In a surprising move at the end of March 2024, the Swiss National Bank (SNB) became the first central bank of the OECD to decrease its rate. This decision comes amidst a backdrop of inflation reaching target levels and stabilizing, signaling a shift in economic dynamics. While this move has broad implications, its impact on the hotel investment sector in Switzerland is particularly noteworthy.
Inflation Decrease Combined with RevPAR Growth Means Margins Increase
- In February 2023, inflation in Switzerland stood at 1.2%, a significant decrease from the 3.4% recorded a year prior. Notably, decreases were observed in essential sectors for hotel operations, such as food and energy.
- With lower costs in these areas, particularly crucial for alpine resorts, hotel margins are poised to improve. This comes alongside continued growth in Revenue per Available Room (RevPAR), up by 3.4% year-to-date for alpine resorts, further bolstering profitability.
- The SNB's rate cut of 25 basis points is expected to enhance financing conditions in Switzerland, driving mortgage rates down. Anticipated stability in the Swiss Average Rate Overnight (SARON) around 1% by 2025 will further improve liquidity in the Swiss hotel investment market.
- These improved financing conditions, coupled with positive performance outlooks, are likely to support higher Internal Rate of Return (IRR) performances for investors.
Increase in Real Estate Value & Performance
- Lower rates typically translate to higher real estate prices. While Switzerland has experienced relatively limited impacts on its real estate market compared to other European countries, the rate cut is expected to fuel increases in real estate prices.
- This presents a positive signal for market entry, as further rate cuts are anticipated to support real estate value in the medium term, enhancing investment performance. Notably, the gap between Real Estate funds and the Confederation 10-year interest rate has significantly narrowed, signaling a favorable trend for institutional investors reallocating funds toward real estate.
A Stable Parity Means Less Volatility for Touristic Demand
- Despite historically high levels compared to the USD and EUR, the Swiss franc is expected to remain relatively stable in the coming months. This stability is crucial for the tourism sector, as it reduces volatility in touristic demand.
- Foreign tourist demand has surged over the past two seasons, with the US surpassing pre-pandemic levels by 23.6%. This positive outlook for outbound tourism is expected to fuel further RevPAR growth in the coming years.
The SNB's rate cut has multifaceted implications for the hotel investment sector in Switzerland, ranging from improved margins and financing conditions to enhanced real estate value and stability in touristic demand. Investors are presented with a favorable landscape, characterized by increasing profitability and promising growth prospects, signaling an opportune moment to capitalize on the evolving dynamics of the Swiss hospitality market.
