the secrets to swiss real estate success - international

THE SECRETS TOSWISS

REAL ESTATESUCCESS

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The Secrets to Swiss Real Estate Success 3

THE SECRETS TO

SWISS REAL ESTATE SUCCESS

Table of Contents

Introduction......................................................................................................................................... 4Highest Country Credit Rating by Institutional InvestorRecently More Friendly and Open to Foreign InvestmentOne of the Highest National Per Capita IncomesStrong, Independent Currency that is Loosely Associated with the EuroRelatively Low Interest and Inflation RatesLand Planning Controls

Strengths of the Swiss Investment Climate......................................................................................... 6The Attraction of Swiss Affluence and Globally Respected CompaniesGeneral Prosperity, Low Unemployment, and a Good Export-Import Balance

Leasing and Property Law................................................................................................................... 9The Basics of Swiss Property Law and International ComparisonsLease Patterns and Regulations

Financing Swiss Real Estate.............................................................................................................. 10

Taxation of Income Related to Real Estate....................................................................................... 12

General Real Property Valuation Methods........................................................................................ 13

The Infrastructure for Swiss Real Estate Operation.......................................................................... 14

Locating Swiss Real Estate Opportunities and Marketing Practices and Associations.................... 16Assistance for Property Location and Government Economic Development IncentivesReal Estate Agent and Broker Requirements and Trade AssociationsThe Media Used by Real Estate Mareting People to Reach Foreign and Local Investors

Rent Trends and Indications of Investment Yields............................................................................ 18Retail PropertiesOffice PropertiesIndustrial PropertiesIndication of Investment Yields

Selected Bibliography........................................................................................................................ 21

By: Dr. M.A. Hines

Clarence W. King Endowed Professor of Real Estate and FinanceSchool of Business

Washburn University • Topeka, KS 66621Tel: (785)267-4627 • Fax: (785)231-1063 • E-mail: [email protected]

4 International Real Estate Institute

THE SECRETS OF

SWISS REAL ESTATE SUCCESSAs international real

estate investors andmultinational corporateexecutives look for sitesfor investment ando p e r a t i o n a ldiversification, they willwant to scrutinize theopportunities ofSwitzerland, theEuropean Free TradeAssociation member thatlies in the center ofEurope with an easternboundary formed byAustria, a westernboundary formed byFrance, a northern boundary formed by Germanyand a southern border formed with Italy.

• Highest Country Credit Rating by InstitutionalInvestor

The Institutional Investor, , a Euromoneypublication, continues to rank Switzerland as thecountry with the highest country credit as judgedon many criteria as compared with the top 136countries of the world. Depending on the year ofthe Institutional Investor survey, the United Statesor Germany may be ranked second. Since realestate investment is highly impacted by creditratings due to the high levels of mortgagefinancing, relatively long leases, long commercialproperty development and construction periods,and need for large sums of money, Switzerland’shigh country credit rating is noteworthy.

• Recently More Friendly and Open to ForeignInvestment

Recently Swiss legislation has become morefriendly to foreign real estate investment. Foreigninvestment in commercial and industrial property

is generally unrestricted,but foreign investment inresidential property forowner occupancy is a littleless restricted. Theopportunities for thepurchase of vacationproperty continue to dependon the permission from thecanton in which theproperty is located. Thoseindividual cantonalgovernment policiescontinue to change overtime with changes in theeconomy, changes in thereal estate market, and

changes in cantonal voter sentiment. Transferralof funds in and out of the country remainsunrestricted.

• One of the Highest National Per CapitaIncomes

The per capita income is one of the highest inthe world. Switzerland competes withLuxembourg for the position of highest nationalper capita income in the world. In comparisonwith Switzerland, we find that the prosperousEuropean countries of Germany, France, and theUnited Kingdom have per capita incomes that areonly 60 percent of that of Switzerland. In 2000,the per capita income of Germany was $24,858;France, $23,730; and the United Kingdom,$25,750. The Swiss Gross National Product, GrossDomestic Product, and population continue to riseslowly in line with the other advanced economies.

• Strong, Independent Currency That is LooselyAssociated With the Euro

Unlike many currencies of the world, theSwiss franc remains a strong, independent


currency. The Swiss Federal government has noplans to adopt the euro or any other currency,though, in the late 1990s, the Swiss National Bankdecided that the Swiss franc should shadow theeuro for currency stability and Swiss exportcompetitive purposes. When the Swiss interestrates rose in 1998 in line with higher euro interestrates, the Swiss National Bank reconsidered thispolicy. Once they changed policies to return tothe generally independent position for the franc,Swiss interest rates declined to a more favorablelevel in Switzerland and the franc strengthenedagainst the euro. As the franc strengthened againstthe euro, the euro began its upward value trendagainst the U.S. dollar in year 2000. The foreigninvestor, therefore, tends to add to any propertyinvestment yield an additional yield from theupward trend in the local currency.

• Relatively Low Interest and Inflation Rates

At the opening of the new millennium,long-term Swiss interest rates have approximated3 to 3 1/2 percent which prospective real estateinvestors welcome. As Switzerland hasadministered monetary policy to gain a relativelylow rate of inflation, the inflation component inthe interest rates has declined. If the foreigninvestor wishes to finance in the country of theselected property to perhaps match the currencyof property liabilities against the currency ofproperty income and expenses,the investor may find favorablemortgage terms that include arelatively low rate of interest.

The strong Swiss francexists in a low inflationenvironment. The relativelylow Swiss inflation is a mirrorof the inflationary conditions ofthe advanced economies of theworld. The monetary policiesof the Swiss government andthe Swiss National Bank tendto follow the monetary policiesof the European Union and itsEuropean Central Bank since

Switzerland is surrounded by EU member countrytrading partners. Since goods and services ofSwitzerland are exported to all regions of theworld, monetary policy takes into account thecompetitive relationships, including the inflationtrends, of its many global trading partners.

• Land Planning Controls

In addition to the high credit rating ofSwitzerland, the affluence of the Swiss populationand business, the unlimited access of foreigninvestors to Swiss nonresidential real estate, therising value of the strong Swiss franc, we need toscrutinize other secrets to Swiss real estatesuccess. The land planning controls over thescarce buildable land may guarantee profitabilityof existing land development and reluctantgaining of planning approval for proposed landdevelopment. Approximately one-fourth of the15,945-square-mile area is mountainous andgenerally un-populated and unproductive exceptfor tourism. Forests cover another one-fourth ofthe land. Nearly one fourth of the country isdevoted to agriculture. The remaining one fourthis covered by cities and towns, which amounts toa relatively small amount of land for the use ofmost of the seven million people. The landplanning controls that apply to this relatively smallpart of Switzerland generally guaranteeprofitability for the existing urban and suburbanland uses.


The environmental protection policies andimplementation procedures add more restrictiveoverlays to the land development regime. Thefederal Environmental Protection Act of 1983applies to air and water pollution, soilcontamination, and waste storage and disposal.The various cantons implement this federallegislation, set additional cantonal standards, andestablish enforcement mechanisms. Theseadditional land use restraints tend to be favorableto the existing foreign and local investors of realestate. New foreign investors may agree with theland use controls so that the values andprofitability of their new real estate investmentsare enhanced in the longer run.

Strengths of the Swiss InvestmentClimate

There are other natural strengths that influencethe foreign investor who is looking to diversifyhis or her portfolio.

• The Attraction of Swiss Affluence and GloballyRespected Companies

Attracting the attention of real estateprofessionals is the fact that Switzerland is anaffluent country. The affluent seven millionpopulation of Switzerland is located in the midstof the affluent 340 million population of theEuropean Union. The continually reported highSwiss per capita income implies personalfinancial capacity for investment and the paymentof property rents, property operating costs, anddebt obligations.

Some of the world’s most respectedcompanies are based in Switzerland. Holderbankis one of the most respected property/constructioncompanies in the world; Swissair, one of the mostrespected transport companies; UBS, CreditSuisse, and Swiss Re, three of the most respectedfinancial companies; Nestle, one of the mostrespected food/beverage companies; and Roche,one of the most respected healthcare companiesin the world. Corporate respect is usually tied tosuch factors as profitability, employeesatisfaction, and management capability.

•General Prosperity, Low Unemployment, anda Good Export-import Balance

As a part of Western Europe, the economictrends of the European Union tend to influencethe economic trends of Switzerland. Since moreyears of economic prosperity are forecasted forWestern Europe, the forecasts for the Swisseconomy reflect the same prosperity.

Low unemployment describes Switzerland.When the U.S. has over four percentunemployment, Germany and France have tenpercent unemployment, and Italy, another countrybordering Switzerland, has over eleven percentunemployment, Switzerland has a much lowerrate of unemployment, 2.3 percent. Migrant laborfrom Italy, Turkey, and Eastern Europe stillcomplement Swiss labor. Approximately 20


percent of the labor force is foreign. Butimmigration policies prohibit the overpopulationof the country that contains only 41,000 squarekilometers of surface area. In the 1960s and 1970s,the lack of appropriate immigration policies ledto overpopulation.

The value of Swiss exports tends to represent80 percent of the value of Swiss imports. Thevalue of tourism receipts and other moneytransfers tend to fill the gap between the exportand the import volumes. Tourism is the leadingservice sector of the country even thoughwholesale and retail service employment issignificant. Hotels and restaurants employed239,000 persons in 1998, for example. The highestsource of employment is manufacturing (685,000employed persons in 1998) that is followed insecond place by the sector denoted by thewholesale and retail trade, repair of motorvehicles, motorcycles and personal and householdgoods (660,000 employed persons in 1998). Incomparison, the real estate business that includesrenting and other business activities employed364,000 in the same year. The most recent

published government statistics cover the year1998.

The work force tends to be well trained andeducated and multilingual. No illiterate personsare counted among the population. Swissuniversities attract large numbers of students. Forexample, the University of Zurich is said to have33,000 students. Other Swiss nationals attendforeign universities including European, UnitedKingdom, and U.S. universities. Swiss nationalsadapt to high technology readily. The internet iswell used. As evidence, sales from the companymarketing to consumers over the internet isincreasing. According to international real estateand other companies, the forecast for business toconsumer internet spending in 2005 approximateseuro 200 per capita in Switzerland. This is similarto the forecast by the same group - CorporateIntelligence Group, Jupiter, Insignia, and RichardEllis - for the Netherlands. The well educated andtrained Swiss work force imply good use of theinternet and computer software for real estatebusiness, a national reservoir of appropriatelyeducated employees and independent contractors,

and a knowledgeable and informedpopulation that is engaged inproperty marketing, investing,financing, and leasing. When theforeign investor wishes to locate agood real estate lawyer, that personmay turn to the annual Guide to theWorld’s Leading Real EstateLawyers that is published in theInternational Financial LawReview. Swiss real estate lawyersare included with attorneys frommore than a dozen countries.

This trained and educated workforce is also multilingual, Realestate activities may be conductedin the four languages native toSwitzerland - plus English - indiffering proportions. The threeofficial languages are German,French, and Italian. German is


primarily spoken in north andnortheastern sections of thecountry (about 73 percent ofthe Swiss people); French, inthe western section (about 20percent of the population); andItalian, in the southern sectionnear the Italian border (about4 percent of the people). TheRaeto-Romansch language,which is expected to becomethe fourth official language, isspoken by Swiss nations of theGraubunden canton in easternSwitzerland by about onepercent of the Swisspopulation. Most of theresident aliens speak today’sthree official languages -German, French, and Italian -in approximately the sameproportions as the Swissnationals. In the public schoolsand at the universities many students learn Englishas a second, third, or fourth language. As in manyother advanced countries, the personnel -particularly the management - of multinationalcompanies, usually speak English. Since Englishis the language of global business includingfinance, the large international businesscommunity including the global bankingcommunity, speaks, reads, and writes English.

The nationally strategic sector of agriculture,hunting, forestry, and fishing employed 179,000persons. At the top of the list of principalagricultural crops is found sugar beets whichaccounted for 1,086,000 metric tons. Furtherdown the list of principal crops are found wheatand spelt (616,000 metric tons) and potatoes(602,000 metric tons). Apples (365,000 metrictons), barley (327,000 metric tons), and vegetablesand melons (319,000 metric tons) account for thethird, fourth, and fifth principal crops during 1998.The importance of Swiss agriculture supports theSwiss efforts at land use planning and control thatreserves as much of the scarce Swiss cultivable

land for agricultural use as possible. Theenvironmental protection programs are linkedstrongly with agricultural land use, also.

The top-ranked trading partners ofSwitzerland are three of the four borderingcountries - Germany, France, and Italy. Austriadoes less business with Switzerland than theUnited States and the United Kingdom do withSwitzerland. Switzerland has a significant positivetrading balance with the United States; exportsto the U.S. (Swiss francs 12,4 billion) far exceedimports from the U.S. (Swiss francs 8 billion).Swiss businesses also have a positive tradingbalance with Japan. Switzerland has a negativetrading balance with Germany, France, Italy, andthe United Kingdom. They import from thePeople’s Republic of China, but export little tothat country. They export to Hong Kong,Singapore, and Israel but import little from thosecountries. The trading relationships are closelyassociated with the demand for industrial andcommercial property. The government seeks toenhance international trade for the relatively small


but highly prosperous landlocked country.Therefore, structural facilities and landdevelopment are part of the overall national tradeprogram.

Leasing and Property Law

To establish the foundation for the laterdiscussion of financing and valuation, let us turnto the basic elements of Swiss property law, somecommon law comparisons, and some leasingpatterns and regulations.

•The Basics of Swiss Property Law andInternational Comparisons

Swiss property law is part of the federal SwissCivil Code (Zivilgesetzbuch/Code Civil Suisse,CC). Various transactions that are carried out byprivate entities are governed by the Swiss federalCode of Obligations (Obligationenrecht/Code desObligations, CO). Absolute ownership of realproperty that is only limited by government rightsis very closely aligned with freehold ownershipof the common law. The principal form of tenureof property in Switzerland is absolute ownership.Long leases are not used in practice as they are incommon law countries. Condominium ownershipas a form of co-ownership applies to all types andgroups of buildings.

A right of residence is given a person tooccupy a structure or an apartment for residentialpurposes. The right of residence cannot betransferred and cannot be inherited. But the rightof residence may be extended to the beneficiary’sfamily.

The few restrictions on landownership includeplanning regulations, rights of access,preservation of natural beauty, compulsorypurchase such as eminent domain, and adversepossession even though it is seldom used. Localauthorities do not exercise pre-emption rightsbefore a transfer of property is finalized.

The transfer of title to land occurs when thetitle is registered. Registration of land ownershiptriggers the tax duties associated with propertyownership. Land registers that are maintained byresponsible cantonal authorities in every town orgroups of towns are used by the tax authorities.Usually the land register is practically kept by thenotary public. All parcels of land are divided intocadastral units on a cadastral map. These cadastralunits are then registered under plot numbers inthe land survey register. The appropriate cantonalauthorities survey the land and determine theboundaries of the separate plots of land, whichare shown on the official plans. The land registrysystem is similar to the Torrens system ofAustralia and some other parts of the world where

the government maintainsand guarantees the accuracyof the data recorded on theregister.

•Lease Patterns andRegulations

Leasing is governed by theprovisions of the Code ofObligations related to rentalagreement (Mieten/bails).Since 60 percent to 70percent of all Swiss citizensrent this homes rather thanown their homes, residentialleases including the


termination provisions are tightly regulated.Residential tenancies are commonly extended foran indefinite period. Other leases often cover afixed term and are based on rent per square meter.Following the European metric standard use, mostleases have measurements in square meters. Thelease may be quoted in the country’s currency interms of square meters per month or per year. Rentcontrol may apply as rent rises may be restrictedto part or all of the rise in the consumer priceindex or other such index. For example, in aparticular canton, residential rent increases maybe restricted to no more than 40 percent of therise in the consumer price index.

Often commercial leases such asoffice building leases call for termsbetween five and ten years. At the endof the original lease term, the tenant mayhave the right to renew the lease anotherten years unless the landlord wishes tooccupy the space him- or herself, thelandlord seeks to redevelop the property,or the tenant is late in paying the rent.Indexation of the rent is onlypermissible if the lease runs for at leastfive years and the parties to the leasehave agreed to use the federallymaintained consumer price index. Leaseclauses that permit automatic rent reviews in anupward direction only no more frequent than oncea year are valid only if the lease runs for at leastthree years and the rent is a fixed annual amount.Residential rent is usually paid monthly inadvance. In the case of residential leases, rentdeposits may not exceed three months’ rent.

Financing Swiss Real Estate

Since Swiss real estate financing coststend to be more favorable than the costs associatedwith the countries of origin for major foreign realestate investors, a foreign real estate investor mayconsider financing the selected properties inSwitzerland. The relatively low interest rates areattractive. Switzerland houses numerous financialinstitutions that have large volumes of funds withwhich to finance real estate and real estate

companies. Two of the major global banks - UBSand Credit Suisse - are based in Switzerland andfinance properties of all financial dimensionsfrom their vast international sources of funds. Full,unrestricted currency convertibility permits theinvestor to withdraw funds at any time from theproperty operating proceeds or sales receipts. Themany reciprocal national tax agreements permitlittle or no withholding of tax payments as moniesare transferred out of Switzerland.

The continuing Swiss bank secrecypolicies continue to attract large sums for depositfrom international private and public sources.

Switzerland has recently been labeled an“of f-shore tax haven” by an internationalconference involving the Bank for InternationalSettlements and the International Monetary Funddue to the alleged Swiss banking role in illegalmoney laundering. Since the Holocaust hearingrelated to Swiss bank account use by foreignpersons, institutions, governments, and companiesfor the deposit of funds from the confiscation ofJewish assets and the subsequent financialsettlement and payments to Jewish survivors ofthe Holocaust, the international community hassought certain changes in Swiss secrecy policiesand provisions. Part of the attraction of Swiss bankdeposits is related to the ongoing Swiss traditionof remaining neutral in the time of war.

The banks are regulated by the Federal


Banking Commission (EidgenossischeBankenkommission) that is based in Bern alongwith the Bank for International Settlements. TheFederal Banking Commission maintains varioustypes of connections with the European CentralBank and the remaining national central banks.The Swiss Banking Ombudsman, in contrast, isbased in Zurich where most of the major Swissbanks of all types and most of the internationalbanks are based. The regulators are charged withthe control of inflation, the management of theinterest rate structure, the administration of themoney supply, and the honesty and integrity ofthe banking sector through their monetary, fiscal,and other policies.

Usually Swiss property acquisition requiresfinancing. The relatively high cost of buildingconstruction leads torelatively high propertyvalues. Often the acquirerwho seeks financing caneasily locate sources ofmortgage and leasefinance and investmentbanking assistance withm o r t g a g e - b a c k e dsecuritization, stock andbond underwriting andm a r k e t i n g ,s a l e - l e a s e b a c k s ,partnerships, jointventures, and equitysyndications.

Mortgage financing might be obtainable fromSwitzerland’s two global universal banks - UBSand Credit Suisse - and their branch officesworldwide. They may both have branch operationsin the country of origin of the prospective Swissreal estate investor. Twenty four cantonal banksdeal in mortgage finance. Even though the 144foreign banks tend to finance companies andgovernments rather than engage in mortgagefinance, the 106 regional banks may financeproperty on the various bases including mortgagefinance. There are 17 private banks that are notknown for their mortgage lending; they tend to

invest in non real estate assets for their individual,family, foundation, trust, and other wealthyclients. There are 78 other banks, that includesthe Coop Bank/Banque Coop that is a centralcooperative credit institution. These banks addedtogether total 372 banks operating in Switzerland.

The twenty four cantonal banks representlocal financing in the twenty cantons and sixhalf-cantons that are provided for by therepublican federal Constitution. Any regulationsassociated with real estate finance are derivedfrom the federal government that sets nationalpolicy and the cantonal governments each ofwhich have either own constitutions,governments, and legislative assemblies. Theautonomous cantons tend to have considerablymore government power than the federal

government even thoughthe bicameral FederalAssembly elects one ofthe Federal Councillors tobe President each year fora term of one year. TheFederal Assembly iscomprised of the Councilof States with 46members ( two representeach canton and onerepresents each halfcanton) who are electedfor three to four years andthe National Council with200 members who aredirectly elected on thebasis of proportional

representation by the Swiss voters for terms offour years. The 24 cantonal banks are generallyfinanced and controlled by the cantonalgovernments. Their business activities arecoordinated by the Association of Swiss CantonalBanks. At the end of the 1990s decade, thesecantonal banks had approximately 750 branchesand controlled roughly one-third of Switzerland’ssavings deposits.

As the number of banks and bank branchescontinues to fall, the total number of bank


employees started to rise again in 1998 after asteady decline in numbers from 1990 through1997. The expansion of bank personnel parallelsin part the return of prosperity from therecessionary conditions of the early andmid-1990s. The merger and acquisition activityamong Swiss banks can be expected to increasethe size of the assets and deposits under the roofof each of the remaining large banks who mayemploy additional financial officers who handlereal estate finance matters from an larger pool offunds.

Taxation of Income Relatedto Real Estate

Since Switzerland is a confederation of 26cantons (20 cantons and 6 half cantons) thatconsist of many communes, the federal tax law issupplemented by important cantonal andcommune tax laws. Each canton enacts its owntax laws as does each commune. By the 1993 TaxHarmonization Act, under certain federalguidelines, the cantons and communes will

coordinate their tax laws and regulations with thefederal tax laws and regulations in accordancewith the Federal Tax Act. As of year 2000, thefederal corporate tax rate is 8.5 percent of taxableincome, After the deduction of tax payments, theeffective federal corporate tax rate is 7.8 percent.The maximum total cantonal and communalincome tax burden ranges from 10 percent to 27percent of pre-tax income. Therefore, the rangein total federal, cantonal, and commune tax ratesis 16.5 percent to 32 percent.

Generally capital gains are taxed along withother business income at the regular income taxrates. At the cantonal and commune level, capitalgains from business-related real estate sales orreal estate companies may be treated differentlythan at the federal level. On the federal level,capital gains of individuals of a noncorporatenature are not taxed. Most, but not all, cantonsdo not tax nonbusiness capital gains

Depreciation may be calculated with use ofstraight-line or declining balance depreciationmethods. For commercial buildings, for example,

the straight-line method permitsthe deduction for income taxpurposes of 1.5 percent to 2 percentof the depreciable value each yearwhile use of the declining balancemethod permits a tax deduction of3 percent to 4 percent. Forindustrial buildings, the owner maydeduct 3.5 percent to 4 percent ofthe depreciable value each yearusing the straight-line method and7 percent to 8 percent using thedeclining-balance method. Theannual depreciation deductionpermitted for data-processingequipment is 20 percent using thestraight-line method and 40 percentusing the declining-balancemethod.

Even though the standard rate forthe value-added tax is 7.5 percentas of year 2000, the value-added


tax rate for hotels and lodging services is only 3.5percent. As of 1997, all construction work andthe services of real estate agents, lawyers, andnotaries were subject to the value-added tax.

The capital tax rates of the various cantonsand communes range from 0.3 percent to 1.3percent, according to the Ernst & Young 2000Worldwide Corporate Tax Guide. As of 1997,businesses were subject to a federal capital tax atthe flat rate of 0.0825 percent. As of 1997, aspecial tax based on the value of the land waslevied in 15 of the 26 cantons. If the canton taxedthe development value of the land, the rate rangedfrom 0.05 percent to 0.2 percent of the value ofthe property.

PricewaterhouseCoopers, in a recent taxsummary, stated that most cantons and/or theircommunes levy annual real property taxes(Liegenschaftensteuer - impt foncier - tassaimmobiliare), that is based on the gross value ofthe land, buildings, and rights to water powerwithout the deduction of mortgages or other debtsthat may be associated to these assets. The taxablevalue is normally lower than the market value ofthe property. The rates of taxation among thecantons and their communes range from 0.05percent to 0.4 percent of the taxable value.

The transfer or sale of real property usually

triggers a transfer tax (Handanderungsteuer -droitde mutation - diritto di mutatione) on theestimated worth of the property transferred. Thetax ranges from 0.2 percent to 4 percent on theproperty value. The transfer of shares of real estatecompanies is usually subject to these same transfertaxes.

Cantonal stamp taxes are levied on documentsrelated to real estate transactions and vary widelyamong the cantons. The amounts may depend onthe nature of the document, the number of sheetsof paper involved, and other such considerations.For example, the stamp taxes on leaseacquisitions, lease disposals, and property salesrange from Swiss francs 100 to Swiss francs 300

A number of countries havedouble tax treaties with Switzerland.Under the Switzerland/United Stateswithholding tax treaty, the withholdingtax rate on dividends paid to UnitedStates recipients is 5 percent; there areno withholding taxes on interest orroyalty payments made to U.S.recipients.

General Real PropertyValuation Methods

The valuation of property isnecessary to mortgage financing,property insurance, eminent domain

payments, estate settlement, real propertytaxation, and other functional processes.Generally Swiss valuers use the cost and incomecapitalization approaches. International real estateappraisers tend to bring to their Swiss appraisalwork the market comparison and the discountedcash flow technique to the income approach.

The market approach to real propertyvaluation is difficult to use in Switzerland due tothe policy of secrecy of private matters that applyto real estate transactions as it does in the bankingsector where foreign and local deposits areinvolved. Some institutional valuers have access


to data banks of real estate information withintheir institutional files and can use the informationin employment of the market approach. Ifadequate commercial property revenue, expense,and financing data is available for the subjectproperty and an adequate number of comparableproperties, the discounted cash flow technique canbe applied in the use of the income approach. Butthe commercial property data is difficult toacquire in the continuing atmosphere of privacyof private matters.

The Infrastructure forSwiss Real Estate Operation

Swiss real estate operation is efficient andoften profitable due to both demand and supplyconditions and the good infrastructure. Let usbriefly review such infrastructure as energy, water,security, transportation, and telecommunications.

Switzerland generates electricity throughhydroelectric plants principally in the Alps

Mountains and through nuclear power from fivereactors that provide more than three gigawattsof electricity that provides 40 percent of the Swissenergy supply. Hydroelectric power provides morethan half of the total Swiss energy output. Energyis also derived from petroleum of which about 80percent is imported. More than 60 percent of thefinal energy consumption is associated withpetroleum and related products. Surplus electricitycontinues to be sold to other countries. Naturalgas supplies are more problematic. Foreignsources of natural gas appear to be needed -perhaps from the United Arab Emirates in theMiddle East. The power supply seems to be ampleand at reasonable cost for the energy for personal,corporate, institutional, and government computersystems, industrial plant operations, andcommercial and residential structure heating, airconditioning, and ventilation. Hydroelectric andnuclear power are relatively inexpensive incomparison with energy generated by coal-, oil-,and gas-fired power plants. The construction anddevelopment of hydroelectric and nuclear powerplants consume large sums just as geothermalpower plant development and construction do.

Swiss Telecom supplies services related totelephony, cable television, and mobile phoneswith internet access. Broadbandtelecommunications services is probably on thehorizon.

Water is usually ample due to the glacial,mountain snow, and rain sources. Water treatmentplants assure clean water with ample levels ofpurity for potable water. The water emitted fromthe various chemical and other industrial plantsis treated to adhere to the Swiss environmentalprotection laws and standards that have been inplace since 1983.

Security has long been a consideration in suchan affluent country whose borders have neededprotection during centuries of European militaryconflicts. In order to remain neutral in wartime,national protection has been required to guardagainst invasion. A trained citizen military forceis maintained through involuntary military


conscription. Training and retraining is requiredof the Swiss citizens who are a part of the nationaland local security forces.

Building, other asset, and personal securityas a part of national security has been a necessarycomponent of the real estate scene. Looking onlyat the banking sectors of Zurich and Bern and atthe international trade association sector of Bernand Geneva, we note the security needed andgiven to the various banking headquarters andbranch offices and their personnel and theinternational association headquarters buildingsand their personnel. The bank vaults, offices, bankbuildings in general, and personnel are protectedfrom terrorism that is rampant in the world andfrom ordinary burglary, theft, and industrialespionage. By providing appropriate security,Switzerland, for example, retains its reputationfor depositary and investment safety, security, andsecrecy.

Since Switzerland is a cross roads forEuropean commerce due to its central location inthe midst of Italy, Germany, France, and Austria,

transportation within and throughSwitzerland remains a controversialtopic. The impressive federally financedrail system for freight and passengers issupplemented by private rail systems thattend to serve the smaller markets in moreremote mountainous areas that attracttourists to seasonal sports. Thecontroversy revolves around theconstruction of additional rail lines withassociated tunnels through the mountainsthat would better accommodate throughtraffic for speedy delivery of products toand from Mediterranean locations andnorthern Europe and Scandinavianlocations. Switzerland compromises bycontinuing to accommodate EuroStar,intercity, and local trains through theSwiss Alps without constructing new railsystems that would accommodate mainlyinternational trade to the exclusion of

Swiss trade. The urban areas of Switzerland arewell linked by rail service that is generallyfrequent, on time, comfortable, clean, andprovides passengers with appropriate food service.Bus systems exist for commerce and passengersincluding tourists. Cable cars providetransportation up mountain slopes for sightseers,skiers, and supplies for mountaintop andmountainside structural developments. Inlandwaterways that link Swiss locations with otherEuropean locations accommodate thetransportation of bulky, heavy products that canuse this slower but more reasonably priced transitsource. Switzerland has a merchant fleet ofapproximately 15 vessels. The urban airportssupport general and commercial aviationincluding plane service offered by Swissair andits affiliate airlines that serve many countries.Swissair has been declared, in the December 15,2000 Financial Times from a recent specialsurvey, one of the world’s most respectedtransportation companies. Overall, the Swisstransportation system provides excellent servicefrom multiple media for the international realestate community.


Locating Swiss Real EstateOpportunities and Marketing

Practices and Associations

If the foreign investor seeks information aboutavailable properties that generally fit his or hercriteria, there are several sources of informationthat should be considered. We will then note thegovernment/business requirements for real estateagents and brokers as they wish to set up or starta real estate business or begin marketing realproperty interests. We will also note the mediaused by those advertising the availability ofvarious real property interests, in particular theactive use of the internet.

Assistance for Property Location andGovernment Economic Development

Incentives

How do you locate Swiss real estateopportunities that fit your investment needs? Theresponse generally is use the Swiss marketing

system that is available. For residential properties,many agents and brokers exist to help you selectthe inventory of primary, secondary, and vacationhomes. Professional and other business personswho market residential, commercial, andindustrial properties also exist to help theprospective investor. If the house or apartment isassociated with the foreign investor’s employmentin Switzerland, real estate agents and brokers, thecompany’s Swiss or international accountants,attorneys, or commercial or investment bankersmay assist with the search for appropriatecorporate-related housing. Swiss laws permitforeign managers and other workers inSwitzerland to purchase homes for their personalresidences. The Swiss home may represent a

“secondary” home when the foreigninvestor maintains his or her primary orprincipal residence in the foreigncountry that is his or her home taxdomicile. If the foreign person seeks avacation home in Switzerland, themarketing person needs to be privy tothe availability of residential units thatare available by law for foreigninvestors. Each of the cantons reservethe right to restrict the sale to foreigninvestors of their vacation-typeresidential properties on the basis ofannual quotas or other such bases ofexclusion. There continues to be a highdemand among foreigners for Swissvacation properties for sale or lease,particularly in locations close to popularwinter or summer resorts or touristattractions. Financial institutions,attorneys, accountants, and otherprofessional people may aid the

prospective foreign investor in the search for theappropriate vacation property as well as real estateagents and brokers.

If the prospective foreign investor seekscommercial or industrial property, specialized realestate agents and brokers, attorneys, andaccountants may assist with the search forappropriate office, retail, or industrial property


for sale or lease. Sale-leasebacks have seldombeen used in Switzerland. The chambers ofcommerce and economic development authoritiesmay welcome an opportunity to assist with tax,financial, and other advice about office, retail, andindustrial property selection or development. Iftax concessions are given, the Swiss governmentis usually seeking new or expanded businesslocations in less utilized and less economicallydeveloped portions of the country. Or the Swissgovernment seeks to encourage the market entryand property use by certain high-technologyindustries and businesses who meet the country’senvironmental protection requirements. Few taxconcessions are given for general economicdevelopment purposes.

•Real Estate Agent and Broker Requirementsand Trade Associations

According to the Swiss Association of RealEstate Agents and Administrators in Zurich,approximately 1, 100 registered agents and amuch smaller number of registered real estatebrokers and administrators are Associationmembers. The membership in the Association isvoluntary. The real estate agents are registeredwith the appropriate chamber of commerce to bequalified for their real estate marketing and otherwork. The real estate brokers are also registeredwith the appropriate chamber of commerce, butfollowing the successful completion of thegovernment-sponsored and administered exam,

the real estate brokers are said to have receivedtheir Diplomas in real estate. These requirementssubstitute for, what some advanced economiescall, licensing requirements.

Recent real estate agent/broker compensationcan be summarized in the following way: Fornegotiating the sale of a property for the owner,the agent/broker may receive three to five percentof the sale price. It is unusual for the real estateagent/broker to represent the prospective buyerfor a fee or commission. When the agent/brokernegotiates the disposal of a lease, a commissionof five to ten percent of the lease value is payable.When the agent/broker represents the tenant in alease acquisition, the same five to ten percentcommission based on the lease value is payable.

The Swiss Association of Real Estate Agentsand Administrators holds seminars on newlegislation and other significant changes in realestate which members voluntarily attend. Otherreal estate trade associations in Switzerland,according to Real Estates Directories at web sitehttp://web.interware.hu/tilklg/vip/eured.htminclude (1) Immo-Valais, Genore, Suisse, (2)Societe des regisseurs de Genove, (3) Societevaudoise des regisseurs et courtiers en immeubles,and (4) Union Suisse des Professionnels del’immobilier.

•The Media Used by Real Estate MarketingPeople to Reach Foreign and Local Investors

The foreign investor maybe attracted to particularproperties and real estatemarketing companies throughadvertising the internationalnewspapers such as the FinancialTimes, web home pages andother web locations, directmailings to identified prospects,and personal contacts. Since theadvent of the internet, themarketing to foreign prospectsvia the web has become veryactive.


Rent Trends and Indicationsof Investment Yields

In the review of “Prime Rents in Cities Acrossthe World” by FPDSavills international real estatefirm in the November 10, 2000 issue of FinancialTimes, Swiss center city commercial rents on aU.S. dollar square meter per month basis werevery low compared to Hong Kong, New York,London, Amsterdam, Prague, and Beijing. TheSwiss representative city, Zurich, for the rentcomparison showed rents of approximatelyU.S.$12 per square meter per month while HongKong center city commercial rents approximatedU.S. $50 per square meter per month. Let us someestimates concerning Geneva and Zurich retail,office, and industrial rents for three currencieson a square meter and square foot basis.

• Retail Properties

In a recent worldwide real estate investmentreport, Healey & Baker indicated that the relativelevel of Swiss retail property leasing andinvestment activity was medium level but thedirection of leasing and investmentactivity was upward. As of thesecond quarter of 2000, retail rentsof Geneva have approximatedSFr2,500 or Euro 1,598 orU.S.$1,451 per square meter perannum. In U.S. dollar terms, that’sapproximately U.S.$145 per squarefoot per annum. At the same timerecently, retail rents of Zurich weremore than twice as high - averageestimates of SFr5,500 or Euro3,192or U.S.$3,192. In U.S. dollar terms,that’s approximately U.S.$320 persquare foot per annum.

• Office Properties

According to an analysis inGlobal Real Estate News based ondata from a number of internationalreal estate firms, office rents in

Geneva in the second quarter of 2000approximated SFr9OO or Euro 575 or U.S. $522per square meter per annum. In U.S. dollar terms,the office rents approximated U.S.$52 per annum.Zurich office rents were considerably higherduring the second quarter of 2000, according tothe recent “Rents in Europe” tabulation: SFr1,100or Euro 703 or U.S.$638. In other words, theZurich office rents recently averaged U.S, $64 persquare foot per year.

We can compare these second quarter 2000office rents with late 1998 rent estimates fromC.B. Richard Ellis Global Research andConsulting Company. Geneva office rents, at thistime, average U.S.$45.66 per square foot perannum or U.S.$491 per square meter per annum.The rents had risen 8.1 percent over the previous12 months. Zurich average office rents had risen7.6 percent over the previous 12 months so thatthey were estimated at U.S.$52.42 per square footper annum or U.S.$564 per square meter perannum in early 2000.

• Industrial Properties


From the same second quarter 2000 “Rentsin Europe” tabulation, we note that industrial rentlevels of Geneva were roughly the same as thatof Zurich: SFr 170 or Euro 109 or U.S.$99 persquare meter per annum. That translates, roughlyto U.S. $10 per square foot per annum.

• Indication of Investment Yields

Colliers International has concluded recently

that retail and office investment yields were higherin Zurich than retail and office investment yieldsin Geneva. But in Zurich, retail investment yields(6.5 percent to 7.5 percent) were higher than officeinvestment yields. Colliers International, in their1999 Market Report, Real Estate Investment,Europe & South Africa, suggested that the readermay convert these gross yields to net yields bymultiplying the gross yields by 0.85.


About the Author

As the author awaits the arrival of hardcovercopies of her 45th book/monograph, JAPANREAL ESTATE INVESTMENT, that is to bedistributed nationally and internationally byQuorum Books, the Westport, Connecticutpublisher, this manuscript surveys some of the realestate investment highlights of one of the world’smost affluent European countries and stableeconomies, Switzerland.

The author, Dr. M.A. Hines, started herpublishing history with an Ohio State UniversityPh.D. dissertation that was published by theNational Retail Merchants of New York that dealtwith retailing opportunities within federal urbanrenewal projects of the United States. Someacademic refereed and professional real estate andfinance articles were written and published. Then,while the author served as a Associate Professorof Finance at Cleveland (Ohio) State Universityand later as Professor of Real Estate and Financeat The University of Alabama, Dr. Hinesproceeded to write four real estate textbooks forthree major U.S. publishing houses. McGraw-HillIrwin published her PRINCIPLES ANDPRACTICES OF REAL ESTATE in 1976.Prentice Hall published her REAL ESTATEFINANCE textbook in 1978. Then John Wiley &Sons/Macmillan published two of her textbooksthat includes REAL ESTATE INVESTMENT(1980) and REAL ESTATE APPRAISAL (1981).

The second edition of SHOPPING CENTERDEVELOPMENT AND INVESTMENT,published in the United States in 1988 by JohnWiley & Sons, Publishers, of New York, was

published in the Japanese language by ToyoKeizai Shimpo Sha, Tokyo publishing house, in1990. Two other professional real estate books ofthe author were published by John Wiley & Sonsof New York: FINANCING REAL ESTATEWITH SECURITIES (1988) and REAL ESTATEDEBT FINANCING (1987)

The International Real Estate Institute haspublished several of the author’s 45 international-and U.S.-oriented books and monographsbeginning with INTERNATIONAL INCOMEPROPERTY INVESTMENT and JAPANESESHOPPING CENTERS: FINANCIAL ANDINVESTMENT FEATURES in 1985. Threeeditions of AN OVERVIEW OF GLOBAL REALESTATE FINANCE followed in 1989, 1995, and1999. The full-color monograph, BRAZILIANREAL ESTATE, was published in 1999 andfollowed by the monographs, MOROCCANREAL ESTATE: NORTH AFRICANPROPERTY, THE IMPACT OF ePROPERTYON INTERNATIONAL REAL ESTATE, andINVESTING IN JAPANESE REAL ESTATE:LINK TO INTERNATIONAL TRADE in 2000.

The author continues, after 19 years, to serveas the Clarence W. King Endowed Professor ofReal Estate and Finance at Washburn Universityof Topeka, Kansas. When Washburn Universityasked Dr. Hines to accept its first endowedprofessorship, it was discovered much later thatDr. Hines became, at that time, the first femalefinance and/or real estate endowed professor inthe United States.


Selected Bibliography

Campbell, Callum, “Real Estate Lawyers,” Inter-national Financial Law Review Real Estate Law-yers Guide (1996), pp. 2-47.

Coates, Philip L., Editor. INTERNATIONALREAL ESTATE GUIDE. Antwerp, Belgium:Oncor International, April, 1999.

Cohen, Norma, “Do Not Discount Web Shop-ping,” (Research points to strong demand fordesktop shopping as malls continue to battle forbusiness share) Financial Times, December 1,2000, p. 23.

Conser, Eugene P. REAL ESTATE - EUROPEANSTYLE or WHAT YOU SHOULD KNOWABOUT REAL ESTATE IN 32 COUNTRIES.New York: Exposition Press, 1976.

“Country Commerce: Switzerland, The Econo-mist Intelligence Unit, April, 2000, pp. 1,8,11-14,27-29,32-33, 44.

Doing Business in Switzerland. InformationGuide. Supplement to the 1991 Edition of the In-formation Guide. New York:PricewaterhouseCoopers, March, 1994.

“EU Shapes Up,” (Enumeration of the currentmembers of the EU with facts including their GDPper capita 2000 income) Financial Times, Decem-ber 12, 2000, p. 2.

Ernst & Young. 2000 Worldwide Corporate TaxGuide. New York: Ernst & Young,2000.

Hall, William, “Still Holding Many of the TrumpCards,” Financial Times Survey: Switzerland:Banking Finance and Investment. FinancialTimes, November 16, 2000, p. 1.

Heiz, Christoph, “Switzerland,” International Fi-nancial Law Review. Fund Management Supple-ment (February, 1994), pp. 40-43.

Hoesli, Martin, Andre R. Bender and PhilippeFavarger, “Chapter 15, Switzerland,” publishedin EUROPEAN VALUATION PRACTICE:Theory and Techniques. Edited by Alastair Adair,Mary Lou Downie, Stanley McGreal and GerjanVos. London: E & FN Spon, an imprint ofChapman & Hall, 1996.

Hurndall, Anthony, General Editor. PROPERTYIN EUROPE: LAW AND PRACTICE. London:Butterworths, 1998.

“Institutional Investor’s 2000 Country CreditRatings,” “Transparency Rewarded,’’ InstitutionalInvestor, March, 2000. p. 90.

Lennards Properties International. Two advertise-ments run in the Weekend January 20/January 21,2001 issue of the Financial Times, p. XVII. Swit-zerland and Anzere vs. Life on a Natural High.Domaine de Chamossaire

Meier, Walter, “Restrictive Rules in Switzerland,”International Tax Revi 5:4 (April, 1994), pp.33-35.

Moore, Philip, “Local Institutions Look to theEquity Market,” Euromoney Switzerland Supple-ment (September, 1993), pp. 28-29.

“National Financial Markets: Switzerland,” Fi-nancial Market Trends (France), No. 66 (March1997), pp. 125-128.

“National Financial Markets: Switzerland,” Fi-nancial Market Trends (France), No. 67 (June,1997), pp. 189-192.

Oliver, Marcus, Editor. Healey & Baker BUSI-NESS TRAVELLER’S GUIDE TO THE NEWEUROPE. London: Property Week, 1999. Swit-zerland, pp. 106-111.

Pierard, Nicolas and Michel Barbey,“Securitization,” International Financial Review35:53720123 (2000) p. 35.


PricewaterhouseCoopers. DOING BUSINESS INSWITZERLAND. Information Guide. Supple-ment to the 1991 Edition. New York:PricewaterhouseCoopers, March 1994.

“Prime Rents in Cities Across the World,” Finan-cial Times, November 10, 2000, p. 29. PrivateInvestment in Real Estate.

Pulver, Urs, “New Investment Fraud Statute,”Financial Regulation Report, 43:8 (February,1995), pp. 22-24.

“Rents in Europe: Second Quarter 2000,” GlobalReal Estate News. Alexandria, MN: InternationalReal Estate Institute, 2000.

Stephens, Rebecca, “The Funny Thing AboutSwitzerland,” Resident Abroad, 109:1 (February,1993), pp. 50-51.

Sullivan, Aline, “Havenly Homes,” ResidentAbroad, 48:3 (October, 1995), pp. 22-24.

“Switzerland,” The Europa World Year Book2000, Vol. II. London: Europa Publications Ltd.,2000.

Williams, Frances, “Economy: Barometer is NowSet Fair,” Financial Times, May 17,2000, p. Ill.

Wilson, Mary, “Slip-Sliding Away?” ResidentAbroad, 20:1 (December 1996) pp. 59-60.

“World’s Most Respected Companies,” FinancialTimes, December 15, 2000, p. IV.


International Real Estate Institute

Code ofProfessional Ethics

The purpose of this code is to establish clear and ethical parameters for the members ofthe International Real Estate Institute. Should a member violate these codes or

standards of professionalism, their designation may be revoked for a period of time,and/or they may be expelled from the Association.

1 Members of the Institute must conduct

themselves in a professional manner at

all times.

2 Members must respect the professional

reputation of other Institute members.

3 Members of the Institute must strive to

maintain a public awareness that the

Institute Members treat all assignments

or projects fairly and impartially.

4 Members must strive to maintain and

improve Professional Standards and be

willing to assist the Institute to that

end.

5 Members must respect a Confidential

Relationship with other Institute

members.

6 Members of the Institute must accept

only those projects or assignments for

which he/she has the ability to perform

in a competent and professional manner.

7 Members of the Institute must noc

accept projects or assignments which

involve a conflict of interest.

8 Members of the Institute must not

engage in any practice which is in

violation of the law of the land.

RIMRegistered International Member

SCVSenior Certified Valuer

RPMRegistered Property Manager

International Real Estate InstituteP.O. Box 879 • Palm Springs, California 92263 USA

Tel: (877)743-6799 • Fax: (760)327-5631E-mail: [email protected] • Website: http://www.irei-assoc.org

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