Depressed margins are pushing Swiss banks into attractive but fiercely contested territory, the real-estate market.

There is barely another business area more fiercely fought over by Swiss banks than real estate, and just about every week at least one financial institution hooks up with a real estate company.

Tuesday, three cantonal banks founded a joint venture to participate in the online platform Newhome.ch. Recently, Zurich-based private bank Julius Baer took a majority stake in the real estate service provider Kuoni Müller & Partner and intends to integrate its three dozen staff into its own organization.

Four Priorities

At the beginning of 2021, Avobis, an independent mortgage and real estate manager took over management company Verit Immobilien with its ten sites and 150 employees.

Another noteworthy example is AgentSelly, a real estate agent in which the Valiant banking group took a stake in 2019 and raised it a year later. Bank Thalwil has also taken a shine to the company and enjoys a close cooperation with it.

But what is driving more and more banks to do this kind of thing?

«We’re excited about developing our traditional core business and expanding into real estate with a fintech,» Bank Thalwil CEO Sandro Meichtry said.

«Our strategic focus is on four priority areas: seniors, Generation Y, real estate and ancillary services. By working with AgentSelly, we can kill all four birds with one stone and create value for all parties involved,» he added.

Great Resilience

Basically, there are two decisive reasons why an increasing number of banks are going into the real estate business: Firstly, the pressure on margins in the traditional mortgage business and investment advice because other players such as insurance companies, pension funds and, more recently, fintechs now offer comparable, and in some cases lower-priced services.

 Secondly, the Swiss real estate market guarantees stable earnings and is still experiencing enormous demand even after many years of growth – not least due to continuing negative interest rates. «We’ve noticed that revenues from management mandates, in particular, have been highly resilient,» head of research at real estate consultancy Jones Lang LaSalle in Zurich, Daniel Stocker, said.

Desirable Switzerland

Several studies have illustrated how strongly real estate prices have risen since the outbreak of the coronavirus pandemic. There are various reasons for this. Since the pandemic, more and more people want a roof of their own over their heads in case there is another one.

At the same time, many foreigners regard Switzerland, now more than ever, as a desirable place to live that still offers enormous security and stability, which in turn causes real estate prices to balloon even further, especially in the luxury segment.

«If you are looking for somewhere with stable institutions and established high-end locations in global luxury markets, you are increasingly likely to be looking at Switzerland,» UBS economist Katharina Hofer said.

«The pandemic triggered a boom in demand for luxury real estate,» UBS said in a recent study. The highest prices per square meter are in Cologny near Geneva. There, a single square meter costs as much as an entire apartment in some parts of Germany – the equivalent of around 36,300 Swiss francs ($40,132).

Delicate Area

Competition is becoming increasingly fierce precisely because of the growing number of players in the market, and not every bank is likely to achieve long-term success.

At the same time, financial institutions are entering a delicate area. Mixing valuations, financing and negotiating can give rise to conflicts of interest.

«Depending on people’s position within a bank, there are likely to be differing views on appropriate market value,» Jones Lang LaSalle’s Stocker said. In other words, the once neatly separated processes in real estate transactions could in some cases become intertwined.

Who Will Fold First?

The mortgage lender and the advisor representing the mortgagee will often see the credit risk differently. Who is likely to fold first?

The conflicts of interest become even more obvious when bank customers enter into a price negotiation and a commission is payable depending on the purchase price. This can be fixed with internal regulation, but that can have a negative effect on individual employees or even entire teams hitting their targets.

One thing is certain, banks and their partners can gain additional know-how on covering the entire client life cycle through their increased involvement in the real estate sector.

At the same time, this also calls for new and, above all, more regulated processes. How well real estate service providers fit into often rigid bank structures will be another important indicator of whether their cooperation will be a success.

Make Hay While The Sun Shines!

Last but not least any change on the interest-rate front would put a spanner in the works of the real-estate gold rush. The current situation from the banks' point of view could be summed up as «Make hay while the sun shines!».