NEGATIVE INTEREST IN THE BUILT ENVIRONMENT

(1) CHF: A safe haven currency, 10CHF, 1997

(2) GLOBAL INSTABILITY: Bruno Latour, Down to Earth, 2018.

(3) COVID-19: Coronavirus Impact Report, Wüest + Partner, March 2020

(4) KEY INTEREST RATE: -0.75, Leitzinsmonitoring SNB, 2019

(5) PENSION FUNDS: real estate asset investment statistics, 2019

(5) TENANCY LAW: rent increase for existing tenants

The Swiss Franc, a so called „safe haven currency“, meaning: in times of severe global instability, asset investment companies tend to hedge their money into a robust and stable currency. The financial crisis, the trade war between China and the US, and nowadays COVID-19* – all these events caused a similar behavior amongst the global asset investors: they increasingly invest in bonds from the Swiss National Bank. The effect on the CHF: the currency gets stronger, rises its value on the financial market.

The Swiss National Bank, virtuously caring for the well-being of the Swiss economy, is, in order to uphold the export industry, desperately keeping the value of the currency on the lowest possible – with an „ultra-loose monetary policy“, where the key interest rate is now kept on an all-time minimum of -0.75. This measure has a great effect on how asset investors within Switzerland have to park the money from the pension funds. The Swiss citizens put a certain percentage of their wages into the pension system, which is laid out to generate a maximum asset after the 50 years of depositing money. The targeted conversion rate that the citizens get when they retire anticipates a minimum interest of around 1% – which means that state bonds are no longer a feasible option, since the negative interest rate means to even pay for depositing money in the Swiss National Bank.

As a consequence, asset investment is increasingly driven into more risky funds – or into one of the few remaining fields of quite profitable money deposit: real estate.

In the last twenty years, the popularity of Zürich as a place to live has been continuously rising. A well-educated middle class is conquering the urban territory, longing for housing in good order. The price level of property and rent has accordingly reached such a high level, that property owners are blessed with market prices that are at a multiple of what they were two decades ago.

The pension funds’ increasing interest in the housing stock is in that context nothing but comprehensible. Nevertheless, they encounter certain restrictions on the legal level: an acquired building can normally never exploit its full financial potential, since the tenancy law protects the existing tenant from an all too quick rising of the rental price, even if the building would be newly renovated.

Anybody investing in real estate is therefore confronted with this paradox interplay of tenancy law and the actually achievable market price of a property. As the total amount of money that has to be burnt is extraordinarily high and the expected return can only be reached if the there is no previous tenant, asset investors tend to see the one most profitable solution in the act of demolition and replacement. (March 12, 2020)

*Addition on March 25, 2020: The first reactions to COVID-19 were as described above – nevertheless, the situation has evolved in the last two weeks. As by now (with a quasi-lockdown of the everyday life) an economic recession is the most probable scenario for the Swiss economy, the dynamics appear to change drastically. How the asset investment companies will treat the housing stock and their real estate in the upcoming time is at this very moment not predictable.