[BERLIN] When Swiss Life Holding AG bought an office building in Geneva earlier this month for 535 million Swiss francs (US$613 million), it set a record for the city. A day later, the central bank unexpectedly scrapped its currency cap, making the job of leasing the property more difficult.
Investors such as Swiss Life, Switzerland's largest life insurer, and Pensimo Management AG, a Zurich-based pension fund manager which sealed Bern's biggest office deal last year, keep buying properties even as rising vacancy rates cause rents to fall, eroding returns. That's because of a lack of high-yielding alternatives in a country with one of the world's lowest interest rates.
"There's a decoupling of the commercial real estate market from the occupier market," said Fredy Hasenmaile, head of property research at Credit Suisse Group AG in Zurich. "Prices keep going up and we expect vacancies to rise further in the next two years."
The central bank's decision to end its three-year-old cap of 1.20 franc per euro, announced on Jan 15, spurred a record surge in the franc against the single currency, pushing it to the highest in more than three years versus the dollar. That makes Swiss exports more expensive, damaging companies' revenue and the national economy, and increases the rental costs incurred by foreign companies operating in Switzerland.
Martin Signer, head of real estate at Swiss Life, said the purchase of Rue du Rhone 8 in Geneva will add to the company's "superior" property portfolio. The building will this year be renovated by UBS Group AG, the previous owner. While companies including Societe Generale SA have agreed to move into the building, 17 per cent of the office space remains unleased.
"It's not unusual that a property has a higher vacancy during a comprehensive refurbishment," Mr Signer said by e-mail. "We are very confident that this vacancy rate will quickly be reduced, in part because of the unique location and the modern and flexible refurbishment standard."
Swiss office rentals have languished since 2011. A building boom in Zurich and Geneva, Switzerland's largest cities, created a surplus of space that forced landlords to cut rents.
The vacancy rate climbed to 5.1 per cent in Zurich - Switzerland's biggest office market - in the fourth quarter, the highest since 2004, according to data compiled by Jones Lang LaSalle Inc. Prime annual rents in the Swiss financial capital have fallen from a peak of 1,100 francs a square meter in 2011 to about 825 francs, Jones Lang said.
In Geneva, the vacancy rate was 4.9 per cent, the highest since at least 1998, Jones Lang said. Prime annual rents in Geneva fell 5.1 per cent in 2014, to 925 francs per square meter.
The SNB ended its policy of limiting the franc's value in euros, designed to shield the Swiss economy from the euro area's sovereign-debt crisis. On the day of the announcement, the franc appreciated as much as 41 per cent to 85.17 centimes per euro, the strongest level on record, according to data compiled by Bloomberg.
"The news comes at an inopportune time because we already have a renter's market and now it will become even more so," said Claudio Saputelli, head of real estate research at UBS. The Swiss economy probably will grow only 0.5 per cent in 2015, instead of 1.8 per cent as previously forecast, UBS said after the SNB announced its decision.
A stronger franc may also discourage foreign companies from renting offices in Switzerland, said Martin Bernhard, head of research at Jones Lang LaSalle in Zurich. In December, Google Switzerland said it's renting 50,000 square meters for its engineering center in Zurich.
"If the franc increases further against the euro and the US dollar, companies will think twice about expanding their presence here because it's already expensive," said Mr Bernhard.
Despite these obstacles, insurers and pension funds are eager to buy office properties as a way to earn stable returns, as bond investments offer record-low yields. Office buildings, while offering record-low prime yields of less than 4 percent, still beat negative returns available on the Swiss bond market.
Investors bought about 3.1 billion francs of Swiss commercial properties in 2014, compared with 3.4 billion francs in 2013, according to Jones Lang. Buyer interest has increased since the SNB decision, said Luciano Gabriel, chief executive officer of PSP Swiss Property AG, the second-largest Swiss property company by market value.
That's reflected in the stock market. PSP has gained 5.9 per cent since the day before the SNB's announcement, while Swiss Prime Site AG has risen 2.3 per cent.
In contrast, Swiss Life has dropped about 15 per cent, Credit Suisse has fallen about 16 per cent and Cie Financiere Richemont, owner of the Cartier brand, has lost 15 per cent.
Growing demand for buildings isn't unique to Switzerland: insurers, pension funds and sovereign wealth funds fuelled a US$112-billion increase in worldwide property acquisitions in 2014, according to Jones Lang, as investors looked for a safe place to park their cash.
The widening divergence between rents and prices is "not a healthy development" because it reflects artificially low interest rates resulting from faulty government debt policies in the eurozone, Mr Gabriel said.
"The gap can remain, but of course it can't widen indefinitely," he said.
Meanwhile, investors are hoping that their properties won't suffer, as long as they buy centrally-located, modern buildings.
"Properties such as Rue du Rhone 8 will remain very attractive," said Swiss Life's Mr Signer, referring to the office building the insurer bought in January on Geneva's upscale luxury-shopping street.
"If commercial real estate comes under pressure, it will primarily be the peripheral locations and vulnerable sectors such as retail and gastronomy that are hit."