On October 26, 2020, the Federal Supreme Court ruled that the net yield for an investment property with rental properties may not exceed 2% above the reference interest rate collected quarterly by the Federal Department of Economic Affairs. Until now, the maximum yield was capped at 0.5% above the reference interest rate. This decision has caused a lot of controversy, especially because it could directly affect many people in Switzerland, since there are around 2.1 million rental apartments in our country.

A land of tenants

Precisely because it affects so many and housing is a fundamental right, rent is considered a compulsory consumption and accordingly tenant protection is always a political issue, which is currently once again on the agenda in Bern. The concern is clear: No unjustifiably high profits should be made at the expense of tenants and the cost rent plus net yield applies according to the current Federal Court decision.

The key question: what is an acceptable rate of return?

Around a third of all rental apartments are owned by institutional investors such as pension funds, which must be able to generate a profit that should be well above inflation and thus benefit us all again in old age. And it should also remain interesting for private investors to be able to invest in attractive housing with the chance of a moderate but good return. 

Furthermore, social housing has historically been in a strong position in Switzerland - a quarter of the rental apartments in the city of Zurich, for example, are owned by building cooperatives and private or church foundations. Under the fundamental article approved by the electorate at the end of November 2011, this proportion must be increased to one-third by 2050. This will ensure that there is sufficient affordable housing for people who need it in the long term. In this context, the current Federal Court decision appears more socially acceptable. 

The right decision with foresight

Overall, it can be said that the market and the state are playing it right, and a real estate market with the prospect of healthy returns that can be reinvested in new and attractive housing is to be welcomed in the long run. Further, it should be noted that probably most of the returns violated the old rule and thus an estimated 70-80% of the tenancies were not in compliance with the law. Such a situation is of course repugnant and the Federal Court with its decision has made a long overdue legalization of reality. Therefore, we consider a net yield of 2% above the reference interest rate to be appropriate for the present time with the low interest rate environment that has now persisted for a long time. Especially since this 2% only applies as long as the reference interest rate itself does not rise above 2%, thus preventing the net yield from rising above 4%.