It currently seems unlikely that the Swiss residential real estate market will become seriously agitated in 2008. Both demand and supply of residential houses are in good shape. Supply is driven by the large number of houses under construction (more than 42,000 units are likely to be placed on the market this year, versus 35,000 on average between 2000 and 2006). The number of construction permit applications filed in the first quarter of 2008 does appear to have slightly declined in comparison with previous years however.

Demand is driven both by increasing immigration from EU and EFTA countries and by a positive outlook in terms of income for 2008, for which no major changes are expected. The Swiss residential rental price index, established by the Federal Office for Statistics, shows an increase of 2.3% for 2007.

Commercial real estate

The Swiss commercial real estate market is experiencing positive trends after its previous years of overcapacity. 2008 is expected, like 2007, to be a year in which office supply will decline thanks to the increase in office-based employment (2.7% during the last quarter of 2007 – that is, 76,000 jobs). Zurich's unoccupied office spaces are estimated to be about 250,000 square metres, compared with only 36,000 square metres in Geneva.

In Geneva, worth noting is the increasing office supply outside the city centre. Generally speaking though, the Geneva region is undergoing a supply stagnation, due to increasing demand and the small number of construction plots available on the market, as well as the decision-making process, which is still too heavily politicised, at least for large construction projects.

Foreign real estate investment funds and investors have shown, these last years, a growing willingness to increase their real estate investments in Switzerland. They have, however, sometimes been prevented from doing so due to a lack of investment opportunities and high competition for few opportunities. Switzerland is a relatively small territory, with a rather small market.

Even though the sub-prime crisis is not expected to have direct consequences on the real estate market, one must stress that financing and refinancing of real estate used for commercial purposes (that is, office space, hotel facilities, industrial buildings) has considerably slowed down since the second half of 2007. During the first half of 2007, foreign investment funds took advantage of the rising value of Switzerland's real estate commercial properties to increase their leverage, at the same time bringing down their interest rates.

Swiss property law

Swiss property law is regulated by the Swiss Civil Code, dated December 10 1907 (the CC). These provisions are to a large extent provisions that entered in force with the CC in 1907. Indeed, Swiss property law has not undergone any major revision since its enactment, its system proving to be efficient and clear in practice.

Real estate ownership can take any of the three following forms in Switzerland: land ownership, ground lease ownership, or condominium-principled ownership.

Land ownership

Land ownership is the most standard form of ownership, and encompasses the ownership of the land and its integral parts (that is, mainly the constructions erected on the relevant plot), in accordance with the so-called accession principle (principe de l'accession) prevailing under Swiss property law.

Ground lease ownership

The ground lease (droit de superficie distinct et permanent) is a form of ownership that enables the owner of a plot to dissociate the ground ownership from the ownership of the constructions erected on the plot. Technically, the ground lease under Swiss property law is an easement, authorising its beneficiary to make or own constructions above or under the relevant plot (the so-called base plot), restricted by the easement, and whose features are the following:

• It is distinct, meaning that the easement has been granted neither in favour of a particular plot, nor in favour of a particular person. Such a right can hence be freely assigned or transferred.
• It is permanent, meaning that the easement has been granted for at least 30 years or an undetermined duration.
• It has been registered as a separate entry in the land registry.

The ground lease being registered, by definition, as a separate entry in the land registry, it can be sold as a plot to a third party (subject to the consent of the owner of the base plot), and can benefit from and be covered by all the various types of easements which Swiss property law permits. The most interesting feature of the ground lease is the possibility to use it, as can be done with a standard plot, in mortgages, and hence to enable its owner to benefit from its enforcement value.

The ground lease is a form of ownership frequently used for industrial zones in Switzerland. The canton of Geneva, for instance, has made extensive use of this form of ownership by creating six industrial zones composed of 277 ground leases and regulated by special regulations, enacted by the state of Geneva in light of the specificities of each of the industrial zones. Generally speaking, the state or the city of Geneva, either directly or through an entity controlled by it, keeps the ownership of the base plot. The relationship between the ground lease owner and the base plot owner is regulated by a so-called ground lease agreement (contrat de superficie), the main terms of which can be essentially summarised as follows:

• The duration of the ground lease is 90 years, with a right to renew it for an additional 30-year periods.
• The ground lease can be assigned or sold to another entity, subject, though, to the prior written consent of the base plot owner. Since the state of Geneva usually owns the base plots, a written decision of the State Council of the Canton of Geneva is required. The requirement for such a decision needs to be taken into account in a transactional context, since it might affect the timing of the ground lease sale.
• The owner of the ground lease pays a rent to the owner of the base plot. The rent is normally calculated so as to render the ground lease institution sufficiently attractive in comparison with a pure land ownership and a simple lease of premises.

Generally speaking, the ground lease is used in Switzerland to facilitate the establishment of enterprises in industrial zones. The institution of the ground lease satisfies both the interests of the owner of the base plot and of the owner of the ground lease. As a matter of fact, it enables the enterprise to use its equity to invest in its equipment and/or premises, rather than to purchase a piece of land, which will immobilise its equity. At the same time, it enables the state to attract companies (thus creating jobs and taxable income) and receive a ground lease rent, while minimising its investment costs, since the company buying the ground lease will pay for the construction costs of the buildings erected on the ground lease.

Worth noting is the reciprocal legal pre-emption right that the CC grants to the owner of the base plot and the owner of the ground lease in case of change of ownership of the ground lease and the base plot respectively. This pre-emption right can be exercised at the price agreed in the sales deed, which triggers the pre-emption right.

In addition, local regulations may provide for an additional pre-emption right in favour of a local authority. In the canton of Geneva, such a pre-emption right exists, and can be exercised at the price agreed in the sales deed, or, more importantly, at a lower price, if the local authority deems the price as being too high in the context of the public interest governing the creation of the industrial zone on which the ground lease is located (that is, facilitating the establishment of enterprises). If the seller contests the new (lower) purchase price offered by the local authority, an appeal must be filed in accordance with the regulations applicable in case of expropriation.

Condominium-principled ownership

Condominium-principled ownership is a form of land ownership in which one right of ownership is owned by a community of owners (as opposed to one owner in a standard land ownership or ground lease ownership). The ownership right of the condominium owner is composed of two elements:

• An exclusive right of ownership on determined parts of the plot (and/or building constructed on the plot, typically a flat).
• A collective ownership right on the entire plot on which the condominium-principle ownership has been created (that is, the equivalent of the base plot in the ground lease context).

Each owner's right is registered as a separate entry in the land registry (as for the ground lease), but each right is expressed as a fraction of the total ownership. The sum of all the condominium fractions equals one.

The condominium-principled ownership is typically used for residential buildings. It is, in particular, commonly used in real estate development projects, since it enables the developer to sell, flat by flat, the building constructed.

Unlike the ground lease, the CC does not provide for a reciprocal legal pre-emption right of the condominium's owners. Such a pre-emption right may nonetheless be included in the constitutional deed for the creation and registration of the condominium in the land registry.

Additional security

The three types of ownership described above enable their owners to benefit from the enforcement value of the underlying asset by encumbering it with mortgages in order to guarantee a claim. The mortgage certificate is by far the most common type of mortgage used, if not the only one in practice.

The mortgage certificate, unlike a standard mortgage, is incorporated in a security paper, which can be transferred to a third party in accordance with Swiss securities regulations. Mortgage certificates can be issued by the land registry in the form of bearer mortgage certificates or registered mortgage certificates. In this latter case, the name of the creditor can be registered in the land registry, for information purposes only. Indeed, the registration of the name of the creditor is not constitutive, but merely of a declaratory nature. A registered mortgage certificate is transferred by endorsement of the certificate in favour of the transferee. The change of ownership can thereafter be registered in the land registry at the request of the beneficiary. A bearer mortgage certificate can be transferred by delivery of the mortgage certificate.

Big Swiss banks tend nowadays no longer to register the beneficiary of the mortgage certificate in the land registry. Any change in the beneficiary of a registered mortgage certificate technically requires a filing with the land registry to reflect the change. Such filing processes can become quite cumbersome in mortgage loan securitisation contexts, without adding any additional protection to the creditor. Hence the renunciation in practice of these registration updates.

Swiss property law provides that the ownership of mortgage certificates can be assigned for security purposes to a creditor (transfert de propriété aux fins de sûretés). This type of security is by far the most important type of collateral sought for financing banks in mortgage loan transactions, since it provides the bank with a security on the underlying asset. The ownership of the mortgage certificates is transferred to the bank on a fiduciary basis – that is, the bank is entrusted to use the mortgage certificates for the sole purpose of securing its claim under the mortgage loan agreement.

Mortgage certificates are normally completed with additional security benefiting the financing bank. A common security in the context of real estate financing is the assignment for security purposes of the owner's rental claims (against its tenants) to the bank. As for the mortgage certificates, the ownership of the owner's claims to rent payment is transferred to the bank on a fiduciary basis, for the sole purpose of securing the bank's claims against the owner. A new bank account system is typically put in place simultaneously with the security to ensure that the rents paid by the owners' tenants are wired directly to a bank account opened with the financing bank.

Lex Koller restrictions

Foreign investors sometimes still struggle with the provisions of the so-called Lex Koller, the Federal Statute on the Acquisition of Real Estate by Foreigners, dated December 16 1983, which restricts the acquisition of real estate in Switzerland by foreigners.

The enthusiasm triggered by the announcement by the Swiss Federal Council in 2005 to launch a consultation for the abolition of the Lex Koller drastically collapsed at the beginning of 2008, when the Swiss parliament refused the abolition as long as no satisfying accompanying measures were implemented. The purpose of such accompanying measures would be to avoid excessive speculation on Swiss real estate and to fight against cold-beds in secondary residence areas (for example, ski resorts).

Until the Lex Koller is abolished, foreign investors will have to cope with its restrictions, which affect mainly residential real estate, the acquisition of real estate used for commercial purposes being permitted by the Lex Koller since its 1997 revision. Indeed, only non-foreigners (as defined in the Lex Koller) are authorised to own their main and/or second residence (for example, a chalet in a ski resort) in Switzerland.

The following persons are deemed foreigners for Lex Koller purposes:

• EU/EFTA nationals not domiciled in Switzerland. EU/EFTA nationals are deemed domiciled in Switzerland if they benefit from a so-called B or L permit, provided that they effectively have their domicile in Switzerland within the meaning of the CC.
• Non-EU/EFTA nationals not established in Switzerland. Non-EU/EFTA nationals are deemed established in Switzerland if they benefit from a so-called C permit.

Even though the Lex Koller no longer restricts the acquisition of commercial real estate by foreigners, one must stress that the notion of "real estate used for commercial purposes" can become quite a problem when the commercial premises at stake are either empty, contain residential areas, or are non-occupied. These situations normally require a clearance from the local Lex Koller authority, which may impact on the timing of the transaction (or even its feasibility) if they are not envisaged at an early stage of the process.

LPCC

A new law on collective investment schemes entered into force on January 1 2007 in Switzerland (the LPCC). This new law provides for a new type of collective investment scheme for real estate investments, with very attractive tax conditions. But the relation between this new collective investment scheme and the Lex Koller has not been regulated by the legislative body in the LPCC. Some uncertainties have already arisen, even though only one such investment scheme has so far been registered in Switzerland.

The main question is whether this new investment scheme could invest in Swiss residential real estate projects if some foreigners, within the meaning of the Lex Koller, have invested in it. Informal contact with competent Lex Koller authorities indicates that a rather restrictive approach would be taken, unless and until a clear – hopefully more flexible – legislative input is provided for in the LPCC. A restrictive approach would have the effect of forbidding residential real estate investments for any such collective investment schemes in which foreigners invest. This would lead to the end of the new collective investment scheme for real estate investments before its birth. The issue raises a more general concern regarding the Lex Koller. The statute is outdated. Unless abolished within the next few years, it would require a complete revision to adapt it to the 25 years of evolution since its enactment.

Author biographies

Andreas Rötheli, Partner Lenz & Staehelin, Geneva Email: andreas.roetheli@lenzstaehelin.com Telephone: +41 22 318 70 00 Cécile Berger, Associate Lenz & Staehelin, Geneva Email: cecile.berger@lenzstaehelin.com Telephone: +41 22 318 70 00