Location, location, location

Thursday, 01 April 2010
On the practicalities of investing in Swiss real estate.

It has become much simpler for citizens, especially of EU/EEA (EU15) and EFTA member states, to purchase Swiss real estate since the Bilateral Treaties, which Switzerland concluded with the European Union, came into force on 1 June 2007.1 Together with the other freedoms granted under this agreement, these citizens can purchase any suitable property for use as a primary residence, if they intend to move to Switzerland permanently.2 After having become residents of Switzerland, these citizens are no longer subject to any restrictions regarding acquisition or sale of real estate in Switzerland. This means both primary residences and holiday homes are permitted, but also investments in real estate capital are allowed, e.g. apartment blocks. The size of the property used as a primary residence is in principle unlimited. Interestingly, the right to keep the property as the primary residence remains, even if the owner decides later to leave Switzerland for good.3

This means that if EU/EEA and EFTA citizens, who are not ordinarily resident in Switzerland, wish to purchase a holiday home in the country, they must apply for approval by the competent Swiss authorities. There is currently a limit of 1400 annual permits to buy such a home for Switzerland, however this figure has not been reached over the last few years. Additionally, since Switzerland accepted the Hague Convention on Trusts, it is technically permissible, within the guidelines above and under certain circumstances, for the Swiss real estate to be held by the trustees.4

Regarding the size of the secondary or holiday apartment and the size of the ground occupied, for EU/EEA/EFTA citizens that are not resident, the size is usually restricted to 200m2 of living space and 1000m2 size of the ground. If the family is rather large, exemptions can be applied for and are usually permitted. Interestingly, the right to keep the property remains even if the owner decides later to leave Switzerland for good.3

Since 2005, it has been possible for non-Swiss nationals to invest in Swiss properties in general via companies, as long as these are listed on a Swiss stock exchange. Unlisted real estate company investments must be approved. Approval authority is required for all transactions in the canton where the real estate is situated.5

The law applicable for the purchase of real estate by foreigners is the so-called Lex Friedrich/Lex Koller. As mentioned above, for European investors many restrictions have been lifted in the past years. Experts believe the law will be abolished in its entirety sometime in future, but this may not be before 2011. This federal law is however complemented by local regulation, particularly in popular Swiss holiday and skiing resorts.

Regarding commercial real estate investments, there is no restriction. This rule applies to anyone, whether they are Swiss or not, and also to foreign companies who do not wish to relocate to Switzerland permanently but wish to invest in Swiss real estate with the purpose of conducting commercial activity. Limited residential space, for example for a technician, can be on location of such commercial property and does not need a separate permission.

Swiss housing market

According to market experts, the residential housing market in Switzerland is stabilising. This is predominantly due to a low interest rate environment, the relatively limited supply of housing and the continuing strong demand generated by immigration, despite the recession. House building activity, however, has been at an all time high over the last 10 years, with the number of dwellings under construction being 9.6 per cent higher in the fourth quarter of 2009 than in the equivalent period in 2008. Therefore vacancy rates may edge up a bit in future. The commercial real estate market is more pressured, as the number of planning permits alone dropped 41 per cent over the last 12 months. In this sector it is also much easier to anticipate vacancy rates, which typically track economic conditions. The expansion of office space will slow down by 2011 due to the lead time from planning permission to market.6

Valuing Swiss real estate

The value of the property is not only important for an interested buyer but also for tax assessment purposes. Swiss practice therefore relies upon two important terms: one is the market value (Marktwert). The other term refers to the fair value (Verkehrswert), which is estimated as an average price for similar properties in similar circumstances and size, a term defined by a Federal Court decision.7 The latter value is considered as an objective value for a property. If in doubt as to what the correct value for a Swiss property is, or how to assess it, guidance can be found in the Swiss Valuation Standards as published by the Royal Institution of Chartered Surveyors, Chapter Switzerland.8

As in other parts of the world, prices vary greatly according to the location of the property. All real estate investments are guided by the principle of ‘location, location, location.’ But of course local circumstances with regard to taxation, transport connections, level of crime, pollution, noise, schooling and of course the neighbourhood need to be carefully examined before purchasing real estate. Locations such as St. Moritz or Gstaad are, for example, expensive by comparison due to high demand and it is normal to pay more than CHF1 million for a second home even in less prestigious areas of these mountain resorts. It is advisable for investors to consult their financial advisor, as well as their tax, legal and other advisors, before concluding such a personal transaction as a real estate investment.

Cost of purchasing real estate in Switzerland

The acquisition cost in terms of charges and fees can vary depending on which canton the property is situated in. There are different transfer fees, namely notary charges, land registry fees and real estate transfer fees. Generally, notary charges are between 0.1 per cent (e.g. Berne, Schaffhausen, Schwyz) and a maximum of 0.7 per cent for immediate transfer (e.g. in Vaud). The land registry fees are about 0.1 per cent (lower in Schwyz, applicable for example in Grisons, Nidwalden) and 0.6 per cent (e.g. Schaffhausen). Real estate transfer fees range from 0.4 per cent (e.g. Zug) to 3.3 per cent (e.g. Vaud). If a mortgage is required for the property, the fee for this that is payable to the notary and/or land registry varies between 0.09 per cent (e.g. Schwyz) and 1.3 per cent (e.g. Ticino in some circumstances).9

Aspects to consider

It is usual in Switzerland to take two mortgages: for a second home the first one is up to 50 per cent of the purchase value of the property and the second mortgage about 16 per cent. This amount of 66 per cent is much lower than in other countries and needs to be taken into account when considering buying Swiss real estate. The reason for this lower loan-to-value than is perhaps usual elsewhere is because the prices of holiday homes tend to be squeezed in times of crisis as they are typically sold off first by their owners to satisfy cash requirements. A bank can help to increase the mortgage amount to 100 per cent, but it may then wish to include other collateral for this purpose. Interest rates in Switzerland are generally lower than elsewhere in the world and a bank can help to advise the client to select the type of mortgage product best suitable to the individual’s needs.

The mortgage is only paid out once the purchase of the property, i.e. the transfer of the property, is entered in the land registry. Legally, the owner is only recognised once a property transaction is entered in the land registry. It is practice for purchasers to deposit an amount of money with the seller to secure the property. This amount should be included in the contract, however, the deposit is merely a gesture and has no legal significance. It would have to be returned unless otherwise agreed if the transaction does not complete.

A competent bank may help the buyer in a number of ways, by helping to check on the fairness of the purchase price, by helping to arrange the necessary notary services, by helping to scrutinise the purchase contract, which is usually much more detailed than a foreign buyer would expect. It is always advisable to seek proper legal advice in the canton where the property is located. Lastly, it is usually common to insure the property in Switzerland.

As there are a number of aspects to consider when investing in Swiss real estate, it is highly advisable to seek timely professional advice.

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Dr Ariel Sergio Goekmen

Dr Ariel Sergio Goekmen TEP is a Director at Credit Suisse.

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