Market environment

Accentuated by the continuing low level of interest rates, institutional and private investors remain under high pressure concerning their investments. Despite lower yields, the price of residential property continued to rise in 2013. In contrast, with regard to the acquisition of commercial real estate, investors showed increasing reservations owing to a threatening overcapacity of office space. Consequently, the stable prices for commercial buildings – albeit at a high level – will probably come under increasing pressure depending on their location and rental situation. Rent-free periods and financial contributions toward remodelling and interior conversion have not only become the rule but often a precondition for the conclusion of a lease agreement.

As a result of the continuing and gratifyingly stable economic cycle accompanied by a low level of interest rates and Europe’s lowest home-ownership ratio, there is a consistently strong and unswervingly high demand for affordable residential property in Switzerland. In terms of financing residential property, banks are implementing clearly stricter guidelines than they have done until recently. A decline in prices for residential property is noticeable at least in those areas that have shown exaggerated prices. It is therefore to be assumed that overall the prices for residential property and land ready for building will stabilise at the current level.

Considering that the supply of highly priced residential property is now clearly surpassing demand, the sale of completed projects or projects under construction in the upper or highest price class is growing increasingly demanding.

General contracting

Pressure on the prices and margins of general and total contractors has continued to grow while the level of construction activity remains stable and high. The main reason for this continued competitive accentuation is seen in the growing number of market participants, such as architects, planners and companies in the construction industry aiming to cover a larger segment of the value-added chain. Moreover, Allreal is observing that established general and total contractors are showing increasing aggressiveness in the market and submitting quotes that hardly cover costs.

A further challenge facing general contractors concerns the mostly high to very high capacity utilisation of companies operating in the main and secondary construction trades. This complicates and increases the price of procuring the necessary capacity and results in lower profits obtained from contract awarding to subcontractors. In addition, owing to a shortage of skilled employees the supervision of construction work necessary to secure quality is growing increasingly labour intensive. Moreover, joint and several liability introduced for subcontractors with effect from 1 July 2013 is causing considerable additional administrative expenses as compliance with the new regulations is connected with higher supervision and control duties.