Key points.
- For two decades, real estate prices have shown an upward trend in most countries
- However, since 2022, investing in real estate has become more complex due to soaring inflation and increased financing costs, which have dampened demand in many regions.
- Markets particularly dependent on short-term mortgage financing, notably Sweden and the United Kingdom, are affected.
- The deterioration of macroeconomic conditions has exerted downward pressure on residential property prices in Germany and France.
- Dubai, a major beneficiary of the global geopolitical situation since the war in Ukraine, is attracting family offices and wealthy individuals from the BRICS countries.
- In Switzerland, the elimination of rental value will have negative consequences on the prices of condominiums and owner-occupied properties.
Real estate prices are rising worldwide, despite a recent slowdown.
The price trajectory of houses and apartments is a key driver of household wealth. Demand for owner-occupied housing stems primarily from migration flows (the number of people entering or leaving a given area) and the purchasing power of those affected. Supply dynamics also play a crucial role.
Over the past 22 years, real estate prices have shown an upward trend in most countries. In some markets, price fluctuations follow more cyclical patterns, while in others the increase has been more regular and gradual.
However, since 2022, soaring inflation and rising financing costs have weakened purchasing power and dampened demand in many regions. Markets particularly reliant on short-term mortgage financing, notably Sweden and the UK, are among the hardest hit. Furthermore, in London, a major destination for foreign residents, a less favorable tax regime has recently led to an exodus of wealthy individuals.
At the same time, the widespread deterioration of macroeconomic conditions, exacerbated by socio-economic challenges (security, infrastructure, transport, etc.), exerted significant downward pressure on residential property prices in Germany and France. However, some countries bucked this negative trend, notably Spain, Dubai, and Singapore.
Dubai, a major beneficiary of the global geopolitical situation since the war in Ukraine, is attracting family offices and wealthy individuals from the BRICS countries.
In Europe, Spain benefited from its status as a tourist destination and from immigration from Latin America, and residential real estate held up better in Southern European countries than in the major EMU countries. Dubai, a major beneficiary of the global geopolitical situation since the war in Ukraine, is attracting family offices and wealthy individuals from the BRICS countries, who are increasingly choosing it over traditional European or American cities. Both destinations, however, experienced more pronounced slowdowns than other comparable markets due to a rapidly increasing oversupply, as Dubai is historically known for its cycles of growth and slowdown. In Singapore, residential real estate prices reflect the city’s growing role as Asia’s financial and commercial center.
It’s worth noting that the US owner-occupied housing market has fared much better than during the global financial crisis, a period when prices plummeted by 30% to 40%. Despite some local shocks, adjustments have been more measured, as many borrowers locked in long-term mortgage rates when interest rates were low.
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Correction of commercial real estate and residential income real estate
In many countries, commercial and residential income properties have experienced sharper corrections than owner-occupied housing. Yields, which had fallen to historically low levels in 2021, have since recovered in response to rising bond yields, reflecting real estate’s sensitivity to financing costs and relative asset allocation.
Yields, which had fallen to historically low levels in 2021, have since recovered in response to rising bond yields.
Unlike the widespread downturn seen during the global financial crisis, the current correction is uneven: sectors such as logistics, residential rentals, and alternative solutions (e.g., student housing) remain supported by low vacancy rates and rising rents, while offices and retail face structural challenges exacerbated by the pandemic. Given that supply and demand in real estate markets tend to lag, the current low volume of construction suggests that the supply of new properties will be limited in many sectors over the next two years.
Lower valuations and interest rates could provide some support
Investors focused on commercial and residential income properties are operating in a revalued market, offering opportunities to invest capital at more attractive returns. With the easing of inflationary pressures in 2022 and 2023, interest rates have begun to decline, improving financing conditions. In Europe, limited supply suggests strong rental growth, further enhancing the region’s appeal. A research-driven approach is essential for successful real estate investing, given the significant differences between countries and sectors. Looking ahead, rapid technological advancements, an aging population, and certain secular shifts will continue to reshape real estate demand. Investors must also adjust their indirect asset allocations to reflect evolving market realities.
Swiss real estate is holding up despite the drop in the benchmark mortgage rate
Since 2008, the Swiss benchmark mortgage rate, derived from average bank mortgage rates, has been the national indicator used to determine rent adjustments. By 2025, approximately 60% of rental agreements are indexed to this rate. Its recent decrease of 0.25 percentage points (to 1.25%), resulting from the Swiss National Bank’s policy rate being lowered to 0%, allows Swiss tenants to request a rent reduction of around 3%.
Nevertheless, the cash flows of rental funds remain stable. This resilience is largely explained by the scarcity of apartments, with vacancy rates below 1% in major cities, as well as by tenants’ reluctance to request rent reductions for fear of being blacklisted by property managers. Under these conditions, the impact on the performance of Swiss real estate funds has been moderate.
Office market: recovery and evolving demand
Regarding the office market, rents increased slightly in 2024, but remain 5% to 10% lower than in 2019, adjusted for inflation. Office supply increased slightly, particularly near Geneva Airport and north of Zurich.
Demand is fueled by job growth in high-value-added sectors such as information technology and finance, with Zurich and Zug leading the way. Geneva lags behind, with growth shifting to surrounding areas. Rents in desirable neighborhoods are rising in central Zurich (+15% since 2019) but remain stable in Geneva.
Rents in desirable neighborhoods are rising in central Zurich (+15% since 2019) but remain stable in Geneva
Tenants are increasingly seeking flexible and sustainable spaces in prime locations, leading to a tenfold increase in conversions, which now account for 60% of investments in the office segment. Rents for these modern offices are higher than pre-Covid-19 pandemic levels. Meanwhile, remote working is losing momentum, which should further support demand for office space.
Tax reform in Switzerland: abolition of the imputed rental value tax following the vote of September 28
On September 28, Swiss citizens voted to abolish the imputed rental value tax on owner-occupied housing. This tax is based on a theoretical income, equivalent to what owners could earn by renting out their property, and generally represents 60% to 70% of the market rent in French-speaking Switzerland and 70% to 80% in German-speaking Switzerland. The abolition of the imputed rental value tax will not be implemented until 2028, or possibly later.
This reform will have a direct impact on those wishing to invest in Swiss real estate, particularly with the elimination of tax breaks for mortgage interest and maintenance costs on owner-occupied primary and secondary residences. This discourages investment in older properties, especially those requiring major renovations to meet Switzerland’s 2050 CO₂ emission targets. Furthermore, to compensate for the resulting tax shortfall, cantons could introduce a new property tax on secondary residences, along with broader tax increases (possibly including a VAT hike), which would affect the entire population. For example, the canton of Valais attempted to introduce a property tax on secondary residences in 2009, but was unsuccessful, highlighting the complexity of this process.
Overall, investing in residential real estate in Switzerland could become less attractive, impacting the prices of condominiums and owner-occupied properties. The elimination of tax breaks for renovation work will deprive owners of the main financial incentive that motivated them to maintain and modernize their properties. This could accelerate the depreciation of these assets, both physically and in terms of market value, and ultimately weaken the resale market, increase discounts at the point of sale, and lead to an overall erosion of value across a large portion of the housing stock.
It should be noted, however, that the vote only concerns primary and secondary residences occupied by their owners and does not affect rental properties or commercial real estate. It therefore has no impact on Swiss listed real estate funds, and even less so on commercial funds, which hold only investment properties.
