of Frauenfeld, Weinfelden and Kreuzlingen and the outlying municipalities. Even the prices for single-family dwellings in the urban centers and near the lake are below national average. Rents are relatively high in the growing municipality of Kreuzlingen. Rental apartments in Kreuzlingen are popular with migrants from also growing Constance, where residential space is scarce due to lack of building land.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Frauenfeld Kreuzlingen Arbon Amriswil Weinfelden Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 7'524 10'471 7'194 10'006 6'960 5'823 6'944 9'684 8'103 9'665 6'255 6'245 4'864 4'855 6'209 9'415 9'400 7'326 7'311 9'348 209 204 179 182 187 232 216 222 196 184 189 237

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Ticino: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

TI Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 + =

GR + + = =

UR ++ ++

VS = =

In Line with Neighboring Cantons Ticino ranks 23rd in terms of locational attractiveness. However, there are pronounced differences between its regions. The most significant negative factor is poor accessibility, which is the result of its topography. But Ticino also scores poorly in terms of level of education, which is below average for Switzerland. Neighboring cantons score similarly to Ticino. Growth in the Valleys, Stagnation in the Mountains The marked heterogeneity of the canton of Ticino is reflected in the differences in population growth: While there is strong growth in suburban areas around Mendrisio, Lugano, Locarno and Bellinzona, some municipalities have lost population. These are located, above all, in peripheral areas in the northern part of the canton. The exodus can be explained by the shortage of (skilled) jobs and the distance from the most important job markets. The Bellinzona area is drawing in people from the Mesocco region in the canton of Graubnden. The strongest growth is being seen in the municipalities on the southern approach to Monte Ceneri, which are in the wider catchment area of Lugano.

Population Growth 2006-2011


Average annual growth per municipality, in percent

TI < -2% -1.9% - -1% -0.9% - -0.5% -0.4% - 0% 0.1% - 0.5% 0.6% - 1% 1.1% - 2% 2.1% - 3% 3.1% - 4% > 4%

Bellinzo na

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research, Geostat

Overnight Stays in the Canton of Ticino


Left scale: in 1'000; right scale: growth in overnight stays since 2005
3'500 3'000 2'500 2'000 1'500 1'000 500 0 -500 2005 2006 2007 2008 2009 2010 2011
Switzerland EU east Switzerland EU east EU 15/EFTA Gulf states EU 15/EFTA Gulf states BRIC Other BRIC Other

140% 120% 100% 80% 60% 40% 20% 0% -20%

German Pensioners Feeling the Exchange Rate Swiss tourism is suffering from the strength of the Swiss franc. With around 35% of its visitors coming from the eurozone, Ticino has experienced a larger drop in overnight stays than any other canton. While the Gulf states and BRIC countries are not significant markets in terms of volume, they are growing sharply. The fall in overnight stays by around 400'000 since 2007 presents a challenge to Ticino's tourist industry even after the introduction of the lower limit on the euro's exchange rate against the franc. The initiative on second homes has compounded the situation. A stronger focus on both new markets and the home market as well as on niche offerings promises to counteract this trend.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Seasonal Utilization of the Gotthard Road Tunnel


Average traffic volume at the Quinto monitoring station, all vehicle types
40'000 35'000 30'000 25'000 20'000 15'000 10'000 2009 2011 Average 2010 2010 Average 2009 Average 2011

and Fearing the Closure of the Tunnel The planned upgrading of the Gotthard road tunnel is a key issue for Ticino. The Federal Council's plan to create a second tube for the upgrading of the tunnel will secure the canton's link to the rest of Switzerland. Due to the expected appeals, it is not likely to open until 2027. The Gotthard route is of central importance to tourism because its utilization is very seasonal. Although the majority of vehicles that use it are on their way to Italy, the complete closure of the tunnel would significantly reduce the attractiveness of Ticino as a vacation destination and a location for second homes.
December

April

September

October

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

November

February

January

August

May

March

June

July

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Canton of Ticino: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 327 1.3% 1.2% 1.1% 2009 330 0.9% 0.9% 1.2% Canton of Ticino 2010 2011 334 337 1.3% 0.9% 1.3% 1.1% 0.8% 0.9% 2012 340* 0.9%* 2013 343* 0.8%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

215 1.1% 0.71% 6.0% 3.0% 1.33

217 1.1% 0.74% 1.5% -2.2% 1.39

219 0.9% 0.67% 6.1% 1.5% 1.42

221 1.0% 0.77% 8.7% 7.2% 1.53

223* 0.7%* 0.83% 9.2% 5.3% 1.64

225* 1.0%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Few New Rental Apartments The canton experienced a frenzy of housing planning from 2003 to 2008. In spring 2008, the twelve-month total of building permits reached 2'800 residential units. Since this peak was only short-lived, the housing stock did not see the anticipated excessive growth, but instead grew in line with the national average in the years 2009 to 2011. Based on the number of building permits in the canton of Ticino, the number of rental apartments coming onto the market in 2013 is likely to be very low. In the outlying valleys of the Tre Valli and Locarno regions, where the price of ownership is still relatively low, many households choose ownership over rental. There is also substantial interest in condominiums in the urban centers.

Building Permits by Region


As a % of total housing stock; number of homes (canton, right scale)
2.0% 2'800

1.5%

2'100

1.0%

1'400

0.5%

700

0.0% 2004 Tre Valli 2005 Lugano 2006 2007 2008 Total 2009 Locarno 2010 2011 2012 Mendrisio Bellinzona

0 Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Tourism Boosts the Price/Rent Ratio The strong preference for ownership has caused prices to rise more rapidly than rents. For example, a medium-standard rental apartment in Locarno costs the same as in Solothurn. On the other hand, the price of a condominium in Locarno is 60% higher than the price of a comparable residence in Solothurn. These differences result in a high price/rent ratio: Purchasing a condominium cost 37 times the annual rent for a comparable rental apartment in 2012. Since income in Ticino is relatively low, prices have decoupled from income in much of the canton, partially due to the influence of tourism. Also for many middle-income households, affordability is unlikely to be guaranteed in every part of the canton.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Locarno
20

2007 Price/Rent Ratio Switzerland 2007


25

Lugano
15

Mendrisio
10

Bellinzona
5

Tre Valli
0

10

15

20

25

30

35

40

Source: West & Partner, Credit Suisse Economic Research

Demand for Second Homes Affecting Prices In addition to conventional housing, prices in Ticino are affected by demand from tourists for second homes. In relative terms there are a large number of vacation and second homes in the regions of Locarno and Tre Valli, where they line the ridges overlooking the valleys and are also widespread in the urban centers. These homes now account for around 40% of the housing stock. But even in Lugano, which deviates particularly from the price structure in the region, demand for vacation homes is thought to have a substantial impact on prices for apartments and houses.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Lugano Bellinzona Locarno Mendrisio Giubiasco Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 10'589 14'729 8'169 11'361 9'677 13'465 7'363 10'245 7'073 9'839 7'992 11'119 8'227 12'393 6'300 6'500 5'864 9'481 9'778 8'822 7'909 11'904 212 197 207 196 175 232 220 199 207 198 176 237

7'325 11'027

Source: West & Partner

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Canton of Uri: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

UR Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 ++ ++

GL + ++

SZ ++ ++ = = +

NW ++ ++ = = = +

Low Attractiveness Despite Low Taxes The canton of Uri ranks 22nd in terms of locational quality. Its above-average attractiveness in terms of taxation cannot offset its competitive disadvantages, which are relatively low levels of education and poor accessibility. The peripheral canton of Glarus has a similar profile.

Share of Land That Can Be Used for Development


Land by type, 2004/2009
UR GL OW NW SZ VS LU ZG ZH 0% 20% 40% 60% 80% 100%

Developed land incl. roads and rail lines Forests and woodland

Agricultural land Natural areas, waterways

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Little Developed Land There is barely another canton that is as strongly characterized by its topography as Uri. Development in Uri is limited to the valley floors, but these account for only a small percentage of the canton's total surface area. Only 2.9% of the canton's land is developed, which is the smallest percentage of any canton. As in Glarus, over 40% of the canton is taken up by unproductive land. When forest zones are added, it means around 70% of the canton is considered to be unfit for development. However, when the considerable reserves of building land, the potential for change of use and compact development are taken into account, there is still scope to build in the canton of Uri. The upgrading of Altdorf station in the Reuss delta to take NEAT trains and the Andermatt tourism project are expected to trigger investments. Uri: Vulnerable to Structural Change Uri's economy is quite industrialized. The most important employers are the electrical engineering, plastics and metal processing industries. The majority of the workforce is employed in agriculture, tourism and transportation. An analysis of the opportunities and risks reveals that the majority of the larger sectors in the canton of Uri are in a weak position. Electrical engineering and the finishing and engineering trades in construction are exceptions to this; we believe they have greater potential for growth. In addition, a few large employers account for the majority of the workforce. Uri's economy is thus comparatively vulnerable to structural change and strongly dependent on individual business decisions.

Opportunity/Risk Profile of Sector Structure


Largest 15 sectors, 2013, circle size = share of jobs
high
Healthcare Homes Public administration Electrotechnical Construction of equipment buildings Civil engineering Plastic Retail trade
Agriculture and forestry Construction and industry Services Public sector

Finishing trade

Opportunity-risk profile

Education Restaurant industry Land transport Hotel industry Agriculture

Fabricated metal products 6%

low

-4%

-2% 0% 2% 4% Employment: deviation from the Swiss average

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Traffic Congestion Hotspots in Switzerland


Number of days of congestion a year
400 350 300 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011

Source: Swiss Federal Roads Authority

Gotthard: Federal Council Calls for "Second Tube" The upgrading of the Gotthard road tunnel has again thrown up the issue of how Switzerland should deal with trans-Alpine traffic. The Federal Council does not regard partial closures and car-carrying trains as viable options and has plans for a second tunnel. To comply with the constitutional article on the protection of the Alps, today's road capacity will not be increased. This proposal was rejected by Uri's voters in 2011. The Gotthard route is Ticino's most important link to the rest of Switzerland and remains its most important transportation artery. On the northern side, however, fears about additional traffic appear to be gaining the upper hand. Commuting and relocation patterns illustrate that Uri has close links with its Central Swiss neighbors and few links with Ticino.

Northern ZHWinterthur bypass

Lausanne bypass

Berne Kriegstetten

South Gotthard

North Gotthard

Greater Baregg

Geneva bypass

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Canton of Uri: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 35.3 0.5% 0.7% 1.4% 2009 35.5 0.5% 0.6% 0.8% Canton of Uri 2010 2011 35.4 35.4 -0.1% -0.1% 0.3% 0.3% 0.7% 0.7% 2012 35.5* 0.3%* 2013 35.6* 0.4%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

17.4 1.2% 0.87% 1.0% 7.3% 0.92

17.6 0.8% 0.73% -3.9% -3.7% 0.91

17.7 0.7% 0.75% 7.9% -0.5% 0.93

17.8 0.6% 0.78% 9.0% 2.4% 0.99

18.0* 0.8%* 0.76% 4.0% 6.8% 1.04

18.2* 1.1%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Medium-Term Rise in Demand The housing stock in the canton of Uri has grown sluggishly compared to the national average in recent years. Demand for conventional housing is limited, while the tourist resort in Andermatt is experiencing slow growth. Several vacation homes were approved in Andermatt in 2012, and the resort should act as a catalyst for further projects. The rejuvenation of this tourist destination will boost employment in the medium term, requiring additional conventional housing. Altdorf is also seeing an increasing number of planning applications for rental apartments, which will add to the housing stock from 2014. The anticipated slight growth in the canton's population and below-average vacancy rate should ensure that the new housing is taken up.

Building Permits By Region


As a % of total housing stock; number of homes (canton, right scale)
2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 2006 Glarner Hinterland Total 2007 2008 2009 2010 2011 2012 Uri Innerschwyz Nidwalden/Engelberg Approved units 250 200 150 100 50 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Focus on Ownership Prices for condominiums have risen by an average of 3.3% p.a. over the last five years. This growth is well below the national average of 5.7% and is mainly due to the slight correction of prices in 2009, which was also experienced in the cantons of Obwalden and Nidwalden. Nevertheless, the price/rent ratio was still above the Swiss average in 2012. Demand focuses on ownership, and the rental sector is relatively small. Combined with price increases caused by tourism and a catch-up effect that started in 2010, the price of ownership has risen significantly faster than rents.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Nidwalden/Engelberg
20

2007 Price/Rent Ratio Switzerland 2007


25

Innerschwyz

15

Uri

10

Glarner Hinterland
0

10

15

20

25

30

35

Source: West & Partner, Credit Suisse Economic Research

Rising Prices in Urserental A medium-standard condominium in Altdorf was estimated to cost CHF 6'318 per square meter in the third quarter of 2012, making it almost 16% more expensive than five years ago. The differences in prices between the five large municipalities situated along the A2 and the Reuss river are limited. In Urserental, on the other hand, purchase prices have risen significantly in the past five years: by 50% in Andermatt to CHF 7'509 and by 60% in Realp, where a number of new condominiums were recently built, to CHF 5'400 per square meter.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Altdorf Schattdorf Brglen Erstfeld Silenen Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 7'484 10'419 6'766 6'298 5'532 5'008 9'413 8'761 7'703 6'968 6'318 6'364 5'473 5'145 4'773 9'504 9'578 8'244 7'748 7'178 195 202 175 175 158 232 196 204 176 177 160 237

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Valais: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

VS Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = =

VD = + = =

BE = = = =

UR ++ ++

Unfavorable Starting Point The canton of Valais ranks third from bottom in terms of locational quality, behind all four of its neighboring cantons. Only the tax burden on companies and the availability of highly skilled workers are close to the Swiss average. Its greatest disadvantage is its poor accessibility, a drawback which is largely due to its topography.

Population Growth 2006-2011


Average annual population growth in percent

Lausanne

VS < -2% -1.9% - -1% -0.9% - -0.5% -0.4% - 0% 0.1% - 0.5% 0.6% - 1% 1.1% - 2% 2.1% - 3% 3.1% - 4% > 4%
Sio n

Boom Region Martigny The canton of Valais recorded the fourth-highest rate of population growth in Switzerland between 2006 and 2011. Within the canton, the Martigny region had the highest annual rate of population growth, at over 2%, followed by Monthey and St-Maurice and Sion. In contrast, the municipalities in upper Valais grew at a below-average rate, and the population of the Goms region has been falling for a number of years. The Visp region also grew at a below-average rate, although growth is currently accelerating. The sharpest fall in population was recorded in the municipality of Zwischbergen in the Simplon Pass area, while the strongest growth took place in the municipality of Tsch just outside Zermatt.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Inter-Cantonal Migration 2005-2010


Migrants to and from other cantons
8'000 7'000 6'000 5'000 4'000 3'000 2'000 1'000 0 -1'000
In-migrants Out-migrants Net migration

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

From Lake Geneva to Lower Valais The strong wave of international immigration in recent years has resulted in a high rate of population growth in the Lake Geneva region. As a result of the shortage of housing, living costs there have risen, thus boosting the attractiveness of Valais as a place to live by comparison. The largest numbers of inter-cantonal in-migrants have thus come from the cantons of Vaud and Geneva. The most important intercantonal flows of migration have been from the regions of Aigle, Vevey/Lavaux and Lausanne in Vaud to Monthey/StMaurice. This region has the highest level of net intercantonal in-migration in Valais; within the canton, however, people are leaving the region to move to other parts of Valais. The region around the cantonal capital of Sion has seen the highest level of inter-cantonal in-migration in the canton. Tourism a Cluster Risk Some 5% of the workforce in the canton of Valais is employed in the hotel industry. Further 15% work in the tourism-related restaurant and retail industries. The finishing and engineering sectors and the construction sector absorb further 12% of the workforce, some of whom are involved in the construction of second homes, in which there has been a large increase. This will soon come to an end as a result of the acceptance of the second homes initiative. The fall in the number of overnight stays since 2007 presents Valais with a major challenge. Although overnight stays from guests from eastern European EU countries and the BRIC countries have risen sharply, they still do not account for a significant percentage of the total. Tourism, the canton's most important sector, is thus faced with structural change.

Overnight Stays in the Canton of Valais


Left scale: in 1'000; right scale: growth in overnight stays since 2005
6'000 5'000 4'000 3'000 2'000 1'000 0 -1'000 2005 2006 2007 2008 2009 2010 2011
Switzerland EU east Switzerland EU east EU 15/EFTA Gulf states EU 15/EFTA Gulf states BRIC Other BRIC Other

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

VD GE NE JU GR TI GL SZ AR SG BL OW AI NW ZG BS UR TG SH SO AG LU FR BE ZH
120% 100% 80% 60% 40% 20% 0% -20%

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Canton of Valais: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 304 1.6% 1.3% 1.5% 2009 308 1.4% 1.0% 1.1% Canton of Valais 2010 2011 313 317 1.5% 1.3% 1.0% 0.9% 1.4% 1.3% 2012 321* 1.3%* 2013 324* 1.2%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

218 1.3% 1.30% 5.4% 10.3% 1.09

220 1.1% 1.03% 4.8% -1.9% 1.17

223 1.5% 1.00% 5.6% -2.2% 1.21

226 1.4% 1.01% 11.5% 12.0% 1.32

230* 1.5%* 1.13% 5.6% 4.8% 1.41

232* 1.1%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Planning Applications Go through the Roof Raised levels of construction activity within the canton center around Lower Valais, where the number of approved homes exceeded 1.5% of the housing stock in all regions in 2012. This is because the regions are preparing to once again absorb an influx of population from Lake Geneva this year. Furthermore, the number of planning applications for second homes positively went through the roof in many parts of Valais in 2012 as a result of the second homes initiative. The initiative committee has filed appeals against many applications. The Swiss Federal Supreme Court will have to decide to what extent the committee is entitled to appeal, and how many of the approved units can be built. This has not yet happened as of the start of 2013.

Building Permits By Region


As a % of total housing stock; number of homes (canton, right scale)
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 Leuk Sion Martigny Approved units 2006 2007 2008 2009 2010 2011 2012 Visp Goms Total Sierre Monthey/St-Maurice Brig 4'900 4'200 3'500 2'800 2'100 1'400 700 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Price Distortions between the Mountains and the Valley The price/rent ratios are strongly influenced by high prices in tourist destinations. For example, a medium-standard condominium costs just under CHF 8'000 per square meter on average in the economic region of Martigny and CHF 5'800 in Martigny itself, while in the municipality of Bagnes (which includes the tourist destination of Verbier) the same figure is almost three times higher at just under CHF 16'000 per square meter or more. High demand for conventional housing in the valley and second homes in tourist destinations provides double the stimulus for the regions of Martigny and Sion in particular. On the other hand the distortion of prices is more limited in the dynamic region of Monthey/St-Maurice, where the price/rent ratio is still balanced. Below-Average Prices in Urban Centers Although the canton's larger municipalities (particularly in Lower Valais) are experiencing strong migration from the area around Lake Geneva, their prices are still relatively low despite making strong gains. There is a ready supply of building land in many places, which has kept land prices reasonable, and a new single-family dwelling is in some cases cheaper per square meter than a new condominium. Modest prices for condominiums relative to rents mean home ownership is a high priority for house hunters.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Martigny Sierre Visp Sion Monthey/St-Maurice
10 15 20

2007 Price/Rent Ratio Switzerland 2007


25

Goms Brig Leuk


0 5

10

15

20

25

30

35

40

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Sion Monthey Martigny Sierre Brig-Glis Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 6'645 6'298 5'694 6'540 5'202 9'245 8'761 7'929 9'097 7'239 6'291 5'818 5'809 5'436 5'427 9'467 8'748 8'748 8'178 8'170 189 195 207 196 193 232 193 197 210 199 194 237

7'992 11'119

7'325 11'027

Source: West & Partner

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Canton of Vaud: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

VD Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 = + = =

GE = ++ + +

FR = = =

VS = =

High Taxes Diminish Appeal The canton of Vaud ranks 17th in terms of locational quality. Its attractiveness is reduced by a high tax burden. By contrast, Vaud scores above average in terms of availability of highly skilled workers. Other components are more or less in line with the Swiss average. As a result, Vaud comes in ahead of the cantons of Fribourg and Valais but behind Geneva. Population Concentrated around the Centers The canton of Vaud is highly heterogeneous. Lausanne is one of the two poles on Lake Geneva. The city and its urban area along the shore of the lake are densely populated. The picture is similar on the approach to Geneva, in the Nyon area. On the other hand, the canton also has rural, mountainous areas where the population is scattered. As a result of the shortage of space in Lausanne and Geneva, the population is spreading out even further, for example along the route to Yverdon, along the Rhone valley and into the nearer Fribourg municipalities. In view of the very high level of migration into the Lake Geneva area, the cantons and municipalities face tough planning challenges, and there is an increasing need for compact forms of development and rezoning. EPFL: Western Switzerland Innovation Hub In recent years, the Technical University in Lausanne (EPFL) has emerged from the shadow of its sister institution in Zurich. Prestigious new buildings and private-sector funding are an impressive demonstration of this. The EPFL has spawned a number of spin-offs in recent years that play a key role in the sector portfolio of the canton of Vaud and have opened up new perspectives. In addition to the computer mice of Logitec, there is also EPFL technology behind Siri, the iPhone's virtual voice. There are many other companies as well. It is difficult to overemphasize how important it is to position Switzerland as a center of innovation; innovation continues to be the country's most important raw material, just as it always has been.

Population Density
Population per km2, 2010

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Spin-Offs at EPF Lausanne and ETH Zurich


Number of start-ups, figures unavailable for ETH Zurich before 2003
90 80 70 60 50 40 30 20 10 0 1970-1990 1991-1996 1997-1999 2000-2002 2003-2005 2006-2008 2009-2012 EPFL ETHZ

Source: EPF Lausanne, Swiss Federal Institute of Technology (ETH) Zurich

Expenditure-Based Taxation
Number of people in 2010, receipts from expenditure-based tax in CHF
1'400 1'200 1'000 800 600 400 200 0 Number of flat-rate taxpayers (left scale) Tax receipts per flat-rate taxpayer (right scale) 245'000 210'000 175'000 140'000 105'000 70'000 35'000 0

28% of all Lump-Sum Taxpayers Live in Vaud Expenditure-based taxation was first used in the canton of Vaud in the 1930s. Since then, it has been possible to use a simplified method of tax assessment for high net-worth foreign nationals who are not in work. In recent years, this method of taxation has come in for criticism and been abolished in some cantons. In response to this criticism, the federal government has decided to overhaul the system. The assessment basis is to be increased and the conditions tightened, and higher tax revenues are to be generated per taxpayer overall. Lump-sum taxation is an important locational factor for the canton of Vaud, since over a quarter of the beneficiaries live here, and the average receipts are high.

Source: FDC, FFA, Credit Suisse Economic Research

VD VS TI GE GR BE LU TG ZG NW SG FR SZ OW NE AI AR BS AG JU BL SH

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Canton of Vaud: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 690 2.4% 2.2% 1.0% 2009 703 1.9% 1.6% 0.9% Canton of Vaud 2010 2011 713 726 1.5% 1.8% 1.2% 1.4% 1.3% 1.0% 2012 738* 1.6%* 2013 749* 1.5%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

358 1.0% 0.46% 10.0% 8.0% 0.85

361 0.9% 0.42% 3.5% 0.6% 0.90

366 1.3% 0.45% 7.3% 6.1% 0.94

370 1.1% 0.52% 13.6% 9.2% 1.05

374* 1.2%* 0.56% 9.4% 7.5% 1.16

378* 0.9%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Surge in Planning Near Lake and in Remote Areas Compared with the strong growth in population, the expansion of housing stock has been moderate for some time. This has resulted in housing shortage in many places, which is not likely to change any time soon. This is because although housing planning picked up in 2011, it fell significantly again in the following year. An extraordinary number of homes were planned for the Broye region on the eastern edge of the canton in 2010 and 2011, which will result in further strong housing growth there this year. 2011 saw another surge in new projects around the lake between Geneva and Lausanne in the Morges/Rolle and Nyon regions, as well as in the canton's outlying regions of La Valle and Gros-de-Vaud. Population pressure is very high in this area due to lack of housing in both of these major urban centers. Prices Decoupled in Many Areas Even though rents in the more urban regions of Vaud are anything but low, they have been left behind by increases in the price of ownership in many areas. In the Lausanne region, condominiums cost 42 times the annual rent for a comparable apartment. This is the same ratio as in the canton of Geneva. However, the differences between the regions are substantial, much more pronounced than just five years ago and are influenced to a large extent by the distance from Lake Geneva. Prices in the regions of La Valle and Gros-de-Vaud have therefore remained more in line with rents. Tourism also fuels prices in the canton's southern regions of Pays d'Enhaut and Aigle.

Building Permits By Region


As a % of total housing stock; number of homes (canton, right scale)
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 Vevey/Lavaux Nyon Pays d'Enhaut 2006 2007 Lausanne La Valle 2008 2009 2010 Yverdon Aigle La Broye 2011 2012 Total Gros-de-Vaud Approved units 6'400 5'600 4'800 4'000 3'200 2'400 1'600 800 0

Murten (Morat)

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Lausanne Vevey/Lavaux Nyon Aigle Morges/Rolle Pays d'Enhaut Yverdon Gros-de-Vaud La Valle Murten (Morat) La Broye
0 5 10 15 20

2007 Price/Rent Ratio Switzerland 2007


25

10

20

30

40

50

Source: West & Partner, Credit Suisse Economic Research

Heterogeneous Price Levels in the Lausanne Region Prices in the arc around Lake Geneva have risen to remarkable levels in some cases. In the city of Lausanne, the price per square meter for a medium-standard condominium stood at CHF 11'709 in 2012, 60% above the national average. Prices are considerably lower depending on the location within the agglomeration of Lausanne, for example in Renens. The Nyon region, which is home to many employees of the multinational companies and organizations based in Geneva, now almost rivals the canton of Geneva with regard to prices.

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Lausanne Yverdon-les-Bains Montreux Renens Nyon Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 13'145 18'290 8'089 11'252 12'427 17'297 10'016 13'942 13'105 18'239 7'992 11'119 11'709 17'622 7'282 10'963 10'282 15'481 8'591 12'933 12'436 18'719 7'325 11'027 264 210 231 228 283 232 251 209 237 233 291 237

Source: West & Partner

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Canton of Zug: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

ZG Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 ++ ++ + ++ ++ ++

SZ ++ ++ = = +

ZH ++ + + ++ ++

AG + ++ = = ++ +

Highest Locational Quality The canton of Zug tops the rankings of locational quality by some distance from the cantons of Zurich and Aargau, which follow in second and third place. Since the indicator was first calculated in its current form in 2004, Zug has been able to maintain its position at the top of the rankings. All four neighboring cantons also have above-average locational quality. International Immigration and National Out-Migration The low tax burden makes the canton an attractive place to live for high-earning and high net-worth individuals. One effect of this is that living costs in the form of rising real estate prices outweigh the tax advantages for households with average earnings. The introduction of the free movement of persons in the year 2007 and the associated and Switzerland-wide sharp rise in international immigration resulted in out-migration of existing residents from Zug to other cantons. However, the canton still has a positive migration balance overall. Around 1'000 people moved from Zug to the canton of Lucerne in the period from 2005 to 2010. The neighboring cantons of Aargau, Schwyz and Zurich also all welcomed over 500 new residents from Zug.

Net Migration 1990-2010


Total number of people
2'000 1'500 1'000 500 0 -500 -1'000 -1'500 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Inter-cantonal International Total

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Per-Head Resource Equalization


New fiscal equalization system, reference year 2013, assessment basis 2007-2009
3'000 2'000 1'000 0 -1'000 -2'000 -3'000

Largest Per-Head Payer Zug is the canton with the highest resource potential for the reference year 2013. The resource potential forms the basis of the inter-cantonal financial equalization system and reflects the level of a canton's tax base per head compared to the Swiss average. In 2013, nine cantons have an above-average resource potential and are thus deemed to be strong in terms of resources. The canton of Zug again tops the list, paying around CHF 2'500 per head into the fiscal equalization system, 2.5 times as much as the second-placed canton of Schwyz. Zug's lead can be explained by the high number of high-earning and high net-worth individuals and the high level of productivity of the companies based in the canton.

Source: Federal Department of Finance

Company Start-Up Rate Zug


Share of newly established companies relative to number of existing companies
25% 20% 15% 10% 5% 0% 2001 2002 2003 2004 2005 Traditional industry Construction Trading and sales Information, communications, IT Corporate services Administrative and social services Total ZG 2006 2007 2008 2009 2010 High-tech industry Energy supply Transportation, postal services Financial services Entertainment, hotels and catering Total CH

ZG SZ BS GE NW ZH VD SH TI BL NE AG AI OW GR AR SO SG TG LU BE FR VS GL JU UR

Start-Up Rate Remains High The canton of Zug's sustained lead in terms of locational quality is reflected in its unmatched start-up rate. In the last ten years, the canton has always had the highest number of start-ups as a percentage of all companies. Start-ups in the financial services industry are particularly numerous. The high start-up rates in the energy supply sector can be explained by the fact that the few start-ups join what is a very small pool. The low tax burden, the high number of highly skilled employees and the existing sector clusters contribute to this dynamic development. However, the shortage of space and high real estate prices are increasingly proving to be a barrier to investment to companies with higher space requirements.

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

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Canton of Zug: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 111.3 1.1% 1.7% 1.2% 2009 111.8 0.5% 1.0% 1.3% Canton of Zug 2010 2011 113.1 115.1 1.2% 1.7% 1.2% 1.5% 1.6% 2.3% 2012 117.0* 1.6%* 2013 118.9* 1.7%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

50.2 1.2% 0.27% 6.9% 7.5% 0.84

50.9 1.4% 0.29% 4.2% -1.1% 0.87

51.7 1.6% 0.29% 8.3% 5.4% 0.90

53.0 2.5% 0.28% 9.2% 5.7% 0.96

53.9* 1.7%* 0.48% 6.8% 4.9% 1.02

54.7* 1.6%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Higher Density: a Goal for the Canton Strong levels of housing planning in the period from 2008 to 2010 have boosted growth of the housing stock to a very high 2.5%, with a mix of rental apartments and condominiums being built. This additional supply has provided some relief to a market that had previously been under considerable strain. In 2012 the canton's vacancy rate rose to a slightly higher rate for the first time in eight years. The planning of new homes in Zug's core region of Lorzenebene/Ennetsee has slowed slightly since 2010. Efforts to boost density and increasingly critical attitudes in the canton toward growth call for the more efficient use of building land reserves. In 2012 the focus for the planning of new homes shifted to the canton's mountainous municipalities.

Building Permits By Region


As a % of total housing stock; number of homes (canton, right scale)
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2004 2005 2006 Zimmerberg Lorzenebene/Ennetsee Zuger Berggemeinden 2007 2008 2009 Innerschwyz Einsiedeln Approved units 2010 2011 2012 Total Knonaueramt 1'400 1'200 1'000 800 600 400 200 0

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Demand for Rental Apartments Intact Despite High Rents Both of Zug's economic regions have high price/rent ratios however they are lower than in comparable upmarket regions. This is because rents are relatively high. Like Geneva, Zug is a hotspot for multinational companies whose international employees require rented accommodation, particularly for temporary assignments. Demand is high as a result. In many cases the companies assume accommodation costs or subsidize them to a large extent, which makes the potential tenants less sensitive to prices. However, conditions are challenging for luxury rental apartments that do not fall as comfortably within employees' budgets and compare unfavorably with condominiums in terms of costs at a time when interest rates are low. Single-Family Dwellings in Short Supply The increase in density means that multi-family dwellings are mainly being built in the canton, and in the larger municipalities of the Lorzenebene/Ennetsee region in particular. Meanwhile, construction zones and building land for singlefamily dwellings are in short supply. As a result, a mediumstandard single-family dwelling in Zug is 40% more expensive than a condominium of a similar standard. This compares with an average difference of 9% for Switzerland as a whole. Only 18 single-family dwellings per quarter were advertised for sale in Zug in 2012, compared with 53 condominiums.

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Zuger Berggemeinden
20

2007 Price/Rent Ratio Switzerland 2007


25

Lorzenebene/Ennetsee Zimmerberg Knonaueramt Innerschwyz


5 15

10

Einsiedeln
0

10

15

20

25

30

35

40

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Zug Baar Cham Risch Steinhausen Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 15'944 22'181 13'266 18'458 12'000 16'690 12'605 17'542 12'919 17'981 7'992 11'119 11'400 17'163 9'509 14'319 9'082 13'674 8'655 13'022 8'864 13'348 7'325 11'027 304 261 268 229 266 232 310 264 253 227 269 237

Source: West & Partner

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Canton of Zurich: Location Factors


Locational Quality to Swiss Average
+/++ Advantage, -/-- Disadvantage, = Swiss average

ZH Tax burden on natural persons Tax burden on legal persons Level of education Availability of highly skilled workers Accessibility in terms of transportation Locational quality 2012 ++ + + ++ ++

AG + ++ = = ++ +

TG + ++ = = + +

SG + ++ = = = =

Broad-Based Appeal The canton of Zurich comes second in the cantonal ranking of locational quality. The canton benefits, above all, from its excellent accessibility and its tax advantages for natural persons. In addition, the above-average availability of highlyqualified workers gives it an advantage over nearby cantons such as Aargau, Thurgau and St. Gallen.

Growth of Housing Stock 2001-2010


Per km2

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Population Growth Particularly in the North The population of the canton of Zurich grew by around 150'000 or 12% between 2001 and 2010. Only the cantons of Fribourg and Vaud experienced stronger growth. The district of Blach recorded the highest rate of growth at 20%, followed by Dielsdorf and Affoltern. Within the district of Blach, population growth was strongest in the municipalities of Eglisau, Lufingen and Bassersdorf. The municipalities of Buchs and Oberweningen experienced the strongest growth in the district of Dielsdorf. The population growth is concentrated in the non-urban areas north of the city of Zurich, which do, however, have a good infrastructure. The municipality of Bonstetten, which has become more attractive to commuters thanks to the Uetliberg Tunnel, has also seen strong growth. Foreign Nationals Move into Inner-City Districts The population of the city of Zurich increased by around 25'000 between 2000 and 2010. The increase is due to an influx of both Swiss citizens and foreign nationals in a roughly 50-50 ratio. The district of Escher-Wyss, which has been transformed from an industrial district into a residential one, saw the strongest growth. While the districts in northern Zurich are equally popular with Swiss citizens and foreign nationals, there are big differences in the inner-city districts. Districts by the lake saw an increase in foreign nationals and a decrease of Swiss citizens. This development is particularly marked in Hottingen and Seefeld. The opposite applies to the districts of Gewerbeschule, Hard and Sihlfeld.

Population Growth in the City of Zurich 2000-2010


Average annual population growth in percent

1'300 Foreign nationals Swiss citizens Annual growth 2000-2010 < -1% -1% - 0% 0% - 0.5% 0.5% - 1% 1% - 2% > 2%

Source: Statistics Office of the City of Zurich

Growth of Resource Potential per Head 2008-2013


Based on the aggregate tax base, in %
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: Federal Department of Finance

SZ OW ZG BS SH AI AR TG TI VD SO NW LU CH GR VS AG FR GE UR SG NE BE BL GL ZH JU

Financial Crisis Suppresses Resource Potential The canton of Zurich has the sixth-highest resource potential, at CHF 36'200 per head, for 2013. The resource potential is a measure of the cantons' economic efficiency and takes into account the taxable income and wealth of natural persons and the earnings of legal persons. It forms the basis of the inter-cantonal financial equalization system. The belowaverage growth of 6.3% in the canton of Zurich, compared to average growth of 12.9% for Switzerland, can be attributed primarily to the recent financial crisis and the associated fall in companies' earnings. The resource potential is calculated on the basis of historical tax receipts (2013: 2007-2009), so there is a considerable delay before it reflects economic changes.

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Canton of Zurich: Real Estate Facts


Demand: Inhabitants (in 1'000) Population growth Net migration Absorption Supply: Housing stock (in 1'000) Growth in housing stock Market outcome: Vacancy rate Price trend condo Price trend SFD Price trend in relation to income trend 2008 1'337 1.9% 1.6% 1.1% 2009 1'356 1.4% 1.2% 1.0% Canton of Zurich 2010 2011 1'373 1'392 1.3% 1.4% 1.0% 1.1% 1.2% 1.7% 2012 1'412* 1.5%* 2013 1'432* 1.4%* 2008 7'708 1.4% 1.3% 1.2% 2009 7'792 1.1% 1.0% 0.9% Switzerland 2010 2011 7'870 7'953 1.0% 1.0% 0.8% 0.9% 1.1% 1.2% 2012 8'037* 1.1%* 2013 8'116* 1.0%*

662 1.2% 0.61% 6.3% 6.6% 0.93

668 0.9% 0.65% 2.9% -0.5% 0.97

676 1.2% 0.62% 8.8% 4.6% 1.01

687 1.6% 0.65% 10.1% 6.8% 1.09

695* 1.2%* 0.56% 5.6% 5.2% 1.15

704* 1.3%*

3'999 1.1% 0.94% 5.3% 4.6% 0.95

4'038 1.0% 0.87% 2.6% -0.7% 0.99

4'083 1.1% 0.91% 7.3% 3.0% 1.02

4'131 1.2% 0.94% 9.4% 7.1% 1.10

4'176* 1.1%* 0.94% 5.9% 4.8% 1.16

4'223* 1.1%*

Source: Swiss Federal Statistical Office, West & Partner, Credit Suisse Economic Research

* Forecast/estimate Credit Suisse Economic Research

Escape to Growth Regions The number of apartments and houses approved for construction in the canton has been falling gradually since planning activity peaked in 2006. New construction of singlefamily dwellings, only half as many of which were approved in 2012 compared to 2006, has been hit particularly hard by the shortage of building land and inflated prices. Many households are therefore looking further afield to the growth regions of the Glatt valley, the Limmat valley or Knonaueramt, or are leaving the canton altogether in favor of Aargau. Equally high numbers of rental apartments and condominiums have also been built in the lowlands of the canton in recent years in response to rapid population growth in the district of Blach, where international immigrants are just as likely to find a rental apartment as those interested in buying their own home. The Attraction of Low Prices Alongside Geneva, Zurich is often at the center of the debate about the overheating of the real estate market. However, the extent of overheating varies widely within the canton. In the city, not only is the price/rent ratio high but prices have also decoupled from income. For middle-class households the affordability of home ownership is approaching the golden rule for financing of 33% of income, despite the low rates of interest. In the peripheral eastern and northern regions of the canton, on the other hand, these indicators are within more of a normal range. The high price differences in these regions relative to the city of Zurich are likely to remain a draw, which means high numbers of commuters and an increasing strain on the canton's transport infrastructure. Attractive Alternatives to the City of Zurich Prices in the city of Zurich are rising rapidly, and regional differences are becoming increasingly pronounced from year to year. This is particularly apparent with respect to Winterthur. In 2011 the difference in prices stood at 56% with respect to condominiums. Last year this difference between Zurich and Winterthur rose to 74%, making the regional center with its good transport connections increasingly attractive for house hunters from Zurich. Rents are also relatively affordable in the city of Winterthur.

Building Permits By Region


As a % of total housing stock; number of homes (canton, right scale)
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 12'000 10'000 8'000 6'000 4'000 2'000

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Zimmerberg Limmattal Pfannenstiel Oberland-West Winterthur Zrich-Stadt Oberland-Ost Glattal/Furttal Oberland Unterland Weinland Approved units

Source: Baublatt, Swiss Federal Statistical Office, Credit Suisse Economic Research

Regional Price/Rent Ratio


Price of a new condominium / annual rent for a comparable apartment
2012 Price/Rent Ratio Switzerland 2012 Zrich-Stadt Pfannenstiel Zimmerberg Winterthur-Stadt Limmattal Knonaueramt Furttal Glattal Oberland-West Unterland Winterthur-Land Oberland-Ost Weinland 0 10 20 30 40 2007 Price/Rent Ratio Switzerland 2007
25

20

15

10

50

Source: West & Partner, Credit Suisse Economic Research

Price Levels in the Largest Municipalities


Transaction prices in CHF/m2; net rent in CHF/m2 and year; Q3 2012
Most populous municipalities Zrich Winterthur Uster Dbendorf Dietikon Switzerland Condo Rent SFD Moderate Upscale Moderate Upscale Moderate Upscale 17'823 24'794 10'097 14'052 11'331 15'768 12'282 17'090 10'524 14'645 7'992 11'119 13'000 19'563 7'491 11'274 8'282 12'467 8'136 12'252 7'827 11'778 7'325 11'027 283 215 240 241 243 232 258 216 242 245 244 237

Source: West & Partner

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Explanations
Real Estate Indicators
Population: permanent resident population at year-end Net immigration/emigration: balance of international immigration and emigration, as a percentage of the population Absorption: share of houses and apartments that the market can absorb, as a percentage of the housing stock Vacancy rate: number of vacant residential units, as a percentage of the housing stock; record date: June 1 every year Price trend: growth rates of transaction prices, every third quarter year-on-year Price/income ratio: quotient from the trend (indexed, 1990 = 100) of prices of condominiums and household income Price level of average properties: new building, 110 m2 (condo/rent)/124 m2 (SFD) net living area, average features, good location Price level of upscale properties: new building, 135 m2 (condo/rent)/155 m2 (SFD) net living area, upscale features, very good location

Switzerland's economic regions


54 51 75 52 110 17 107 108 95 94 96 89 90 88 91 97 47 43 16 106 46 15 14 21 45 22 23 44 93 92 109 105 104 103 24 25 27 28 49 50 19 20 18 31 79 53 48 74 30 29 34 32 37 38 33 26 70 69 98 99 100 84 85 86 87 83 73 68 72 76 3 77 4 1 78 5 41 13 12 10 11 2 6 42 7 9 8 62 61 36 35 39 40 80 63 81 82 57 55 56 58 59 60 64 67 65 66 71

101 102

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Zrich-Stadt Glattal Furttal Limmattal Knonaueramt Zimmerberg Pfannenstiel Oberland-Ost Oberland-West Winterthur-Stadt Winterthur-Land Weinland Unterland Bern Erlach/Seeland Biel/Seeland Jura bernois Oberaargau Burgdorf Oberes Emmental Aaretal Schwarzwasser

23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

Thun Saanen/Obersimmental Kandertal Berner Oberland-Ost Grenchen Laufental Luzern Sursee/Seetal Willisau Entlebuch Uri Innerschwyz Einsiedeln March/Hfe Sarneraatal Nidwalden/Engelberg Glarner Mittel- und Unterland Glarner Hinterland Lorzenebene/Ennetsee Zuger Berggemeinden La Sarine La Gruyre

45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66

Sense Murten (Morat) Glne/Veveyse Olten/Gsgen/Gu Thal Solothurn Basel-Stadt Unteres Baselbiet Oberes Baselbiet Schaffhausen Appenzell A.Rh. Appenzell I.Rh. St. Gallen/Rorschach St. Galler Rheintal Werdenberg Sarganserland Linthgebiet Toggenburg Wil Bndner Rheintal Prttigau Davos

67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

Schanfigg Mittelbnden Domleschg/Hinterrhein Surselva Engiadina bassa Oberengadin Mesolcina Aarau Brugg/Zurzach Baden Mutschellen Freiamt Fricktal Thurtal Untersee/Rhein Oberthurgau Tre Valli Locarno Bellinzona Lugano Mendrisio Lausanne

89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110

Morges/Rolle Nyon Vevey/Lavaux Aigle Pays d'Enhaut Gros-de-Vaud Yverdon La Valle La Broye Goms Brig Visp Leuk Sierre Sion Martigny Monthey/St-Maurice Neuchtel La Chaux-de-Fonds Val-de-Travers Genve Jura

Source: Credit Suisse Economic Research, Geostat

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