UBS Real Estate Focus 2025 report released - aging population may ease supply shortages in the future, but boomers have enough money to avoid downsizing.
UBS Real Estate Focus 2025: Key Insights into the Swiss Real Estate Market
Publication Details:
- Publisher: UBS Switzerland AG, Chief Investment Office GWM | Investment Research
- Editorial Deadline: March 31, 2025
- Languages: German, English, French, Italian
The below is a summary of the PDF report linked above.
Editorial Summary:
While Japan faces a dramatic oversupply of vacant homes due to its rapidly aging and shrinking population, Switzerland has experienced unprecedented population growth, surging from eight to nine million inhabitants in just twelve years. This has led to a significant housing shortage. However, the report cautions that Switzerland’s population growth is also expected to slow down in the long term due to an aging society and reduced relocation tendencies among the elderly. This shift could partially alleviate the current housing scarcity but may lead to higher vacancies and falling home prices in less dynamic regions, albeit far from Japan’s extreme scenario. The 2025 report explores these demographic trends and their long-term impact on the Swiss real estate market.
1. Population Dynamics
Future: Migration as a Value Driver
- Projected Growth: Switzerland’s population is expected to reach 10.7 million by 2045. Annual growth is projected at 1% until 2030, then gradually slowing to 0.6% by 2045, assuming continued high immigration.
- Impact on Housing Costs: High population growth is strongly linked to rising home and rental prices. Countries with over 1% annual population growth have seen real home prices more than double since 2000, and Switzerland exhibits a similar pattern for rents.
- Construction Lag: Construction activity, particularly in urban areas, struggles to keep pace with demand, creating supply bottlenecks.
- Regional Shifts: Immigration disproportionately attracts people to major urban centers, indirectly boosting population in surrounding agglomerations (e.g., Aargau, Eastern Switzerland).
- Easing Shortage: The gradual slowdown in overall population growth is anticipated to alleviate the housing shortage, especially from 2030. Household growth (0.8% annually) is expected to outpace population growth due to an aging society, but historically, housing stock expansion has managed to keep up.
- Hotspot Regions: Cantons such as Zurich, Zug, Vaud, Geneva, and Aargau are forecast to experience the strongest population growth and sustained high housing demand (over 1% annually) beyond 2030.
- Immigration’s Rental Impact: Approximately half of immigrants initially live as single-person households in relatively small, expensive rental units. Household size increases with duration of stay (e.g., through family formation), but homeownership rates rise slowly due to significant capital requirements.
Aging: Market Loses Momentum
- Demographic Shift: The number of residents over 65 is set to increase from 1.8 million to 2.6 million by 2045, making up a quarter of the population. The over-80 age group could nearly double to over one million.
- Low Relocation Tendency: Retirement typically does not trigger a move. The probability of relocating for those aged 60-69 is under 4%, less than half the Swiss average. This is largely due to the strong financial position of Baby Boomers, who often do not need to downsize for financial reasons. Long-term tenants also benefit from comparatively low existing rents, making a move financially unattractive (a new rental could mean a 40% increase).
- Property Demand: Interest in acquiring owner-occupied homes before or shortly after retirement remains high, driven by purchasing power and rising life expectancy. Alpine holiday homes and managed or buy-to-let properties are particularly sought after.
- Market Implications: Aging will lead to a gradual deterioration of general building conditions, especially in the owner-occupied segment, as older owners tend to invest less in renovations. The availability of rental apartments is expected to decrease, particularly after 2040, as more elderly individuals live alone. However, demand for small apartments may not increase proportionally, as financial factors often don’t necessitate downsizing.
- Investor Considerations: While Switzerland is not expected to replicate Japan’s depopulation of peripheral regions, investors should consider an aging population. Targeting the needs of those over 80 (e.g., residential services) and implementing precise regional investment strategies will be key.
- Regional Risks: Regions in the German-speaking Mittelland away from major centers are expected to see significant growth in the retired population, making them attractive for age-appropriate housing. Conversely, regions with shrinking working populations (e.g., Grisons, Ticino) face risks of rising vacancies and falling prices in the primary housing market, exacerbated by increasing public finance strain from care needs.
Housing Shortage: Tenants Compromise
- Market Pressure: Driven by strong immigration and a construction slowdown, the Swiss housing market is characterized by increasing scarcity. Asking rents have cumulatively risen by 9% and existing rents by 7% over the past three years.
- Larger Households: The shortage is leading to the formation of larger households, such as shared living arrangements and young adults staying longer with parents. In 2023, nearly one-third of new households comprised three or more members.
- Outward Migration: To mitigate high housing costs, many households are moving away from expensive urban centers. Major cities experienced a net outward migration of 14,000 residents annually to surrounding regions between 2020 and 2023, benefiting more affordable areas. The prevalence of home office arrangements facilitates longer commutes.
- “Lock-in” Effect: Long-term tenants often pay significantly less than current market rents (e.g., a 42% difference in Zurich for contracts over ten years), which discourages them from moving (“lock-in” effect). This leads to inefficient use of living space; in 2023, only 9.3% of the population moved, the lowest rate since 2013.
- Investor Prospects: The persistent housing shortage is expected to continue for the next five years, extending to the agglomerations around urban centers. This implies lower rental risks and stable income growth prospects for investors. Affordable rental apartments with compact layouts remain in high demand. Niche segments like student housing and micro-apartments could also benefit. Regulatory hurdles remain a key challenge for boosting construction activity.
2. Residential Market
Owner-Occupied Homes: Affordability as a Hurdle
- Rising Demand & Falling Rates: Interest in homeownership has significantly increased since mid-2023, largely due to a sharp decline in mortgage rates. Money market mortgages and 10-year fixed-rate mortgages have fallen by 150 and 135 basis points, respectively, from their 2023 peaks.
- Financial Attractiveness: Ownership costs (mortgage interest, maintenance, taxes) are now generally lower than renting a comparable property. The previous “ownership premium” of 15% in summer 2023 has turned into a “discount” of 13% by Q4 2024, expected to increase to 16% by summer 2025.
- Affordability Challenge: Despite lower financing costs, affordability remains a major obstacle. For an average 110m² apartment (costing nearly CHF 1 million), an annual gross income of CHF 175,000 and CHF 200,000 in equity are typically required. An average family (CHF 150,000 income) could afford only about a third of listed 4+ room homes in 2024, a significant drop from nearly 60% in 2009. This disproportionately affects younger households.
- Limited Supply: The supply of available owner-occupied homes remains tight, with only 3.8% of condominiums and 2.8% of single-family homes listed in Q4 2024, below the 15-year average. New construction permits for condominiums are showing a slight rebound (up 15% in one year), suggesting a potential increase in new supply from 2026.
- Price Forecasts: Owner-occupied home prices rose by 2% (condos) and 2.9% (single-family homes) in 2024. For 2025, price increases are expected to accelerate to 3% for condominiums and 4% for single-family homes, driven by high demand and limited supply, though affordability constraints will likely cap steeper rises.
- Abolition of Imputed Rental Value (“Eigenmietwert”): Parliament approved the abolition of the imputed rental value for primary and secondary residences, with a public vote expected by late 2025. This reform, if accepted, could lead to a significant price increase (around 13%) for owner-occupied homes, particularly in a low-interest environment, by reducing ongoing ownership costs.
- Achieving Homeownership: Analysis indicates that affordable homeownership (for a household with CHF 200,000 income) is most feasible in municipalities located 20-45 minutes outside major urban centers, which also offer good infrastructure and leisure facilities.
Rental Apartments: Confident Investors
- Renewed Attractiveness: Multi-family homes are regaining investor appeal due to strong rental income growth and falling interest rates. Asking rents in 2024 saw significant year-on-year increases, and existing rents rose by 3.3% due to higher reference interest rates. The vacancy rate for rental apartments is exceptionally low at 1.6%.
- Normalizing Demand: While the rental market experienced a boom, demand is now normalizing. High rents burden household budgets, resulting in fewer moves and slightly larger household sizes. Lower interest rates are also diverting some demand back to homeownership.
- Immigration as a Driver: Robust employment growth from 2021 to 2023, coupled with refugee influx, led to high net immigration. This surge drove asking rents up by 9% overall, enabling landlords to pass on reference rate increases.
- Regional Demand Shifts: Renters are increasingly seeking locations outside expensive city centers, benefiting regions in cantons like Schaffhausen, Thurgau, Aargau, and Lower Valais. Rental income growth in these agglomerations has recently outpaced that in core cities.
- Construction Outlook: Fewer new apartments are expected in 2025. However, falling interest rates, stabilized construction prices, and the attractiveness of multi-family homes are expected to stimulate cyclical support for residential construction, with new rental apartment permits increasing by 20% since 2021.
- Persistent Shortage: The housing shortage is expected to continue into 2025, with vacancy rates potentially dropping to 1.4%. An easing of the situation is not anticipated before 2026. Structural factors such as lengthy approval processes and land scarcity continue to impede construction.
- Rising Purchase Prices: The combination of rental income growth and significantly reduced interest rates has boosted the transaction market. Multi-family homes are projected to appreciate by approximately 3% in 2025.
- Risks: The ongoing shortage increases the risk of regulatory interventions in the rental market, such as “renovation brakes” which can lead to significant value losses. A severe deterioration in relations with the European Union could also negatively impact housing demand by restricting free movement of persons. These risks are currently not priced into the market.
3. Commercial Market
Office: Focus on Prime Locations
- Market Environment: The office market faces challenges due to ongoing space optimization by companies and an anticipated increase in home office usage. Zurich and Zug are expected to continue outperforming other major office markets.
- Performance: Office asking rents saw a slight increase last year but remain 5% below 2019 levels (10% real). Existing rents rose in the low single-digits. The national office vacancy rate is around 5%, half that of major European cities, but higher in specific areas like Zurich North and Geneva Airport. Institutional investors saw weaker returns from commercial portfolios compared to residential.
- Employment Growth: Robust employment growth since 2019 (1.6% annually), particularly in high-value-added sectors (IT, finance, legal) and the public sector, has prevented a greater oversupply of office space.
- Prime Rents: Zurich and Zug, benefiting from strong employment growth in high-value sectors, have seen prime rents in their city centers rise by 15% above 2019 levels. In contrast, Geneva’s employment growth has shifted to its agglomeration, with prime rents in the city remaining stable.
- Quality and Flexibility Drive Investment: There is high demand for central, flexible, modern, and sustainable office spaces, especially from large international corporations. Renovation investments are high (60% of all office construction investments), focusing on quality improvements in major centers.
- Investor Interest: The positive market development in prime locations attracts investors, reducing risk premiums. Prime yields in major centers dropped to 2.8% in 2024, indicating a higher willingness to pay. Zurich’s prime yields are particularly low at 2.1%.
- Future Outlook: Only moderate growth in office space demand is expected due to untapped unused workspace capacity and the impact of Baby Boomer retirements. Home office adoption is likely to continue increasing, dampening demand for space. Investor interest will remain concentrated on central, modern, and sustainable properties. Stagnating quality-adjusted rents and below-average performance for commercial portfolios are anticipated for 2025.
Retail: No Respite
- Structural Transformation: The retail sector continues its consolidation. Between 2011 and 2022, nearly 8% of non-food stores disappeared, with significant declines in clothing, footwear, and electronics. Food retail, however, saw a 2% increase in stores, driven by population growth, mainly large supermarkets.
- Online Retail Surge: Domestic online retail nearly doubled its workplaces between 2011 and 2022, capturing 11.9% of total retail sales in 2023 (14% including foreign online sales). This is primarily driven by the non-food segment (19% online), while food remains at a low 3%.
- Shopping Tourism: Cross-border shopping persists due to the strong Swiss franc, despite a reduction in the VAT-free limit.
- Moderate Vacancies: New construction of retail space is significantly lower (half the long-term average in 2024). This, coupled with the conversion of unrentable retail areas into office or commercial spaces, keeps vacancy rates moderate (4.5% for institutional investors in Q3 2024).
- Outlook: While real retail sales are expected to grow by 0.6% in 2025, asking rents for retail spaces are projected to decline by 1%. The market will remain challenging, with continued tenant turnover and marketing efforts. Prime ground-floor locations with high footfall are expected to continue performing well.
Logistics and Industry: Opportunities and Challenges
- Robust Performance: Swiss industrial and logistics properties have shown resilience. The logistics segment, in particular, promises solid long-term returns, though direct investment remains challenging.
- Demand Drivers: The logistics sector is booming (employment up ~3% annually since 2021), primarily driven by e-commerce, with parcel volumes 20% above 2019 levels. This creates a high demand for flexible logistics spaces that can accommodate various services. The manufacturing sector’s employment, however, has stagnated.
- Investment Properties: Self-users dominate the industrial and logistics segments. Institutional investors commissioned only a small fraction (15-18%) of new construction. Attractive investment properties require strategic locations and flexible design (“Light Industrial”) to cater to multiple tenants. Sustainability (e.g., energy-efficient construction) is also gaining importance.
- High Return, Low Liquidity: Direct investment in logistics and industrial real estate is capital-intensive and requires specialized knowledge, with low market liquidity. Development projects often face zoning and community resistance. Acquiring and converting existing industrial properties or engaging in “sale and leaseback” transactions are often more promising.
- Datacenters: A rapidly growing niche driven by cloud computing and AI. Location is crucial for reliable and cost-effective power, high-speed internet, and proximity to customers. While Switzerland is a high-cost location, data residency requirements attract global providers. Over CHF 1.2 billion in datacenter construction has been approved since 2020, with Zurich dominating. Despite growth, it remains a specialized niche for investors.
4. Stock Exchange
Real Estate Funds: Premiums Under Scrutiny
- Strong Performance: Swiss listed real estate funds delivered a strong total return of 17.6% in 2024 (SWIIT Index), their fourth-best performance in 30 years, driven by lower interest rates and improved income prospects. This led to high valuations, with the average premium (Agio) over Net Asset Value (NAV) reaching about 35% in early 2025, significantly above the long-term average of 22%.
- Justified Premiums: A substantial portion of these premiums is justified by structural advantages (diversified portfolio, professional management, higher liquidity – about 10 percentage points) and deferred taxes (NAV calculations deduct estimated real estate gains taxes that are rarely incurred, accounting for another 10 percentage points).
- Interest Rate Expectations: The remaining 10-15 percentage points of the premium are attributed to market expectations of falling interest rates, which lead to lower discount rates and imply an expected 15% increase in inventory values.
- Product Differentiation: Premiums vary significantly across funds, with older, larger funds typically exhibiting higher premiums due to greater value appreciation and economies of scale. Funds focused on residential properties also tend to trade at higher valuations than those with commercial assets.
- Market Timing: Historical analysis over 15 years suggests that systematic market-timing strategies based on Agio levels have not consistently outperformed a simple buy-and-hold strategy.
- Long-Term Investment: While current Agio levels might suggest overvaluation for short-term investors, real estate funds remain an attractive long-term portfolio addition due to relatively attractive distribution yields (compared to bonds), potential for tax optimization, and positive operational developments driven by rising rents and falling financing costs.
Global: Investors Return
- Increased Interest: Global commercial real estate is expected to attract more investment in 2025, as inflation normalizes, leading to lower interest rates and financing costs.
- Financial Market Recovery: Central banks are projected to lower key interest rates, and banks are expected to loosen lending standards, significantly reducing financing costs for real estate investors.
- Higher Transaction Volumes: Transaction volumes, which fluctuated heavily in recent years, are set to rise considerably in 2025. This increase is expected to drive investor returns and support capital values, making 2025 a potential turning point with a forecast total return of around 9%.
- Sectoral Recovery: Global directly held properties, which saw over a tenth of their capital value eroded since mid-2022, found a stable valuation floor in autumn 2024. Rental growth and stronger leasing activity are bolstering investor confidence. Rental growth could exceed inflation by up to 1 percentage point over the next 2-3 years.
- Opportunities: The end of 2024 marked an attractive entry point for direct and indirect real estate investments. While stagflation remains a long-term risk, it appears unlikely. All sectors are benefiting from the recovery, with office buildings in the US yielding an average initial return of 8.9% by end-2024, retail at 7.2%, industrial at 6.4%, and multi-family at 5.7%, outperforming 10-year government bonds. A significant reduction in new construction across all segments is positively impacting capital values and rent growth.
5. Sustainability
Current Status: The Journey is the Destination
- Slow Progress: The rate of heating system replacement in Swiss residential buildings is too low to meet 2050 sustainability targets. Sales of heat pumps declined by 29% in 2024, partly due to lower oil/gas prices compared to rising electricity costs.
- Cantonal Variations: As of end-2024, only 40% of residential buildings used sustainable heating. Oil remains the most common (36%), but heat pumps (nearly a quarter) have overtaken gas. Cantons like Obwalden, Appenzell Innerrhoden, and Uri lead with almost 60% sustainable heating, while Geneva lags significantly at 21%.
- Focus on Existing Buildings: New construction almost exclusively incorporates sustainable heating, but its impact on overall emissions is limited. The primary focus must therefore be on retrofitting existing buildings.
- Regulatory Push: Cantonal “Model Energy Regulations 2025” (MuKEn 2025) propose a comprehensive ban on fossil fuel heating systems for replacements. Several cantons (e.g., Basel-Stadt, Zurich) already have such bans, which are expected to accelerate the transition, though full implementation across all cantons is a lengthy process.
- UBS Forecast: By 2030, just over half of Swiss residential buildings are projected to have sustainable heating. However, a quarter of cantons will likely remain below 50%. MuKEn 2025’s broader impact is expected after 2030, eventually accelerating progress toward 2050 climate goals.
Profitability: Incomplete Incentives
- Financial Incentives: Subsidies and tax rebates significantly reduce the cost of energetic building renovations (25-40% of investment), but current financial incentives are insufficient to trigger a widespread wave of renovations.
- Single-Family vs. Multi-Family Homes: Single-family homes see higher rates of sustainable heating adoption due to direct benefits from lower heating costs, higher savings potential per area, and simpler decision-making. For multi-family homes, profitability hinges more on potential rent increases, which often do not fully compensate for renovation costs under current rental agreements.
- Renovation Mandates: Stricter regulations, such as future bans on fossil heating replacements and minimum energy efficiency standards for building envelopes, could lead to price discounts for properties requiring renovation. In urban centers, such mandates might drive up rents, or, if rent increases are capped, incentivize conversion of rental apartments into owner-occupied condominiums.
- District Heating: The low renovation rate in cities, partly due to the prevalence of gas heating in multi-family homes, highlights the need for increased investment in district heating infrastructure, similar to successful models in Scandinavia, to achieve climate goals in urban areas.
Future: Expensive Final Sprint
- CO2 Reduction: Switzerland has significantly reduced CO2 emissions per square meter in residential buildings (30% between 2011-2021), outperforming many European countries but lagging behind Scandinavian leaders.
- Grey Emissions Focus: The climate debate is shifting from solely heating systems to the total CO2 emissions over a building’s entire lifecycle (“grey emissions” or embodied carbon). For new and renovated buildings in Switzerland, grey emissions account for an estimated 20-40% of total lifecycle emissions, rising to over 90% for energy-efficient new builds. Cantons will be tasked with setting grey energy limits from 2025.
- Urgency & Cost: Earlier emission reductions have a greater climatic impact. Delaying measures increases the difficulty of reaching targets and slows the cost reduction of energy-efficient technologies. Switzerland has strong potential for rapid CO2 reduction due to its low-carbon electricity mix, good building quality, and relatively low heating replacement costs.
- Conflicting Goals: Achieving a CO2-neutral building sector faces challenges. The cost of improving energy efficiency rises as efficiency increases, and heritage protection complicates renovations. The inclusion of grey energy can worsen the climate footprint of energetic renovations and even seemingly climate-friendly replacement new builds. Significant reduction of grey emissions implies considerably higher construction costs, potentially conflicting with investor attractiveness and political goals for housing densification.
- Compensation: Compensation mechanisms, particularly those involving direct CO2 extraction and long-term storage, could play a role. While currently costly (CHF 500-1000 per tonne of CO2), these might offer a more resource-efficient alternative to minimizing grey emissions through complex structural measures, suggesting that strict net-zero targets for every building may not always be practical.
6. Market Data and Forecasts (Selected Trends for 2025)
- Economy: Real GDP growth expected at 1.8%. Inflation projected to be 0.9%. SNB key interest rate forecast at 1.4%.
- Residential: Owner-occupied prices: Condominiums +3.0%, Single-family homes +4.0%. Rental market: Multi-family purchase prices +3.0%, Asking rents +2.5%, Existing rents +1.5%. Vacancy rate at 1.5%.
- Commercial: Office asking rents -0.7%. Retail asking rents -1.0%.
- Real Estate Funds: Total return expected in the low single-digits.