Engel & Völkers’ Hans Ueli Keller expounds on some of the innovative ways he helps clients strategise their transactions in the Swiss real estate market.
Best known for its private banking sector, Switzerland is also home to an active real estate market that ranks amongst the healthiest and most desirable in Europe. As everywhere else in the world of real estate brokerage, knowing whom to talk to is vital. Enter Hans Ueli Keller of the global real estate firm Engel & Völkers. Mr Keller and his associates talked to Swiss Style about t he intricacies of what, to external observers, seems to be an impenetrable market (access to transaction statistics in Switzerland is very limited) in one of the world’s most attractive countries for real estate acquisition.
Because real estate is an important decision for commercial firms as well as an increasingly attractive option for private investors concerned with financial stability, Mr Keller provides his clients with a comprehensive consulting service bolstered by years of experience; he also offers access to various legal, financial, and tax-related agencies.
While clear that the firm politely declines involvement in any transaction that may potentially run afoul of Swiss law, he seems to take pleasure in thinking of innovative ways in which investors may not only leverage their entry into the real estate market, but also do so in a manner which guarantees their assets and equity remain as liquid as possible.
Because of a surge in demand for Swiss commercial properties, prices are increasing. Despite fluctuations in its market value, the relative stability of the Swiss franc is also a significant draw to firms looking to hedge themselves against volatile currencies such as the euro or the US dollar. Indeed, Engel & Völkers emphasises that investors are drawn to Switzerland—despite the country’s lower yields—precisely because the Swiss real estate market is still seen as more secure than other European markets and far more secure than investments in financial institutions. The investment perspective, Keller argues, is one of consistent, low-yield assets rather than high-yield assets with wildly fluctuating values. Says Mr Keller, “If you make an investment in an apartment block and do not overpay or overleverage the building, then probably you won’t lose money with it”.
Even for commercial properties, the forecast seems sunny. When asked about where he would recommend investment, Keller is quick to suggest the Swiss manufacturing sector, which, despite recent currency woes because of the high value of the franc, is nonetheless increasing its efficiencies and expanding its export base.
That said, the relative inflexibility of the Swiss real estate market has its own challenges. While real estate prices are high because of Switzerland’s reputation for political and economic stability, prices are expected to decrease as the Swiss private banking sector continues on its path of retrenchment, potentially leaving commercially oriented firms with overvalued real estate in a deflating market.
Indeed, Mr. Keller urges caution on the part of commercial investors where regional effects are especially pronounced. To overcome this hurdle, Keller states that investors are packaging properties into companies and offering the newly created entities on the stock exchange to provide an exit strategy if needed. Mr. Keller offers the example of a 250 million-franc shopping complex. For both private and corporate investors, the sum is considerable; private investors are likely to be wary about investing such a significant sum in a single property, while larger, corporate investors may be reticent to have such an expensive item on their balance sheets. An asset-packaging system on the other hand, allows 7-8 investors to own a significant portion of the shopping complex via an Aktien Gesellschaft (a corporation limited by shares) traded on the Bern stock exchange. It seems clear that such a system would make The Economist writer Walter Bagehot proud: while allowing for a match between investors looking to engage in high-liquidity equity transfers, Switzerland’s well-developed banking system also allows investors to determine, via leveraging, their extension into the real estate market. On the other hand, for firms looking to trim excess assets from their balance sheets—financial firms hit by Basel III capital requirements, for example—this system allows the chance for companies to sell properties, buy shares, and, in effect, rent back their own properties, all the while maintaining some measure of control over the property itself. Likewise, because the Bern stock exchange has strict rules on information, the process is far more transparent than if firms and investors had to research Switzerland’s opaque and decentralised real estate market across three different linguistic zones. Though Mr Keller does not mention it, such a system also permits the write-off of capital losses in the event of property depreciation.
Despite potential setbacks, continued evolution of the Swiss financial sector means the future of commercial real estate is not all cloudy. Moreover, such is the value of property in Switzerland that, Keller says, “If you have invested in good geographic locations, then it is unlikely that you’ll see the value of your property holdings depreciate”. While commercial properties do have a certain risk associated not only with tenants but also with the general future of the private banking sector in Switzerland (“private banking is going to make us suffer,” he states), it should be remembered that equity turnaround bolstered by the AG system is often rapid. In some cases, even where the AG system is not widely used, the real estate market is naturally liquid. Keller raises the example of Zurich, a city where larger firms such as Allianz and Credit Suisse are moving out of the city centre while smaller firms are taking advantage of favourable tax laws and chic addresses to move in. Like any other investment, real estate is a reflection of supply and demand, one that, because of Switzerland’s stable economic forecast, is likely to remain on a trajectory of growing importance as the banking system continues its unfortunate decline.
Article by Alain Bartleman