Market environment

Real estate

Residential property continues to be in high demand, however, increasingly in low- to mid-price-range locations close to city centres or easily accessible. Hence, the more expensive properties are more difficult to sell. This is due, on the one hand, to a progressively higher supply than demand in this segment and, on the other, to increasingly rigorous requirements for obtaining a mortgage. Due to constant warnings concerning an imminent real-estate bubble, lending banks tend to value higher-priced residential property more conservatively. As a result, buyers of residential property are required to contribute a higher down payment and redeem mortgages faster. Market prices have therefore softened and, in certain regions, even declined. Moreover, clearly longer absorption periods and higher marketing expenses are putting additional pressure on profits.

In terms of rental apartments, as the supply of high-priced units exceeds demand, the vacancy rate in this category continues to rise. Renting of expensive apartments is further hampered by the considerable number of condominiums acquired by private individuals as an investment for letting purposes. Properties that include rental apartments in the lower- to mid-price range continue to be in demand, especially by institutional investors.

The price of land suitable for the development and realisation of residential space persists at a high level, and signs of a turnaround are not to be detected. Correspondingly, the acquisition of building land for the construction of projects with the promise of a commensurate yield remains demanding.

As the vacancy rate in commercial real estate continues to rise, investors are growing increasingly insecure, resulting in a noticeable slump on the market. While office and commercial buildings continue to be in demand, investor interest is confined to new buildings at good locations with long-term tenants and a high vacancy rate. Owners of commercial properties experienced initial rentals, sub-letting and reletting to be equally as demanding. As a rule, contract conclusions today call for longer rent-free periods and conversions and interior fittings to be implemented at the owner’s expense. It is nearly impossible to re-let an older building without implementing comprehensive remodelling and renovation work. Depending on the region, the level of rents is stable to declining. Based on the oversupply of commercial space emerging in Switzerland, pressure on rents is expected to rise in the medium term.

Projects & Development

Insecurity concerning the course of economic activity, the oversupply of commercial space and the declining dynamics in the rental and residential markets will certainly exert a negative influence on construction activity, which today is still buoyant. A decline in construction volume would additionally fuel the existing pressure on margins in the entire industry and inevitably further frustrate an economically successful business activity. Should this development actually set in, consolidation in the construction industry will be likely. As a result, professional promoters would most likely put increasing value on the sound financing and creditworthiness of all companies involved in a building project, not least because careful risk evaluation is becoming increasingly important. Well-funded providers of construction-related services – including financially sound general contractors – will most likely benefit from this development.

Should construction activity really have passed its peak, companies in the construction and ancillary industries today operating at full capacity will in the foreseeable future inevitably show surplus capacity. Should capacity not be reduced, companies are likely to submit lower offers for their work in order to fill capacity. In such a case, general contractors will be in a position to benefit from commissions obtained from contract awarding to subcontractors.

Beyond any doubt, the immense pressure on costs and deadlines in the construction industry puts compliance with contractually stipulated quality standards at additional risk. Furthermore, the risk of wage dumping and other violations of labour and social-insurance regulations will increase. In order to minimise resulting liability risks and secure quality standards of the awarded jobs, general contractors will be obliged to more consistently observe their supervision and control duties by means of suitable concepts and measures. Higher connected administrative and technical expenses will cause significantly higher costs and, in turn, reduce profit opportunities.

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