A rate cut after a phase of inflation is tantamount to a mission accomplished statement after a won war. Somewhat humorously, we compare the situation in the meme with President Bush’s declaration on May 1, 2003, when he declared the Iraq war won on an aircraft carrier. We all know what happened afterwards. Here we leave aside our major economic reservations about this premature rate cut and turn our attention to the discussion about the implications for the Swiss real estate market.

Here we only discuss the immediate effects, the medium-term effects will be discussed in a separate article

  • Only slightly lower fixed and saron mortgage rates expected

Prior to the rate cut, the markets had expected three rate cuts and anticipated a SARON of around 1% in the medium term. In this sense, fixed interest rates were already relatively low before the interest rate cut. If this interest rate cut was merely brought forward, the effect is likely to remain limited. However, it is important to note that the SNB has revised its inflation forecasts downwards. After the first day of trading, however, market participants have still not priced in any further interest rate cuts below 1%. Should this change, this could lead to market participants pricing in an even lower SARON forward interest rate (perhaps 0.75% or even 0.5%). This would lead to lower swap rates.

However, Basel III and the reduced competition resulting from the forced merger of UBS and CS have led to higher margins on mortgages. We estimate that banks’ margins for institutional mortgages have increased by 15-40 basis points. This has the opposite effect. Overall, mortgage interest rates are likely to fall slightly as a result, but not as much as some in the real estate market would like.

  • No further increase in reference interest rates expected

The implication of this is that no further increase in reference interest rates is to be expected for the time being. Depending on how many mortgages are concluded in the next few months, we could even see a lower reference interest rate. However, this is unlikely to be the case before September.

  • All Clear signal for capital increases in Q2 2024

In 2023, the capital markets for issues of real estate fund units were virtually closed. The first capital increases in 2024, such as those by Cronos and SFP Retail Properties, were a success. We are facing a wave of capital increases in Q2 2024. Without this rate cut, we would have thought that it could be difficult for some of the weaker funds. This interest rate cut is now a game changer. We assume that the environment will be very friendly and characterized by optimism. The real estate funds can now all send champagne to the SNB.

  • Positive impetus for transaction markets

Transaction markets continue to be characterized by relatively high bid-ask spreads. These will not disappear overnight, as risk premiums remain low. However, we think that certain buyers are now more willing to accommodate sellers and transaction volumes will increase. Risk premiums are too low even at the adjusted interest rate levels, so we expect the net yields reported by various brokers last year to be confirmed at higher volumes. Net yields are likely to fall slightly at best. Nevertheless, we expect slightly positive impulses for transaction prices.

  • Valuations of indirect products remain too high

We are of the opinion that the valuations were not sufficiently adjusted downwards last year. Some valuers made rather optimistic cash flow assumptions last year in order to avoid a stronger value correction. We observe that market prices are currently 5%-10% below valuations on average. In view of the fact that residential rents will rise less sharply due to the reference interest rate and increasing political influence in the cities, the question arises as to what will now happen to these optimistic underlying cash flow assumptions. Despite the lower interest rates, we believe that discount rates should rise rather than fall. As real estate valuations in Switzerland are influenced by investment managers rather than being independent, the question remains as to how certain dominant valuers will behave in the market. We are constantly surprised and various reviews are incomprehensible to us. After all, market prices are the most important independent evidence of value, and they are currently lower than many valuations.