Real Estate in Switzerland: How the Investment Pays Off - Everon AG (2024)

Reading Time: 12 minutes

The Swiss Residential Property Price Index (IMPI) allows you to track the ongoing development of real estate prices. These have almost doubled since 1998. Even in recent years, from the fourth quarter of 2019 to the fourth quarter of 2022, the index has risen from 100 to around 115 points. So is it worth investing?

Investing in real estate in Switzerland is therefore particularly worthwhile if you have a long-term investment horizon. Swiss real estate is one of the investment forms that offer a high degree of inflation protection. Returns are generated through both rental income and capital appreciation. There are many ways to invest in Swiss real estate – directly or indirectly.

So first get an overview of whether and in what way Swiss real estate fits your personal investment strategy.

The most important in a nutshell

• Real estate is considered a security component of a balanced investment strategy.
• Owning your own home is a physical investment that is already being used today.
• Direct investment in real estate requires expertise and time.
• Personal requirements determine the pros and cons of a real estate investment.
• With indirect investments, it is possible to invest in real estate even with small amounts and little effort.

Expected returns vs. secure living in one’s own home

The first step in examining the personal advantages and disadvantages of a real estate investment is to clarify your initial situation:

• Do you already own a property?
• Do you live in your own property or rent?
• What significance does the saved rent have for you in the context of old-age provision?
• What financial assets do you have and in which asset classes are you already invested?

When you invest money in real estate, you own a physical asset. Provided you occupy the property yourself, you are already using this asset. This is a clear difference from investing in securities, for example. Owners of their own home often do not consider their property from a yield perspective. They rate the value of being able to make independent decisions within their own four walls, of being able to design their own home and of being safe from termination of the tenancy very highly. Do you see yourself in this or is it more important for you to be able to keep housing costs low in the long term?

Basically, part of a balanced investment strategy is to have a certain amount of financial assets before investing directly in a pure income property, i.e. a property for renting out. After all, when you purchase a property directly, you are opting for a long-term investment. Compared to securities, it cannot usually be converted into liquid assets at short notice, should the need arise. Also, the not inconsiderable incidental costs of acquisition must first be earned through subsequent returns.

Investing money in real estate: Pros and cons

From an investor’s point of view, real estate offers more than just security and income. There is also a risk in this asset class. The investment process also differs from other investments, especially when buying directly. Interested investors should therefore weigh the following advantages and disadvantages.

The main advantages include:

• Real estate in Switzerland has been characterized by a steady increase in value in the past.
• Investments in real estate are considered a stable value investment and inflation protection.
• Compared to other forms of investment, real estate is subject to only minor fluctuations in value.
• Rented properties provide a regular source of income.
• The saved rent on an owner-occupied home eliminates a significant burden in old age.
• An owner-occupied property is an investment that can already be experienced today (free design, high living comfort).

Possible disadvantages are:

• The purchase prices of real estate in Switzerland are very high, even in international comparison. For example, the median price per square meter in the largest Swiss cities is around 12,000 Swiss francs, which is about twice as high as in the largest cities in neighboring Germany.
• Real estate should generally be viewed as a long-term investment. The ancillary costs of acquisition must first be earned through corresponding income from the property. At the same time, the equity capital invested is tied up for the long term.
• The decision-making process and the purchase process require a relatively large amount of time.
• Maintenance and repairs require the formation of reserves and represent a financial risk.
• Mortgages for financing may be subject to interest rate risks.
• Although returns on real estate have been mostly steady in the past, they have been lower compared to other investments.

Taxation of residential property in Switzerland

If you own your own home, you pay federal and cantonal taxes on the imputed rental value (“Eigenmietwert”) in the form of fictitious income. The imputed rental value is between 60 percent and 70 percent of the average market rent. If you rent out your property, the actual rental income is taxable.

Conversely, homeowners have the interest on mortgages and maintenance work deducted from their taxable income. Thus, those who own a heavily mortgaged property benefit from this rule, as the interest payments are usually higher than the imputed rental value. In contrast, those who live in their debt-free home are disadvantaged, as they must pay income taxes on the full imputed rental value.

When a property is sold, there is predominantly a profit that must be taxed – real estate gains tax is due. The net profit is taxable. Expenses incurred during the purchase and sale can therefore be deducted. The longer the real estate owner has held his property, the lower the tax burden. Therefore, those who purchase a property and sell it again at a profit a short time later pay the most.

Lucrative investment in real estate – also for me?

The advantages of real estate investments listed above do not necessarily apply to every investor. Likewise, depending on your personal situation, not all of the disadvantages mentioned will be perceived as such. Therefore, answer the following questions for yourself. This will help you to quickly determine whether real estate is a suitable form of investment for you or not. Successful real estate investors are usually those who continuously take care of their property. In comparison, investing in an ETF, for example, requires very modest effort.

Can I imagine investing my money for a longer period of time and not being able to dispose of it during that time?

When acquiring a property, there are not inconsiderable ancillary acquisition costs. The value of the property must initially increase by this amount so that you do not have to sell at a loss. Also note that you cannot plan the optimal time for a sale.

Can I imagine taking on a lot of debt?

If you want to invest successfully in real estate, you should not be afraid of high debts. Hardly anyone can finance the purchase of a property from equity alone. Furthermore, in the case of rented properties, it is advisable to finance a larger portion for tax reasons.

Am I able and willing to cope with the possible interest rate risk of the financing?

The installments for the mortgage rarely remain at the same level until repayment. After the fixed interest rate expires, the bank will offer a market interest rate that is current at that time for the follow-up financing. So you should be prepared for fluctuations.

Am I willing to invest my free time in searching for and viewing real estate?

A successful real estate investment depends in the first step on finding the suitable property. In addition to expertise, this requires a great deal of time.

Can I imagine carrying out necessary renovation or modernization work and paying for the costs?

Investors with manual skills have a clear advantage here. In any case, you must always think about building up a reserve for necessary repairs and renovations.

Do I want to take care of the rental and management or hire someone to do it for me?

The ongoing management of a property involves just as much effort as the upcoming new rental. Investors who have a certain relationship to their property will find it easier. Otherwise, consider the financial outlay for property management.

Can I financially afford not to rent out an apartment?

The income and expense account will never be able to close consistently for a property. Therefore, in addition to the reasons mentioned above, possible vacancies, at least temporarily, must also be taken into account. This may be the case, for example, in the event of necessary renovations between a change of tenant.

Am I aware of the risks of the real estate market?

Even though the real estate market is a safe investment in the long term, this market also goes in waves. So never calculate to sell at a predefined time.

Reading Tip:

• Switzerland’s 3-pillar principle
• Private financial planning – how to achieve your individual goals

A wide range of options for investing in real estate

Today, investing in real estate is possible in many ways. In principle, direct investment requires the largest sums and at the same time the highest expenditure. Indirect investments, on the other hand, make it possible to enter the real estate investment class with manageable amounts and without great expense.

Purchase of real estate

When investing in real estate, the first question that arises is whether the property is to be considered purely as a capital investment or whether it is to be owner-occupied. To invest money in a property, the following options are available:

• Condominium ownership: this is a special form of co-ownership (a property with several owners, each of whom owns a share). This refers to condominiums in an apartment building that are assigned to owners. There is a community of owners for the entire apartment building. However, the floor owners can dispose of the defined ownership shares (apartments) on their own.
• Single-family house: the classic owner-occupied home.
• Multi-family house: The value of multi-family houses is determined according to the capitalized earnings value method. For this purpose, certain capitalization factors are applied to the rental income.
• Commercial property: Commercial properties are also valued using the capitalized earnings value method. Due to the higher risk associated with commercial real estate, the capitalization factors are correspondingly higher.

Open-ended and closed-end real estate funds

Open-ended real estate funds are comparable to other classic funds, such as equity funds. Instead of investing in securities, open-ended real estate funds invest their investors’ capital in real estate. Investors can buy the units through the fund company and also return them to the fund company.

In the case of closed-end real estate funds, investors invest in a specific project. Once the project has been financed, the fund is closed. The money invested is thus tied up in the fund. The shares cannot be returned, as is the case with an open-end real estate fund. At best, the investor can sell the shares himself to a potential buyer.

Real Estate ETFs

The real estate ETF tracks an index that includes shares of various companies in the real estate industry. The risk is therefore broadly diversified. There are regional and global real estate ETFs.

Real estate stocks

This is a classic equity investment. What makes it special is that it involves companies from the real estate industry that hold real estate in their portfolio.

REITs

REIT stands for real estate investment trusts. They are an alternative to funds or ETFs. REITs are listed on the stock exchange and can therefore be traded at any time, unlike open-end real estate funds. Although this type of investment has existed in the USA since the 1960s and is extremely popular, the legal framework is still lacking in Switzerland. It involves listed stock corporations that undertake to distribute a large part of the rental income as dividends.

Crowdinvesting

The crowdfunding sector has grown strongly in recent years. Mostly, it involves the financing of large real estate projects. As an investor, you are usually a subordinate lender. This means, for example, that subordinated loans (after bank loans) are provided by small investors for the construction of a nursing home during the construction phase. This is organized via a platform, which then provides the project developer with the collected money as a sum. It should be noted that in the event of insolvency, all other creditors are first served before the investors who invested via the crowdinvesting platform are compensated. This means that investors must always expect a total loss.

What factors influence the demand for real estate?

The demand for real estate depends on both the market and the location.

The main factors are:

• Economic factors: a healthy economy allows people to afford real estate, which can cause prices to rise in the market. This also attracts foreign investors.
• Demographic trends: A changing population structure also influences demand for real estate. Furthermore, a rising number of single households increases the demand for housing.
• Location: The residential value of a location has a particularly strong influence on demand. For example, if the property is located near recreational areas such as lakes or mountains, demand is high. Also, if many businesses have settled in a particular area and jobs are being created, this can lead to greater demand for real estate in that area.
• Infrastructure: more buyers are attracted by proximity to public transportation, schools, and cultural institutions.
• Tax policy: Certain government subsidies or tax benefits encourage investors to invest more in real estate.
• Interest rates: Low interest rates make it easier for potential buyers to take out loans and thus finance the purchase of a property. At the same time, investors in a low-interest phase are looking for alternatives to traditional interest-bearing investments.

For a secure capital investment: How to find the right property

When investing in a property, keep the following points in mind above all:

• Economic situation and attractiveness of the location (population development, labor market, range of schools, shopping facilities, recreational opportunities).
• Demand for rental housing in the region
• Development of real estate prices in the region
• General condition of the property and the building fabric
• If the property is rented: Checking the rental contract
• Determination of the yield (ratio of rents to purchase price)
• Determination of total costs (purchase price plus incidental acquisition costs and renovations, if applicable)
• Financing plan and monthly income statement

If the necessary real estate expertise is not available, an expert should be involved in the decision.

The purchase of real estate and financing

When investing in real estate, you should have equity of at least 20 percent of the purchase price. The more equity there is, the better the terms of financing. Pillar 2 and 3a assets cannot be used for rented properties.

When buying a property, there are incidental costs for the purchase in addition to the purchase price.

These are in Switzerland:

• Notary fees (0.1 to 0.5 percent of the purchase price)
• Change of ownership (for the transfer of ownership, the transfer of ownership tax is due, depending on the canton between 0 and 3.3 percent of the purchase price)
• Fees for land register entry (depending on the canton, 0.1 to 0.5 percent of the purchase price)
• Fees for land charge certificate (for the registration of the bank’s security, 0.1 to 0.3 percent of the mortgage debt)

Usually, except for the fees for the land charge certificate, the seller and buyer share the additional costs/ fees.

Example:

A house in Bern is purchased at a purchase price of CHF 1,000,000. A mortgage of 800,000 francs is taken out for the financing.

For the calculation, the usual rates in Bern were applied. In Bern, amounts above CHF 800,000 are subject to a transfer tax of 1.8 percent. Thus, in the example, the buyer incurs a total of 7,300 francs in additional costs.

Investment strategies for real estate

Within the real estate asset class, there are several investment strategies.

The main strategies are:

• Buy and Hold: The buy-and-hold strategy is classic for the private investor. The goal is an inflation-proof investment in a market with moderate fluctuations. Experience shows that the value increases over the years. The investor benefits from regular rental income.
• Fix and Flip: This involves buying a property, renovating it and selling it again at a profit. This strategy is usually only suitable for real estate professionals or tradesmen who can use their spare capacity to refurbish.
• Special types of real estate: Those with pronounced expertise in certain segments invest in specific areas, such as logistics or retail properties. This applies analogously to certain regions.
• Diversification with small amounts: Invest in different properties, each with manageable amounts, rather than in a single one. This works via indirect investments such as funds or ETFs.

Frequently asked questions (FAQ)

What should be considered when taxing real estate?

The income from a property is subject to taxation. This results from the rental income (in the case of owner-occupied real estate, 60 or 70 percent of the notional rent) minus expenses such as maintenance and financing costs. If a profit is made when the property is sold (sales price less purchase price and expenses), real estate gains tax is due. The amount is regulated in the individual cantons and is lower the longer the property is held.

What return can I expect on an investment in real estate?

For residential real estate (apartments and houses), investors in Switzerland can expect a return of around four to five percent. For commercial properties, the return is around six to eight percent.

Under what conditions should I invest in real estate?

Equity capital of at least 20 percent of the purchase price should be available for the acquisition. Real estate as an investment makes sense if there are already assets in more liquid asset classes. As a security component of a balanced asset strategy, a direct investment in real estate is a good idea, provided you are prepared to look after your investment on an ongoing basis.