Switzerland – office rental value correction not over

Switzerland office rents still have plenty of room for further falls over the coming quarters despite touching current historic lows, according to macroeconomic research group Capital Economics. Positive rental growth is still some way off into 2015 for Zurich and Geneva, the group says.

In its latest European Commercial Property Update, the UK-based research group says that subdued take-up, paired with speculative development in both Geneva and Zurich, put the short-term risk for rental values on the downside. In 1Q14, rents fell by 2.2% in Zurich, reaching their lowest level since 1999, and 0.9% in Geneva. Zurich vacancy rate rose to 9.9% from 9.5% in 4Q13. “Much of the recent weakness in Zurich is down to the banking sector, while in Geneva companies’ cost cutting has been putting pressure on rents,” say the Capital Economics researchers.

The KOF (Konjunkturforschungsstelle) employment intentions survey by the ETH Zurich university suggests that banks are gearing up to cut more jobs this year. Geneva is on its way to recovery, with first quarter take-up the highest since 2011 and vacancy rate stable at 5.3% over the last three quarters.

The development pipeline could still put downward pressure on rents, however, warn the researchers. It is only 2.7% of existing stock but the majority is speculative. With cutting costs still uppermost on employers’ minds, landlords may have to cut rents to compete. The supply pipeline in Zurich is even higher, at 3.9%, most outside the CBD, which seems to be currently favoured by companies. This might lead to the opening-up of space as a result, say the researchers.

The longer-term prospects are better, however. As GDP is set to grow by 2% in 2014 and 2.5% in 2015, and most sectors planning to hire new employees, growth should return in 2015. “Once vacancy rates stabilise, additional job creation should then begin to boost rental growth,” said Capital Economics.