Owning or Leasing a Property in Switzerland: Which Option Is Best?
Most investors aspire to own their real estate as freeholders, yet for many, it’s impossible to afford the substantial capital commitment required, even if they are financing their purchase with a mortgage. In such cases, a leasehold arrangement, often simply called a lease, may be more affordable.
What are the comparative advantages of leaseholds? Do they outweigh the disadvantages, or vice versa? Are leaseholds a less attractive form of real estate ownership than freeholds? These are all questions that many are still striving to answer.
A Nation of Tenants or Owners?
With home prices so elevated in Switzerland, the leasing option has been steadily gaining ground in recent years. This uptrend has also been driven by the persisting shortage of freehold properties in several Swiss municipalities. In fact, this shortage is one of the main reasons why Switzerland has long been a nation of tenants, having the lowest homeownership rate in Europe.
The shortage arises largely due to Swiss planning laws, which are highly restrictive when it comes to new developments, making the country one of the most expensive places to become a real estate investor through full property ownership.
How Does a Leasehold Work?
Leaseholds are most commonly associated with apartments but are also available for almost any type of residential real estate. In the context of apartments, the freeholder, or lessor, may own – or even lease – the whole building, then sub-lease or rent individual units to third parties. With a freestanding leasehold building, the leaseholder, or lessee, doesn’t own the land on which the property is situated; that belongs to the lessor.
That said, the lessee can sell the building, apartment, or house – but not the land – to another lessee. They can also rent them out to others. Sometimes, people lease the land, undeveloped, and then erect a home or other building on it to their own specifications and preferences.
Lessees must pay a regular fee, or ground rent, to secure their lease. Usually, rent is paid annually and the lease agreement runs for a minimum of 30 years and up to 100 years. At the end of the term, if the lessee wishes to maintain the arrangement, the leasehold must be renegotiated.
The main advantage of the leasehold approach is obviously financial. The lessee can secure full ownership of a building with a lower upfront cost since they are not responsible for purchasing the land. While they do not own the land, they own the property built on it and, thereby, can exploit it pretty much like any freeholder. With the lessor’s contractual consent, as outlined in the leasehold agreement, lessees can make improvements or additions, rent it out, or sell it.
What Are the Leasehold Costs?
As a hypothetical example of this cost saving, let’s consider a house built on a plot of 200 square meters. In Switzerland, the approximate market value of such a plot would be at least EUR 1’500’000, or EUR 7’500 per square meter. In premium locations like Zurich or Geneva, however, the value could attain over EUR 2 million, averaging around EUR 10’000 per square meter, nearly 1.4 times higher.
While a lessee avoids paying that EUR 1.5 million, they need to consider the ongoing ground rent. Typically, the owner of this hypothetical plot will charge the lessee around 5% of the land’s value annually, or EUR 75’000 assuming the property doesn’t appreciate in value over the lease term. Assuming that’s fixed, the cost will be an additional EUR 2.25 million over the course of a 30-year lease. Even after adjusting this outlay for inflation, the “real” cost is unlikely to be much lower than the cost of the land in this example.
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What’s more, the ground rent may undergo annual adjustments, as is commonly the case. These adjustments can be tied to various factors such as an agreed measure of inflation, mortgage interest rates, or prevailing land values. Such variability introduces an additional, unquantifiable cost factor to a leasehold investor’s calculations.
All of this assumes the putative lessee is buying a leasehold with cash, so the cost of a mortgage has been ignored. If the buyer requires a mortgage, at current rates, it will cost around 2% annually. This expense must be deducted from the rental yield on the leasehold home, which currently averages around three percent nationwide. Additionally, this analysis overlooks the expenses associated with managing a property rented to third parties. Mostly, these expenses will consist of the maintenance of the structure and its fixed amenities (faulty wiring or a burst water pipe can be more costly), as well as property taxes, which vary widely between cantons.
Thankfully, maintenance costs and mortgage interest can be offset against income tax. Nonetheless, these expenses must be paid out of the lessee’s pocket beforehand and that will, in effect, reduce the cash flow generated from rental income.
What Is the Difference in Terms of Cost?
Up to this point, what we have discovered is that over time, the costs associated with leasing or buying a home in Switzerland aren’t really that different. Broadly speaking, the same is true of the potential returns. The shortage of land on which to build your home goes hand-in-hand with the shortage of homes already built. Consequently, the values of both land and buildings tend to rise and fall more or less together.
Read the full article on our website and delve deeper into the advantages and disadvantages of owning or leasing a property in Switzerland.
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