EUROPEAN REAL ESTATE

The risks facing European real estate in the coming months

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

Property developers and builders must prepare for difficult times across Europe. According to S&P, a number of external factors are likely to affect the new construction sector over the next 12 to 18 months. Rising interest rates, inflation and energy costs due to the Russian-Ukrainian conflict could have consequences for the European real estate sector.

Interest rates and inflation, how they affect the real estate market

According to S&P, the current conditions could lower the volume of sales. The market is heavily dependent on mortgages (70% of housing built is paid for with mortgages in Europe), which are influenced by interest rates and banking conditions.

Uncertainty can lead families to postpone the purchase of a new home, because the rise in property prices, linked to inflation, as well as the cost of living, is not accompanied by a increase in real wages. Portugal, for example, has the largest gap between house prices and wages in the OECD, with the cost of housing exceeding labor income by 47.1% in the first quarter of 2022.

In addition, the conflict between Russia and Ukraine, as well as global supply chain issues, are driving up costs and shortages for builders, potentially delaying and making projects more expensive.

Housing prices in Europe

To maintain profit margins, S&P says cost optimization plans and strong cash reserves are needed. In addition, among the factors underlying the prices, there is a problem of new housing stock. In Portugal, for example, the demand for real estate assets in the face of supply has caused house prices to explode, generally in the country, in recent years.

Prognosis 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 homes in Europe, a market that relies heavily on mortgages, although government incentives can serve as a stimulus.

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

Tighter environmental and safety requirements are driving demand for new construction, but also creating additional costs and technical challenges for builders.

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

The bulk of the impact is not expected to be felt until 2023. However, most S&P-rated European property developers are expected to overcome headwinds and maintain credit metrics 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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