Normalisation of interest rates supports property prices
Following the sharp rise at the beginning of 2022, mortgage interest rates have been falling again since the second half of 2023. This has eased the pressure on property prices. The safety buffer for unexpected negative developments has therefore become somewhat larger again. However, we remain very selective when it comes to higher loan-to-value ratios, particularly in the commercial segment.
Diversification of terms
The terms of mortgages taken out are better distributed again. While short terms were in particular demand in 2023, longer terms are now being taken out again to a somewhat greater extent. This facilitates investment activity.
Swap rates have bottomed out again
Last summer, CHF swap yields were around 20 basis points (bps) higher than the long-term average (compared to Swiss Confederation, Pfandbriefe and corporate bonds ). Mortgage rates are offered on the basis of swap rates and were therefore very attractive compared to bonds. As expected, this has now normalised again (only Swiss Confederates are still rather expensive). Mortgage investments outperformed the bond market during this period (duration-adjusted by approx. 1% with a duration of five years). This advantage will disappear in the future. What will remain are the higher current credit spreads of the mortgage market.
Narrow credit spreads on the bond market
Almost all credit spreads on the Swiss bond market are extremely narrow. Bonds issued by hospitals are an exception. The overall market (measured by the Swiss Bond Index) yields only 10 to 15 bps above the swap curve. Credit spreads are also very narrow for foreign currency bonds. On the mortgage market, on the other hand, spreads are widening. With a skilful selection and mix of mortgage investments, a premium of 30 to 50 bps after costs over the Swiss Bond Index can therefore be realised even without an additional widening of credit spreads. Mortgages will outperform bonds in the longer term - with lower volatility because the duration is somewhat shorter on average.
Competitive situation
The integration of Credit Suisse into UBS is likely to lead to a further reduction in the combined market share. For the first time, the domestic banks will also reach the limits of their absorption capacity. For the most part, the domestic banks will only be able to generate the necessary additional capital from retained earnings. This is likely to have a supportive effect on margins in the mortgage business in future. In addition, most insurers have increased their mortgage ratio during the past low-interest phase and are now "fully" invested in this asset class. This will also tend to reduce margin competition. We are now seeing the first signs that the scenario described is becoming reality. We have already been able to slightly increase our margins in new business in recent months.
Market situation for mortgage brokers
There has been a certain degree of market consolidation (some brokers have withdrawn from the market (e.g. Valuu) or restructured their business model (e.g. Money Park)). For investors, this means that diversification of access to the mortgage market is becoming increasingly important. In the past six months, we concluded an above-average number of transactions on the UBS Key4 SORE platform (owner-occupied residential property) compared to previous years. This is also a side effect of the current Credit Suisse integration.
CO2 footprint becomes the standard
We have reported the CO2 footprint for the mortgage portfolio of our Swisscanto investment group for the first time in 2023. Fortunately, it is well below the average for the Swiss building portfolio. The first banks (e.g. UBS, Raiffeisen, Zürcher Kantonalbank) are now also reporting the CO2 footprint of their Swiss mortgages in their sustainability reports. Others will follow. This means that the disclosure of emissions is also becoming the market standard for mortgages. This is happening later than for other asset classes, as data and models were previously lacking. However, it should be noted that there are still two different calculation methods. The first is based on known renovations (documented by the lender). The second is based on expected renovations based on the average lifespan of building components (e.g. assuming that windows are replaced every 35 years). Both methods use the year of construction. The second method results in a CO2 footprint that is about half as large.
ESG on the rise
There are now broader ESG concepts on the market that are applicable to mortgage lenders. These include, for example, those from Wüest&Partner or Real Estate Meta Rating and Monitoring on Sustainability (REMMS). These were only developed after the corresponding models for property investors (and have to work with less property information, as the lender has less property information than the owner). As a result, the broad consideration of ESG in the investment process has become technically possible, as with other asset classes.
We are working on this topic for our investors - more on this in one of our next blogs.
