EUROPEAN REAL ESTATE

The risks facing the European real estate market in the coming months

Demand for new housing is being affected by rising interest rates and inflation, and margins are being squeezed by construction costs, predicts S&P.

Property developers and builders across Europe should prepare for challenging times. According to S&P, several external factors are likely to impact the new construction sector over the next 12 to 18 months. Rising interest rates, inflation, and energy costs stemming from the Russo-Ukrainian conflict could have repercussions for the European real estate market.

Interest rates and inflation: how they affect the housing market

According to S&P, current conditions could lead to a decline in sales volume. The market is heavily reliant on mortgages (70% of newly built homes in Europe are financed with home loans), which are influenced by interest rates and lending conditions.

Uncertainty may lead families to postpone buying a new home, as rising property prices, linked to inflation, and the increased cost of living are not accompanied by a rise in real wages. Portugal, for example, has the largest gap between housing prices and wages in the OECD, with housing costs exceeding labor income by 47.1% in the first quarter of 2022.

In addition, the conflict between Russia and Ukraine, as well as problems in the global supply chain, are leading to increased costs and shortages for builders, which may delay and make projects more expensive.

Housing prices in Europe

To maintain profit margins, S&P states that cost optimization plans and strong cash reserves are necessary. Furthermore, among the factors driving prices is a shortage of new housing. In Portugal, for example, demand for real estate relative to supply has caused housing prices to skyrocket in recent years.

Forecast on European real estate

Here are the main trends identified by S&P for the coming months in the new construction sector:

Rising interest rates and weakening purchasing power are expected to reduce demand for new housing in Europe, a market that relies primarily on mortgage loans, even if government incentives can act as a stimulus.

In addition, rising construction costs, energy costs (which account for 5 to 10% of price increases), labor shortages, land scarcity, and supply chain problems continue to hinder the delivery of housing units.

Stricter environmental and safety requirements are driving demand for new construction, but are also resulting in additional costs and technical challenges for builders.

It is therefore expected that during the last quarter of the year, European property developers and builders will already begin to experience increasing pressure on revenues and margins, as it will be difficult to pass on the increase in costs to end customers.

The bulk of the impact is not expected to be felt until 2023. However, most European property developers rated by S&P should overcome the obstacles and maintain credit parameters in line with annual ratings, thanks to strong balance sheets and good levels of liquidity.

BUSINESS TAXATION MINIMUM TAXATION

The global tax landscape is changing with repercussions for Switzerland and the companies based there.

According to the roadmap planned by the OECD and the G20 states, the first elements of a minimum tax should come into force on January 1, 2023. The Federal Council has therefore decided to implement the minimum tax through a modification of the constitution and to ensure, by means of a transitional order, that the minimum taxation can be introduced on January 1, 2024. Voters will be called upon to vote on this subject on June 23, 2023. Fiscally, Switzerland remains an attractive place for businesses and individuals alike , but with a view to the introduction of a global minimum tax on large companies, some cantons must prepare to tax large companies more. In view of the reforms envisaged by the OECD and the G20 countries, which plan to introduce a minimum profit tax rate of 15% for companies , the differences that exist between cantons which tax their companies low, such as Zug 11.85%, and Berne 21.04% which tax them heavily will decline. However, the minimum tax rate of 15% targeted by the OECD will only apply to companies with an annual turnover of more than €750 million. In French-speaking Switzerland, the cantons of Vaud and Geneva have set their corporate profit tax rate at 14%, Neuchâtel at 13.57%, Friborg at 13.87%, Valais 17.12% and Jura at 16%. %. Compared to the minimum rate of 15% planned by the OECD, the gap is not very high and these cantons will only have to make a slight adaptation to be in compliance with the rates planned by the OECD In German-speaking Switzerland , the canton of Zug is at the top of the ranking, with a rate of 11.9%, Nidwalden (12.0%) and Lucerne (12.2%). With a rate of 21.0%, the canton of Bern is at the bottom of the pack .

2022 profit tax rates in Switzerland

In international comparison, companies are taxed low in Switzerland . Rates lower than those in low-tax cantons are only found in traditional offshore domiciles, in Guernsey, Qatar and a few countries in Eastern (southeast) Europe. Ireland remains Switzerland's main competitor in Europe.
Internationally, large Swiss companies will also be subject to the same rules as those located in cities like Singapore, Hong Kong or Dubai, which will also have to increase their tax rate to 15%.
There will therefore be fewer incentive factors which will encourage companies to move to such locations purely for tax reasons. For very large companies, tax competition between cantons will play a less important role as a factor in establishing themselves in the future. future.
As for whether developments in corporate taxation will have consequences for personal taxation, only time will tell.

2022 income tax rates in Switzerland

EUROPEAN REAL ESTATE

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