Swiss Real SnapShot! Scrapping of Exchange Rate Mechanism divides the Real Estate Investment Market

Transcription

1 Swiss Real SnapShot! Scrapping of Exchange Rate Mechanism divides the Real Estate Investment Market Current developments in the Swiss real estate investment market Autumn 2015

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3 Content Scrapping of Exchange Rate Mechanism divides the Real Estate Investment Market Macro-economic overview 6 Office market 8 Retail market 11 Residential market 13 Focus: Energy infrastructure investments 16 Swiss Real SnapShot! / Autumn 2015 / 3

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5 Introduction Dear Madam or Sir, KPMG Swiss Real SnapShot!, published every 6 months, provides you with an overview of the current developments in the Swiss real estate market and its influencing factors. The Swiss real estate market is a heterogeneous and strictly segmented structure. Thus, KPMG Swiss Real SnapShot! limits itself to global observation, without addressing regional deviations in detail. KPMG Real Estate has both Swiss specific and global expertise in the real estate markets. Our extensive data pools in local markets along with competent and in-depth consultation generate added value for our clients in all areas connected with real estate. Turn to the last page of KPMG Swiss Real SnapShot! to see what we can do for you and how you can benefit from our services. We wish you a pleasant and informative reading. With kind regards, Ulrich Prien Partner, Head of Real Estate Switzerland Beat Seger Partner, Real Estate M&A The KPMG Real Snapshot! is also available for Europe, Asia and the Americas. Contact us if you would like to learn more about the global real estate markets. Download publications: Swiss Real SnapShot! / Autumn 2015 / 5

6 Scrapping of Exchange Rate Mechanism divides the Real Estate Investment Market Macro-economic overview The scrapping of the exchange rate control mechanism by the Swiss National Bank (SNB) has, as was feared, resulted in a significant cooling of the Swiss economy. In Q2 2015, inflation-adjusted gross domestic product (GDP) marginally increased by 0.2% compared to the previous year. Foreign trade may well have a detrimental impact on growth for the whole of 2015; however, thanks to the gradual recovery of the European economy and robust domestic demand within Switzerland, the consensus forecast for remains in positive territory, at 0.6%. An improvement can be expected for 2016, against a background of GDP growth of 1.3%. Nevertheless, the situation remains difficult for many companies, even if it has been generally possible to maintain production levels in the first half of the year (despite the appreciation of the Franc). Because of the fall in margins, affected firms are under pressure to take steps to increase efficiency and reduce costs. Fig. 1 GDP growth, unemployment rate and Consumer Price Index 5% 4% 3% 2% 1% 0% -1% -2% -3% Macro-economic indicators F 2015 F 2016 GDP growth Unemployment rate Consumer Price Index Source: BAKBasel, Credit Suisse, KOF, Seco and UBS F Forecast Forecast maximum Forecast average Forecast minimum In the USA, GDP dropped back by 0.2% in Q after three successive quarters of growth. The negative start to the year can be explained in part by the hard winter and the prolonged port strikes. Over the coming quarters, US exports are also likely to suffer from the appreciation of the US Dollar, whilst domestic demand still lags behind expectations. Seen overall, the US economy should grow by 2.3% over the current year, 0.9% less than previously assumed. The Eurozone grew by 0.5% in Q2 2015, (Q1: 0.4%). However, recovery is very slow in spite of the supportive effect of low crude oil prices, a weak Euro and expansionary monetary policy. Overall, continued modest growth can be expected for the Eurozone over the coming quarters (2015: 1.4%; 2016: 1.7%). There are risks to the global economic recovery. In particular, there has been a noticeable increase in the uncertainties surrounding economic trends in China. Renewed turbulence on international financial markets could have a significant impact on global monetary policy. Deflation of -1.1% is expected in Switzerland for Next year, only slight negative inflation of -0.1% is anticipated. In its most recent assessment, the SNB expects that inflation will be positive once more from the start of According to surveys by the State Economics Secretariat (SECO), 141,269 people were registered as unemployed with the regional employment agency centres at the end of October 2015, 3,043 more than in the previous month. As a result, the unemployment rate rose from 3.2% in September 2015 to 3.3% in the current month. Compared to last year, unemployment has risen by 8,872 (+6.7%). This trend towards a slight rise in unemployment figures has been seen since February According to the consensus forecast, the average unemployment rate should reach 3.3% in 2015 and 3.5% in 2016, which can still be described as low. Fig Nominal exchange rate index for all export countries Changes in Swiss franc exchange rate Source: SNB and KPMG Real Estate Exchange rate index for all export countries (left-hand scale) Europe EUR (right-hand scale) United Kingdom GBP (right-hand scale) USA USD (right-hand scale) Exchange rates: CHF and selected currencies 1 The consensus forecast is based on forecasts by BAKBasel, Credit Suisse, KOF, Seco and UBS 6 / Swiss Real SnapShot! / Autumn 2015

7 Based on its most recent assessment, the SNB decided to continue to pursue its current monetary policy in mid September. As a result, the target range for the three-month Libor still lies between -1.25% and -0.25%. The interest rate for sight deposits with the SNB is unchanged at -0.75%. At the same time, the SNB is still active on the currency markets when required, in order to take account of the effects of the exchange rate situation on inflation and economic trends. Despite a slight relaxation, the Franc is still clearly over-valued. After reaching its second-highest level (behind its 2008 level) in 2013, last year net migration still stood at nearly 79, ,000 people (net) have immigrated into Switzerland so far this year. Extrapolated over the whole year, net migration of around 75,000 can be anticipated, which is still the fifth-highest figure since Because of stagnating economic trends and the coming implementation of the mass immigration initiative, falling migration figures can be expected over the short to medium-term. The US Federal Reserve (FED) also decided on 17 th September 2015 to leave its low interest rate policy unchanged. In the summer months, there were still many indicators that the FED would increase its headline interest rate again for the first time since mid 2006, after nearly nine years of zero interest rates. However, recent concerns about the economic situation in China and the emerging nations, as well as the associated turbulence in the financial markets, the strength of the Dollar and absence of inflation pressures, caused the monetary policy committee to pause once again. Fig. 3 Net migration 120, ,000 Net migration 80,000 60,000 40,000 20, , H Source: SEM and KPMG Real Estate Other countries Germany France Portugal Italy Spain Overall total Swiss Real SnapShot! / Herbst 2015 / 7

8 Office market As has already been noted in previous issues of the Swiss Real Snapshot!, in recent years the low interest rate environment has encouraged the completion of numerous new office developments. Initially, these new schemes were easily absorbed through relocations by major service providers. Many firms seized the moment to move into modern premises on attractive terms. The result was that the vacated existing premises and the office schemes still in the planning phase were left behind. They are now exposed to extremely competitive market conditions. At present, many developments are failing to achieve the required level of prelettings at the planning stage and therefore are not being implemented at all, or are subject to delay. The anticipated expansion of the supply of office space will also continue this year, with a total under construction of CHF 1,930m, only just below the long-term average since 1995 of CHF 1,950m. Whilst more planning consents for office premises have been granted in smaller centres and in suburban and peripheral municipalities than the long-term average, in the principal and secondary centres the number of planned developments is below-average. In view of the scale of the expansion in the major centres over recent years and the incipient over-supply, the emerging slowdown in construction should be welcomed. Nonetheless, further increases in vacancy and falling rents can be expected in Switzerland s largest office markets because of the large number of schemes still in the pipeline. No great stimulus is expected to come from the demand side in the near future. An analysis of trends in the typical office sectors shows that between Q and Q3 2013, typical office employment rates rose continuously by over 2% per annum. Since then, growth in employment has cooled substantially. In Q2 2015, employment in the traditional office sectors grew by only 1.0%, and this is an indication of stagnating demand. Particular mention should be made of reduced growth in the public sector and the information and communications sector. It should be assumed that the public sector savings measures will be further intensified and, naturally, this will have a negative impact on employment trends. Fig. 4 Year-on-year employment growth 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Changes in employment in traditional office sectors Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Information and communications (left-hand scale) Real estate and housing (left-hand scale) Miscellaneous economic services (left-hand scale) Miscellaneous services (left-hand scale) Financial and insurance services (left-hand scale) Professional, scientific and technical services (left-hand scale) Public administration (left-hand scale) Growth per annum (left-hand scale) Changes in the Employment Index (right-hand scale) Source: BFS and KPMG Real Estate Changes in the Employment Index The most recent data for businesses opening premises in Switzerland reinforces the downward trend in employment. The number of new jobs created in this way since 2010 has shrunk by around two thirds. Switzerland seems to have lost its appeal to foreign firms. The most recent data from the Konferenz der kantonalen Volkswirtschaftsdirektoren (Conference of Cantonal Economic Directors) confirms this trend. According to these figures, in 2014 the number of foreign firms opening premises fell by 8% y-o-y and the number of new jobs fell by 20%. Since 2010, the number of firms has fallen by nearly 30% and the number of new jobs by more than two thirds. It should therefore be assumed that employment trends will not turn out particularly dynamic in the coming quarters. In Switzerland as a whole, the supply index for office premises currently stands at 6.9%, an increase of 0.3 percentage points y-o-y. Of Switzerland s four largest cities, by far the highest supply index can be seen in Geneva, at 12.6% (last year: 11.5%). In Zurich, this figure stands at 6.8%. 8 / Swiss Real SnapShot! / Autumn 2015

9 Fig. 5 Supply index and asking rents in the major office markets Fig. 6 Changes in vacant office space in the principal centres 16% 600,000 Supply Index 14% Geneva 12% 10% 8% Zurich 6% Berne 4% 2% Basel 0% Asking rent in CHF per sqm and year (median) Office vacancy 500, , , , , Basel Berne Geneva Zurich Source: W&P and KPMG Real Estate Source: City statistical offices and KPMG Real Estate The high levels of availability in recent years are also now reflected in higher vacancy. At the start of June 2015, vacant space of over 520,000 sq. m was recorded in the four principal office markets, a striking 33% rise year-on-year. An increase of 80% has been observed within a period of three years. Current vacancy levels are also high in historic terms. Since 1999, higher levels of vacancy have been recorded only in 2005 (545,000 sq. m). By far the greatest annual increases have been registered by Geneva (+162%) and Berne (+129%). Berne has even seen the highest vacancy since records began in Geneva has only just fallen short of 1997 s record high, by 1,000 sq. m. In contrast, in Zurich the trend is in the opposite direction. Office vacancy stands at around 208,000 sq. m, a drop of 7,000 sq. m year-on-year. The city s office vacancy rate stands at 2.8%, an annual fall of 0.2 percentage points. There has been a noticeable drop in vacancy in Zurich City Centre compared to last year. This contrasts with a further increase in the Escher-Wyss district. However, the development pipeline does not suggest that the trend in Zurich will switch towards sustainably lower vacancy levels. The time taken before an advertisement disappears from the online marketplace is a reliable indicator of demand dynamics and the shortage of supply. Across Switzerland as a whole, the median advertising period for office space stands at 57 days. Last year, it was still just 34 days. Advertisements can be seen for longest in Berne, at 89 days, and this is consistent with the high vacancy levels. In Geneva, advertisements are maintained for only 37 days. However, this is an increase of 7 days y-o-y. Fig. 7 Advertising period in days Median advertising period for offices in the principal centres 90%-Percentile Median 10%-Percentile Geneva Zurich Berne Basel Switzerland Source: Immodatacockpit and KPMG Real Estate The high level of supply and flagging demand are also reflected in falling rents. According to Wüest und Partner, the quality-adjusted index of rents for new lettings fell by 1.2% across the whole of Switzerland, the highest decreases being observed in Fribourg (-7.3%) and Winterthur (-4.9%). Asking rents for office premises rose by 1.8% in the first half of the year; however, this is because of the higher quality of the space on offer. Swiss Real SnapShot! / Autumn 2015 / 9

10 Fig. 8 Indexed changes in asking rents Rental Price Index Source: W&P and KPMG Real Estate Basel Berne Geneva Zurich Moreover, the asking rents take no account of the incentives currently being offered by landlords, which means that this indicator tends to gloss over the current situation on the office space market. According to a survey by KPMG Real Estate 2, it is particularly common for landlords to contribute to alteration and fitout costs (frequently: 48%; very frequently: 17.5%). This is followed in second place by the grant of rent-free periods (frequently: 34.3%; very frequently: 11.2%), although the length of the rent-free period is heavily dependent on the use of the property and the lease term. Stepped rents follow in third place (frequently: 34.8%; very frequently: 5.2%). This is where the rent is increased in stages to market levels. A reduction in rent is frequently or very frequently conceded only in 21.5% of the responses received. This is because landlords want to avoid the negative impact that a lower agreed rent would have on values. The first incentives mentioned have less of a long-term effect and this is why office rents are not coming under more pressure despite the current over-supply. The scrapping of the exchange rate control mechanism by the SNB has led to some increase in the readiness of landlords to grant incentives. 41% of respondents to the survey admit that they are at least slightly more prepared to grant incentives. 2 Swiss Real Estate Sentiment Index / Swiss Real SnapShot! / Autumn 2015

11 Retail market Like 2013, 2014 was not a shining year for Swiss retailers. Nominal retail sales grew by only 0.4% y-o-y (1.1% in real terms). The scrapping of the exchange rate mechanism with effect from the middle of January this year caught retailers on the wrong foot: compared to the boom in online sales, they are facing various challenges (stagnating sales figures, retail tourism, too many retailers and a serious need for investment). Therefore, it is not surprising that sales figures are vulnerable to the increasing strength of the Franc. As at the end of July 2015, rolling nominal annual growth was running at 1.1% y-o-y. Fig. 9 Retail Sales Index Retail sales and consumer confidence Seasonally-adjusted retail sales nominal (left-hand scale) Seasonally adjusted retail sales real (left-hand scale) Consumer Confidence Index (right-hand scale) Source: BFS, Seco and KPMG Real Estate Over-the-counter retail is losing market share to online retail, to the extent that in the current market, many retailers are focussing strongly on that distribution channel. In the past five years, significant investment has been made in building up online shops and in social media activity. Online retail and mail order selling are increasing disproportionately in Switzerland. Whilst retail is stagnating overall, online retail has grown impressively by 7.2% to CHF 6.7bn. Last year, a y-o-y increase of as much as 9.7% was seen. This demonstrates that the sky is not the limit for online retailers either. Online retail is extremely dynamic and distinguished by the low barriers to market entry and a high number of competitors Consumer Confidence Index The proportion of goods accounted for by different product groups varies considerably. Electronic equipment is ordered most over the internet, with almost 30% of orders by volume. This is closely followed by clothing and shoes, with a 27% share. Measured against total retail sales volumes, online food orders account for only a marginal share, of less than 2% by volume. In comparison, in the non-food sector the figure is as high as 12%. Fig. 10 Sales in millions of CHF Changes in Online Retail Sales Total online and mail-order sales (left-hand scale) Foreign online sales (left-hand scale) Auction and exchange sites (left-hand scale) Sales growth y-o-y (right-hand scale) Source: GfK and KPMG Real Estate 12% 10% 8% 6% 4% 2% 0% The uncertainty of retailers and investors and the substantial increase in space over the previous decade has significantly hampered the planning of new premises. Large schemes have become a rarity and are realised only after a lengthy planning phase, including the recently approved Ebnet retail park in Sirnach (TG). Overall, according to Credit Suisse, both applications and consents were more than 40% below the long-term average at the end of March In contrast to the residential market, and to some extent also to the office market, persistent low interest rates have not led to an increase in planning activity on the retail market. Trends in demand are just too uncertain in many areas. Change in sales y-o-y Swiss Real SnapShot! / Autumn 2015 / 11

12 Fig. 11 Asking rents for retail space in the principal centres Fig. 12 Vacant retail space in the principal centres (1 st June 2015) Rental Price Index Source: W&P KPMG Real Estate Basel Berne Geneva Zurich Until now, the sluggish demand for retail space has only partially been reflected in the vacancy figures. One reason for this is that retail space in central locations remains in demand and that official vacancy statistics exist only for the major economic centres. As at the beginning of June 2015, total vacant space in the four principal cities of Geneva, Zurich, Basel and Berne was 34,000 sq. m, an increase of 6,000 sq. m y-o-y. However, current vacancy rates are still low when seen over the longer term. In 1999, 30,000 sq. m of vacant space was counted in the city of Geneva alone. Vacant space in sq. m 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Geneva Zurich Basel Berne Source: City statistics offices and KPMG Real Estate Overall, the environment for the Swiss retail premises market remains challenging. In the market as a whole, values and overall yields will therefore continue to fall in 2015 as well. Potential for rental increases is limited to retail premises in well-frequented locations. In contrast, peripheral and frontier locations will remain under pressure. When deciding on investments in retail properties, it is vital to take account of issues such as rising vacancy in frontier regions, further increases in competition from online sales, the risk of tenant default and potential changes in demand because of political decisions. 12 / Swiss Real SnapShot! / Autumn 2015

13 Residential market Demand for rented residential space has passed its peak but remains high. Falling net immigration has made a particular contribution here. Naturally, this has a dampening effect on demand for rented dwellings. Experience shows that there is a delayed effect in the response of net immigration to changes in employment activity. The latter has halved in the past two years, from 2% to 1%. Over the medium term too, a further fall in immigration is to be anticipated because of the implementation of the mass immigration initiative. Building applications submitted for residential developments in recent months suggest that construction of rented dwellings will not increase in The number of planning consents fell by 2.8% in the first half of 2015 compared to the same period last year. However, as numerous schemes are still under construction, supply will increase during According to an analysis by Credit Suisse, construction of new homes should reach a new high during 2015, as it anticipates that 23,000 to 24,000 rented dwellings will be built. Because of the low interest rate environment and the resulting investment crisis, rented housing has been favoured by investors for years. As a result, the number of rented dwellings for which planning consent has been granted has risen from year to year. In regional terms, the focus is still on the principal centres and municipalities in the conurbations. However, many homes are also still being planned in other localities. The introduction of negative interest rates has increased the attractiveness of property investments once again, as the yield premium compared with low-risk bonds has increased. A continuation of the high level of planned residential developments is therefore anticipated. The ongoing immigration-driven population growth has so far ensured good absorption of newly-constructed dwellings. Despite the continued high rates of construction, the residential vacancy rate for Switzerland as a whole has risen only slightly y-o-y, from 1.08% to 1.19%. In absolute terms, the number of vacant homes has risen by 5,424 units. The highest increase in the vacancy rate was seen in the followed by Ticino and eastern Switzerland. In the cities of Berne and Basel, vacancy has remained largely static compared to last year. A slight increase in the vacancy rate can be seen in Geneva and Zurich. A further appreciable increase in vacancy for rental homes is expected in Fig. 13 In % Residential vacancy rate Switzerland Lake Geneva region Quelle: BFS and KPMG Real Estate Espace Mittelland North-western Switzerland Zurich Eastern Switzerland Central Switzerland The markets in the principal centres, which are characterised by short supply, should ease somewhat. However, an increase in vacancy can also be seen in rural regions and in small and medium-sized conurbations. This is hardly surprising in view of the high level of construction activity in these regions. In contrast, in the core conurbations (Zurich, Geneva, Berne, Basel and Lausanne) and the large conurbations (Lucerne, St. Gallen and Lugano) and surrounding areas, vacancy has risen only slightly or has even fallen (large conurbations). Here, freely available residential space is still in short supply. In and around Switzerland s four major cities, it is not only vacancy that remains low: the advertising period for particulars of homes for rent is short. In Zurich, Berne and Basel, the median advertising period stands at 14 days. In Geneva, it is 17 days. In comparison: in Delémont or Solothurn, this figure stands at 41 and 25 days respectively. In Switzerland as a whole, the figure is 21 days. According to Homegate.ch und ZKB 3, asking prices for residential units across the whole of Switzerland, adjusted for quality, rose by 1.8% in July 2015 compared to the previous year. Since 2009, average asking rents have risen by 2% per annum. Since the start of 2015, annual increases in rent of less than 2% have been recorded. Thus, asking rents reflect a certain relaxation on the residential rental market as a consequence of the strong increase in supply. The highest price increases over the past 12 months were recorded in the cantons of Basel (+3.0%) and Solothurn (+2.7%). Since the start of the series in 2009, the highest price rises have been seen in the cantons of Geneva and 3 The index measures the monthly quality-adjusted change in rents for new residential units and units available for reletting. Ticino Swiss Real SnapShot! / Autumn 2015 / 13

14 Vaud (+22.7%) and in the canton of Lucerne (+17.5%). The canton of Zurich ranks third, with growth of 16.2%. Fig. 14 Changes in the Rental Price Index Rental Price Index, adjusted for quality Jan. 09 May 09 Sep. 09 Jan. 10 May 10 Sep. 10 Jan. 11 May 11 Sep. 11 Jan. 12 May 12 Sep. 12 Jan. 13 May 13 Sep. 13 Jan. 14 May 14 Sep. 14 Jan. 15 May 15 8% 7% 6% 5% 4% 3% 2% 1% 0% Change from previous year, Switzerland Rental Price Index, Switzerland (left-hand scale) Rental Price Index, Canton Zurich (left-hand scale) Rental Price Index, Cantons of Geneva and Vaud (left-hand scale) Change from previous year, Switzerland (right-hand scale) Source: Homegate.ch, ZKB and KPMG Real Estate In contrast to asking rents, in recent years rents under existing leases have tended to be affected by reductions in reference interest rates. Since 2008, the reference interest rate has halved from 3.5% to 1.75%; this corresponds to a compounded reduction in rent of around 17%. 4 Unlike changes of tenants, which are used to adjust the rent to market levels, increases in rents under existing lease contracts were rare. It is usually only after investing in valueadding refurbishments that higher rents can be imposed. This trend has now led to a significant difference between rents under existing leases and asking rents. Asking rents increased by nearly 49% during the period between 2001 and The increase seen in rents under existing leases was only 19%. The discrepancy between these two submarkets has resulted in a less than optimal use of space on the rental market. Long-term tenants paying belowmarket rents sometimes remain in homes which no longer correspond to their space requirements. Think for example of a married couple who has a large home after their two children have moved out. Because of the difference in rent if they move, they will not look for a smaller home. Fig. 15 Index change, 2001= Index change for rents under existing leases and asking rents Rents under existing leases Source: W&P, BFS and KPMG Real Estate Asking rents The strong expansion in supply and the tendency for demand to drop off may mean that average Swiss asking rents tend to remain level in The reference interest rate for rents under existing leases should remain at 1.75% in the immediate future. At the end of June, the average interest rate stood at 1.83%. The reference interest rate will remain at its current level until the average interest rate falls below 1.63% or rises above 1.87% If the landlord adjusts the rent on the basis of the change in the reference interest rate, it may pass on only part of the increase (a maximum of 40 per cent). No account has been taken of this possibility in our arithmetical model. The landlord may also base a claim on the general increase in prices. However, it must be able to provide detailed evidence of this. As a rule, the general increase in prices amounts to between 0.5% and 1% per annum. 14 / Swiss Real SnapShot! / Autumn 2015

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16 Energy infrastructure investments In recent years, an excess of demand for investment properties has built up in Switzerland. This has meant that pension funds and other institutional investors have not met their strategic allocation targets. In view of the shortage of suitable property investments, the markets are increasingly being probed for alternative investments. So far, Switzerland s property-related Infrastructure investments, have not found much resonance at least where direct investment in local infrastructure is concerned. Until now, investors have become involved in Swiss infrastructure investments only indirectly, by way of investment shareholdings in telecoms providers, energy firms or infrastructure providers. However, the reason for the lack of investor engagement is not through a lack of interest, but due to missing investment opportunities in the infrastructure field. Transport infrastructure such as motorways or the majority of the rail network is directly or indirectly owned by the federal government. Communications infrastructure is also in the hands of the large telecommunications providers. production and storage, as well as energy efficiency. It can already be seen that the future capital requirements can hardly be met using established mechanisms and the existing market players. New financing models and new capital from long-term investors are therefore essential. In order to satisfy this enormous requirement for finance, a partial opening of the market has already been launched by way of a market-level usage charge. This has increased the attractiveness of network infrastructure investments, in part at least. Fig Future energy infrastructure investment requirements to 2050 A further reason for the limited availability of investment opportunities in the infrastructure field is the strong financial position of the public sector. This means that infrastructure investment requirements can for the most part be covered from tax receipts, so that there is no need for institutional capital. In Switzerland, the provision of infrastructure is often viewed as a public service. This also explains why public-private partnerships have not yet really been able to take hold in Switzerland, unlike in other countries. CHF bn Policy starts to open the energy sector market Until recently, the energy sector was also largely closed off to direct infrastructure investments. Rising energy needs and the ambitious Swiss Energy Strategy 2050 have, however, led to a significant change in the previous position held in the energy infrastructure sector. According to the federal Energy Strategy 2050, up to CHF 200bn must be invested in energy infrastructure in the future in order to make the necessary transformation in energy supply possible 5. That is almost a third of Switzerland s annual gross domestic product. Energy companies, which until now have been responsible for security of supply, cannot afford the necessary investment on their own. What is needed is investment in the expansion and replacement of the transmission and distribution network, energy 0 Upgrading the electricity transmission and distribution network Replacing existing power stations Constructing and operating new power stations Source: UVEK and KPMG Real Estate 5 It is estimated that up to CHF 67bn needs to be spent by 2050 on constructing and operating new power stations in Switzerland. The Federal Council [Bundesrat] reckons on investing CHF 126bn on replacing the existing portfolio of power stations. Investments of an estimated CHF 18bn are also assumed for the conversion and upgrading of the power transmission and distribution network. This totals over CHF 200bn of investment. 16 / Swiss Real SnapShot! / Autumn 2015

17 Attractive investment qualities Overall, energy infrastructure institutions display qualities which are attractive for long-term institutional or private investors: these are true values with a long life and easily predicted returns. Infrastructure investments also mainly occupy a strong competitive position (in some cases monopolies or oligopolies) and are distinguished by a high degree of independence from the economic cycle. A further advantage of infrastructure investments is the low level of correlation to traditional investments, which leads to diversification benefits. Moreover, investors appreciate the low volatility of returns and the partial protection of infrastructure facilities from inflation. Particularly in today s low interest rate environment, there is much to be said for investment in infrastructure. On the risk side, as well as individual project-related risks, one must also mention in particular political and regulatory risks: infrastructure investments usually have very long lifespans and are financed over a correspondingly long term. Investors must therefore be able to rely on funding mechanisms which, once introduced, continue in effect for the entire lifespan of the project. Apart from that, the risk/opportunity profile of an infrastructure facility depends on which phase the investment asset has reached within its investment cycle (planning, construction or operation). Swissgrid shareholding leads the way The investment by Swiss pension funds in the country s high-voltage network operator Swissgrid can be interpreted as a sign of the attractions of infrastructure investments there. Various private and public law Swiss pension funds invested in the national network company by way of investment foundations during As a limiting factor for an increased involvement of institutional investors in the infrastructure sector, one should mention the rigorous equity capital requirements for life insurance companies and the current pension fund investment rules. 7 An amendment to these regulatory conditions would permit these investors to take on a primary role in the long-term financing of Swiss energy infrastructure systems. 6 The IST investment foundation took over a 49.9% shareholding in Alpiq Grid Beteiligungs AG and 49.9% of Alpiq s shareholder loan to Swissgrid for CHF 288m. Credit Suisse Anlagestiftung also took over 49.9% the BKB shareholding. 7 Under BVV2, alternative investments must amount to no more than 15% of total assets. Alternative investments are hedge funds, private equity, insurance-linked securities, raw materials and infrastructure. Furthermore, alternative investments may be made only by way of diversified collective investments, diversified certificates or diversified structured products. Swiss Real SnapShot! / Autumn 2015 / 17

18 All-encompassing Real Estate Advisory from one Source In order to realize your chances, to optimize results and to minimize risks in the fragmented real estate markets you need to cut through complexity. KPMG Real Estate can provide an all-encompassing, interdisciplinary approach to support you as you face challenges arising from the wide-ranging factors influencing your real estate related business activities. Please contact us on a non-binding basis with all real estate related questions you may have. We will put the team together that offers you the best solutions to meet your goals as your one-stop shop. KPMG provides you with local, national, international and global knowledge and expertise to enhance your success. Don t hesitate to ask for our list of references! M&A/Capital Market Structuring and execution of transactions (Lead Advisory) Asset deals: Acquisition and disposal of properties and portfolios Share deals: Mergers, spin-offs, IPOs, private placements Arrangement of indirect investments, such as funds or trusts Fund raising for specific projects Debt advisory Debt & Capital Market Advisory Investment Advisory Investment advisory for national or international indirect real estate investments Structuring of real estate investments within portfolios Qualitative and quantitative analysis of investment products Monitoring and investment controlling, portfolio performance measurement Strategy/Organization Strategy development and implementation Business planning/business modelling Corporate/public real estate management Asset and portfolio management Analysis of organization and processes; organizational development, internal control system (ICS) Performance management/mis/investment monitoring Risk management and financial modelling Major Project Adivisory Turnaround and Restructuring Valuation/Due Diligence DCF-valuations of properties and real estate portfolios or companies Independent valuation reports for financial statements Valuations for acquisitions or disposals Feasibility studies and valuation of real estate developments Transaction-focused due diligence and process management 18 / Swiss Real SnapShot! / Autumn 2015

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20 Please contact us KPMG AG Advisory, Real Estate Badenerstrasse 172 PO Box 8036 Zürich Rue de Lyon 111 P.O. Box Genève 13 Bogenstrasse 7 P.O. Box St. Gallen Ulrich Prien Partner Head of Real Estate Switzerland T: E: uprien@kpmg.com Beat Seger Partner Real Estate M&A T: E: bseger@kpmg.com Philipp Schelbert Director Real Estate T: E: pschelbert@kpmg.com Oliver Specker Director Real Estate St. Gallen T: E: ospecker@kpmg.com Arnaud de Montmollin Senior, Manager Real Estate Suisse Romande T: E: ademontmollin@kpmg.com Alfonso Tedeschi, CFA Manager Real Estate Research T: E: atedeschi@kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received, or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. kpmg.ch/realestate 2015 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss legal entity. All rights reserved.