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Five hypotheses on Swiss real estate and rising inflation

Published by Michael Rose, 06.05.2022

Real estate investors are currently uncertain about the effects of the sharp rise in inflation - also in Switzerland - and the increase in long-term interest rates for real estate investments. Currently, we can observe two main aspects:

Rising long-term interest rates

Since the beginning of the year, long-term interest rates in Switzerland have risen significantly. As of January 3rd 2022, the 10-year SWAP was 0.13%. As of May 2nd 2022, the respective rate stood at around 1.30%. This increase is unprecedented in recent history in terms of both speed and magnitude. Internationally, comparable movements in long-term interest rates were observable in the most important currencies (EUR, USD and GBP).

However, short-term interest rates hardly changed over the same period. In the US, the short-term Fed Fund Rate was raised for the first time since December 2018 on 16 March 2022. On May 4, 2022, there was a further increase to 0.75-1.00%. It is currently impossible to predict when and how much short-term interest rates will rise in the Euro and CHF area, although many investors expect a first rate hike in mid to late 2022, or in 2023 for Switzerland. It is worth noting, however, that the accuracy of interest rate forecasts has been very low historically.

As of end of April 2022, the Swiss yield curve is thus very steep and the difference between the 3-month SARON and the 10-year SWAP stands at about 200 basis points.

Inflation continues to rise in all major economic areas

Even before the conflict in the Ukraine, both the US and Europe suffered from high inflation. The supply shocks triggered by the war (supply chains with lower efficiency, rising energy prices, rising prices of commodities, etc.) are expected to lead to a further increase in inflation while lowering potential growth. In the case of Switzerland, inflation has so far been lower than in the Euro area, probably due to a combination of measurement issues and a partial compensation of increased import prices by the strengthening Swiss franc.

The low short-term interest rates in connection with high inflation result in a negative real return on low-risk fixed-income products of considerable magnitude. Even at the long end of the - presently very steep - yield curve (10 years), the current real yield in CHF is -0.9%.

What action is now required from real estate investors? For a discussion of the interest rate sensitivity of rental income, please refer to our respective publication. The debate regarding the possible impact of rising interest rates on the value of real estate shall not be the focus here. The historical evidence in this regard is very heterogeneous and there are indications that the development of the real economy plays a considerably more meaningful role than the development of interest rates.

«Currently, short-term fi­nancing is very attractive from a risk-return perspec­tive.»

We want to outline five hypotheses, which are actionable.

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