From the perspective of institutional investors, increasing regulation has become the biggest threat to the Swiss real estate market. In a survey by the Institute of Financial Services Zug (IFZ) at Lucerne University of Applied Sciences and Arts, 81 percent named stricter regulations as one of the three most important reasons that could end the current real estate cycle, according to a statement on Monday.

This puts regulation well ahead of classic risks such as a slump in economic growth (53 percent), a decline in immigration (47 percent), or persistently high interest rates over the long term (41 percent).

Capital is flowing into less regulated regions

The growing restrictions are already affecting investment strategies. Nine out of ten surveyed investors say they are changing their strategic focus because of regulatory requirements. Seventy-eight percent are increasing their investments in regions with more liberal tenancy laws. In addition, 53 percent prefer new builds over existing properties, which are often more heavily regulated.

The consequences could further strain the tight housing market. Depending on the investor group, between 65 and 92 percent of respondents expect strict tenant protection measures to reduce the supply of housing.

"There is a risk of a kind of vicious cycle," warns co-author Stephan Kloess. In heavily regulated markets, the housing shortage could worsen further, thereby increasing pressure on rents.

Renovations are being postponed

The impact is particularly evident in existing properties. Overall, 90 percent of respondents believe that regulatory requirements are restricting renovations.

Fifty-nine percent avoid renovations whenever possible, while 48 percent postpone such work for as long as possible, often or always. At the same time, 76 percent take social considerations into account when renovating, and 66 percent often carry out such work while the property is occupied.

Lower rents, but also falling property values

Investors do expect tenant protection to have an effect. Fifty-three percent expect rents in heavily regulated markets to remain unchanged in the short term. In the long term, however, 68 percent expect rents in regulated areas to fall.

However, this could shift price pressure to less regulated apartments. At the same time, 60 percent of investors expect property values in regulated markets to fall in the short term and 65 percent in the long term. A majority also expect purchase prices to decline.

Pension funds are increasing their real estate allocation

Despite these risks, appetite for the asset class remains strong. The pension funds surveyed have on average invested 25.1 percent of their assets in real estate, up from 24.3 percent the previous year. Going forward, they specifically want to expand their exposure to Swiss residential real estate.

However, nearly 70 percent of investors fear that the real estate market can absorb the large inflow of capital only to a limited extent. Additional funds would then mainly drive up prices for existing properties further and reduce returns, rather than create additional housing. "So the key issue for the housing market is not only how much capital is invested, but whether it results in additional and renewed housing," says co-author Daniel Steffen.

The study "Real estate investments: And every year the same old story?" examines for the fifth time the requirements institutional investors place on real estate and mortgage investments. It is based on a survey of 249 institutional investors, including 134 pension funds and collective foundations. Together, they manage CHF 724 billion and thus cover a significant share of Swiss pension assets.

The study can be downloaded here as a PDF downloaded .