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In this article I list the main reasons why most rents and charges will soon increase. I do not go into detail about the calculations, because each lease has to be studied individually. This article is based on my own observations of the current situation (spring 2023) and I draw the conclusions.
Construction price inflation
According to the latest publication of the Federal Statistical Office of December 19, 2022, onstruction prices increased in October 2022 by 6.1%. This index is lower than the construction price index which was calculated for the Lake Geneva region which rose by 7.3% and the construction price index for the whole of Switzerland rose by 8.3%.
In Geneva, the greatest increase was observed in electrical installations, which increased by 19.7% in one year.
The strong increase is mainly explained by the increase in the prices of building materials.
Inflation on construction prices will have an impact on the operating costs of buildings. If operating costs increase, these increases will later be passed on to rents.
The rise in the prices of new constructions has as a consequence an increase in the rents of new real estate.
New regulation for the application of the energy law
The new regulation for the application of the energy law entered into force last year and imposes on the owners an energy concept of the building if the heat expenditure index exceeds the fixed threshold. Over the next few years, several old buildings will have to be renovated. After renovation, tenants will save heating costs, but rents must be increased.
Hiigher mortgage rates
Mortgage rates for new business have already increased. If mortgage rates increase, the so-called benchmark mortgage rate will also increase with some delay. It should soon be adapted upwards.
The reference mortgage rate determining the rent calculation is based on the average mortgage rate announced by the banks to the Federal Housing Office. The Swiss National Bank calculates the reference rate to calculate rents. The reference rate is published 4 times a year, on March 2, June 2, September 2 and December 2.
If the benchmark mortgage rate is less than 5%, and if it increases by a quarter percent, the landlord will have the right to increase the rent by 3%. If the rent has been fixed with a reference rate of more than 1.25%, it cannot be increased for the reasons of increasing the reference mortgage rate.
If the National Bank raises the policy rate to fight inflation, mortgage rates will rise and then the benchmark mortgage rate will rise.
If mortgage rates rise, construction credit interest rates will also rise and building becomes more expensive.
Swiss consumer price index
The Swiss consumer price index increased in December 2022 compared to 2021 by 2.8%. and in March 2023 it increased by 2.9%.
According to current tenancy law, 40% of the rise in the consumer price index can be passed on to standard rents and 100% if the lease is indexed. Most leases for commercial premises are indexed and can be adjusted once a year.
Operating costs increase
Operating costs will increase, because service providers and suppliers increase their prices. Construction companies have to recalculate their prices, because building materials increase, wages increase, loans increase, etc. Companies that maintain building installations have already increased their subscription prices by 3%. If operating costs increase, these increases will one day have to be passed on to rents.
Higher heating costs
Energy prices, especially fuel oil and gas, have increased enormously in the past year and tenants will realize when they receive the next statements of heating. It is uncertain how fuel prices will develop in the future.
When will rents be increased?
Calculations must be made for each current lease individually. Increases may be notified with the notice period for the end of the lease. Tenants who have a staggered lease or a fixed rent for a certain period of time will still be protected from an increase until the end of the lease. Tenants with indexed leases will be subject to rapid rent adjustments to the Swiss consumer price index and at the end of the lease the rent may still be adjusted due to the increase in the reference mortgage rate and the likely increase in operating costs. Rent calculations must be made for each lease individually. Landlords may notify tenants by giving notice of the expiry of the lease. Tenants who have signed staggered or indexed leases are not affected immediately, but at the end of the lease, the rents will have to be recalculated and depend on the situation of the reference rate as well as the operating expenses which will probably be increased between time.
Consequences for landlords and tenants
Given the current economic circumstances, landlords will soon be forced to increase rents and tenants will have to pay higher heating costs. Some owners could find themselves in a difficult situation and see their yield decrease.
Inflation of new constructions
New construction prices will rise due to increases in construction loan interest, mortgage interest, interim interest and rising construction prices. Some investors could find other alternatives to the construction of buildings and if this is the case they will build less. If there is less construction and more demand on the market, rents will rise again.
More rental applications for dwellings
Potential buyers of real estate, especially family houses and apartments, will see annuities increase and some of them will stop looking to buy and look for real estate to rent. Switzerland will soon have 9 million inhabitants who need to be housed. Demand for rentals will increase.
Conclusion
Increases in construction prices, consumer prices, interest, etc. will have an impact on the operating expenses and the financial expenses of the buildings, on the real estate market and on the rents.
© Author Esther Lauber, Real Estate Trustee with Advanced Federal Diploma of Professional Education and Training, real estate agent, property broker and manager in Carouge Geneva, Geneva, speaks German, French and English
Mostly translated with Youtube video translation and some phrases with DeepL and correction by Esther Lauber. In case of doubt, the French version applies to translations.