E-commerce puts retail space under pressure

Media Release: Retail space under pressure

Market players continue to rate real estate investments as extremely attractive. That is one of the findings of KPMG Switzerland's annual Swiss Real Estate Sentiment Index. Both the overall index and the Price Expectation Index hit record highs. The assessment of economic conditions is slightly more optimistic than it was in the previous year. The increasing regulatory burden is still cause for concern in the sector. Market players also expect e-commerce growth to trigger declines in the demand for retail space.

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KPMG surveyed investors and appraisers about the Swiss investment property market again this year to compile data for the Swiss Real Estate Sentiment Index (SRESI). The aggregated SRESI stands at 27.1 index points (pts.) across all participant groups, 12.3 pts. higher than the previous year and the highest score since KPMG first began compiling the index in 2012.

Economic outlook still negative – price expectations reach a new high

The respondents' assessment of the economic situation is less pessimistic (-20.9 pts.) than it was in the previous year (-45.2 pts.), however the index still remains in negative territory.

In addition to the all-time high seen in the overall index, the Price Expectation Index for all respondents has risen slightly over the previous year (29.8 pts.) to reach a new record high of 39.1 pts. In 2013 and 2014, the Price Expectation Index was still negative. This tells us that market players nevertheless consider real estate investments to be extremely attractive despite some concerns about the economic trend.
 

Residential properties still hot – retail spaces hit new low

At 70.8 pts., the Price Expectation Index is clearly positive for residential properties, despite being down slightly compared to the previous year (-3.5 pts.). In this segment, 65% of those surveyed expect prices to rise. That leaves Residential as the only investment category where price forecasts are consistently positive.

The Price Expectation Index for retail property, on the other hand, has been negative ever since the first SRESI was compiled and is on a downward trend. It reached a new low of -100.6 pts. in this most recent survey (2015: -28.2 pts.). Respondents' opinions reflect declining sales figures for store-based retailing. In the remaining real estate segments, prices are expected to develop similarly to the previous year. The price index for office property was up slightly to -69.8 pts. (+14.6 pts.).
 

Slight narrowing of gap between location qualities

The gap between different location qualities has narrowed somewhat compared to the previous year. Coming in at 84.0 pts., clear price increases are still expected in central locations. Peripheral locations rose by 6.4 percentage points this year after bottoming out last year. Nevertheless, the index for these locations is still clearly negative (-71.3 pts.). Respondents remain cautiously optimistic about medium-sized towns (13.7 pts.).

Increased price expectations for central locations are also reflected in the regional breakdown: as was already the case in the previous year, respondents in the economic centers (Zurich, Basel, Lucerne/Zug, Lausanne, Geneva and Bern) expect prices to rise – everywhere except Lugano and St. Gallen.
 

Regulatory burden a bigger risk factor than the Brexit

Merely 22% of those surveyed expect returns to decline as a result of Brexit. In last year's survey, the scrapping of the minimum euro exchange rate had a much bigger impact on respondents' expected returns, with nearly half of that survey's participants expecting declining or even strongly declining yields at the time.

46% of the respondents expect market risk to increase over the coming 12 months. Year-on-year there was a 12 percentage point drop in respondents' assessment of the risk situation. Measured over the past five years, the general perception of risk is nearly back to its all-time low of 2012. Only the threat of a European crisis is considered to be more acute than in the previous year. As in the past, respondents identified stricter regulations as the biggest risk; however the situation seems to have relaxed somewhat over the past two years. A major decline can be seen in the perception of interest rate risks; market players seem to have accepted the new interest rate reality and do not expect any sudden interest rate hikes.
 

Rising vacancies in office and retail space

Nearly three quarters of those surveyed expect the market share for e-commerce to increase from its current level of 10% to more than 25% by 2020. That will not only bring declining demand for retail space but also adversely impact the returns and values of retail property. Landlords of retail space will have to expect increasing vacancies and reposition these properties as a result.

Respondents of the survey also expect rising vacancies for office space: According to them, a vacancy rate of 10% for office space in metropolitan areas in 2020 will be the norm rather than any special cause for concern. A major price correction for investment property between now and 2020 is considered very unlikely: 72% of those surveyed do not expect a price correction of this nature.
 

Methodology

The KPMG Swiss Real Estate Sentiment Index (SRESI) serves as a leading indicator for anticipated developments in the Swiss real estate investment market. The main index is generated based on assessments of economic developments and price trends in the real estate investment market. The sub-indices reflect the assessments of market players in terms of individual market and use segments. This data was first collected in 2012, and the survey is repeated every year to generate an index which permits a comparison of market assessments over time. Investors and appraisers of Swiss investment properties participate in the survey. Additional information on one topical area of focus that is currently of interest to the industry is also collected. This year, 20 theses were formulated for the Swiss real estate market in the year 2020.

Swiss Real Estate Sentiment Index

Swiss Real Estate Sentiment Index

The «KPMG Swiss Real Estate Sentiment Index» serves as an advance indicator for anticipated developments in the Swiss real estate investment market.

© 2016 KPMG Holding AG is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.

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