In an environment of structurally higher but controlled inflation, investments in real assets are the first line of defense to preserve purchasing power. Swiss residential real estate in particular is currently benefiting from rising population and household numbers as well as limited supply. This persistent imbalance between supply and demand is putting upward pressure on residential rents. According to the Homegate rent index, Swiss asking rents rose significantly by 4.7% in 2023. Further increases of over 2% were also recorded in the first five months of 2024. A comparison with the average annual inflation rate of 2.1% in 2023 and the inflation rate of 1.4% in May 2024 thus implies a real increase in income for the owners of those apartments that could be let at current market rents.

In the long term, however, this protection against inflation is not always clearly evident and depends on various factors. If we look at the development of the existing portfolio rent index - which Zürcher Kantonalbank calculated on the basis of net rents excluding tenant changes and age depreciation - this index only rose by 4.9% in the period from 2006 to 2023. A comparison with the 8.7% rise in inflation over the same period implies a real decline in income for investors. This development is primarily due to the decline in the reference interest rate, which fell by 225 basis points between 2008 and 2019. However, significant regional differences can be observed. While the existing rental index in the Zurich region rose by a below-average 2.5% between 2006 and 2023, increases of 7.5% were recorded in the Lake Geneva region. Apartment buildings without a change of tenant in the Lake Geneva region were thus able to keep pace with inflation better than those in the Zurich region, where tenancies were adjusted more frequently than in French-speaking Switzerland. Since 2023, the reference interest rate has risen again by 50 basis points, which has now led to an above-average increase in rents in the Zurich region. In addition to the reference interest rate, general cost increases and 40% of inflation can also be passed on to rents. However, the Federal Council has opened a consultation on an amendment to the Ordinance on the Rent and Lease of Residential and Commercial Premises, which would no longer allow general cost increases and would reduce the inflation adjustment to 28%. 

The inflation protection of multi-family homes is clearly demonstrated when the capital growth component is taken into account in addition to the income return component or cash flow yield. According to the Switzerland Annual Property by Wüest Partner/MSCI, capital growth from 2013 to 2022 was 3.3% p.a. and thus contributed around half of the total return of 6.9% p.a. for residential properties. This period was characterized by the low interest rate phase with declining discount rates and low inflation rates of just 0.3% on average. Last year, a marginal negative change in value of 0.9% was also recorded for Swiss residential properties due to higher discount rates, resulting in a total return of 2.1% in 2023. Taking inflation into account, which was also 2.1% in 2023, Swiss residential real estate has not lost its distinction as a real value investment even after the interest rate turnaround.