SWISS Business

SWISS

SEPTEMBER/OCTOBER 2009 路 CHF 9.80/EURO 5.90

BUSINESS

the magazine for economy and finance

Bricks and mortar The hard hats at the round table

The color green Price and value in hard times Space odyssey Building projects across Switzerland Unchain my mortgage Stefan Muehlemann on alternative financing

Dear reader SWISS

BUSINESS

the magazine for economy and finance

5/2009 / 1. edition, bimonthly www.swissbusinessweb.ch Immobilien & Business Verlags AG Grubenstrasse 56 CH-8045 Zurich last name@ibverlag.ch Publisher: Dominique Hiltbrunner Editorial Director: Oliver Kaiser Deputy Editor: Marton Radkai Contributing writers: Nicolas Greinacher, Erol Hertner, Oliver Kaiser, Alexander Osterwalder, Marton Radkai, Aradhna Sethi, Andrea Walther

2011

Guest writers: Andreas Bleisch, Ulrich Braun, Peter Cavigelli, Ellie Filler, Andreas Furrer, Marcin Paszkowski, Stefan Pfister, Michael A. P. Sager, Renate Schubert, Sven Siepen, Christopher Tillman, Elsbeth Wiederkehr, Birgitt Wüst Layout: Jean Weber Photos: Nicolas Greinacher, Roli Käsbohrer, dreamstime Cover photo: Roli Käsbohrer Publishing Director: Dominique Schohn Key Customer Manager: Eric Haas Printed by: Kliemo AG Our ohter magazines: Immobilien Business, Immobilien Brief, Immobilien Bauen & Wohnen, Women in Business

10:12:48 Uhr

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This edition of Swiss Business has a strong focus on real estate investment.

Switzerland’s real estate market is commonly considered a pillar of strength in the Swiss economy. So far, the subprime mortgage crisis and the economic crisis, respectively, have barely affected the Swiss real estate market. The past real estate boom was driven by residential construction, which is still in good shape despite many bad news. However, commercial construction projects for offices have slowed down at this point. If the economy and the employment market continue to worsen, a significant decline cannot be ruled out. Currently, the positive signs outweigh the negative. The contributions in this edition look at the market potentials, new developments, investment strategies and the banks’ mortgage practices. Fixedrate mortgages are generally used to reduce risk by fixing interest rates on a mid- to long-term mortgage contract, which is “very profitable for the bank because it means practically risk-free guaranteed profit for a number of years. The client is basically hand-cuffed. And in case he wants to terminate the contract, he pays substantial penalties,” says Stefan Muehlemann in our interview, pointing out that there are alternatives. Our roundtable gathers the representatives of the major Swiss general contractors who talk about how they fare during the crisis and what the prospects are. Did you know that even Granny has become a substantial asset? Tertianum is currently earning CHF 166.5 million annually with 19 residential complexes for senior citizens. See the article “Old Profits.” And in a special section we feature the biggest and most important projects in Switzerland. This first edition of Swiss Business rounds out the transformation of our immobilien & business verlags AG into a comprehensive publishing house specializing in business publications.

Other products include immobilien business and women in business.

Dominique Schohn Publishing Director

31.8.2009 14:23:55 Uhr

Contents

Frank talks about construction at the round table

17 A new look at an asset called old age

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Finance: Real Estate Investment

10 14 17 24 27 30 32 35 36

Stefan Muehlemann discusses mortgage models Swiss property markets feel the crisis Round table: builders speak A how-to to investing in real estate Evaluating the price of property Timing investments in the economic cycle Retirement homes become an asset Senior residence: luxury to die for Breathing life into Swiss Limited Partnerships

Economy: Construction Market 38 Still standing: the supply segment hits the wall 43 Concrete Switzerland: current projects The building supply is feeling the crunch

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Economy: Law 56 Lady Justice and obstruction of views 58 Whatever happens to waived objections?

Investor’s Club 68 Women and men in top positions: a delicate balance 62 Oil is a slippery commodity 64 Old Masters and safe havens Leisure Business 66 Metamorphosis: the new role of the HR manager swissbusiness

60 A selection of good books 70 Volkswagen takes the green road 74 Cabernets that rule the palate 5

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Building solutions for a demanding world

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IMMOBILIEN BUSINESS · Juli 2009

www.immobilienbusiness.ch

Light battle continues For nearly a year, a draft amendment to Germany’s Radiation Protection Code proposed by the Federal Ministry of the Environment (BMU) has had some Swiss watchmakers on the barricades. The amendment, which would ban the use of tritium in all consumer goods, was scheduled for a vote in the Federal Council this summer. Tritium, a radioactive isotope of hydrogen, is widely present in nature, but it was at one time used as an effective alternative to radium – deemed poisonous – for the illumination of watch hands and hour makers. The vote has now been postponed until after the Germany’s federal elections on September 27, much to the relief of a number of companies using a technology known as Gaseous Tritium Light Source (GTLS) to illuminate instruments such as watches and telescopic sights.

The companies in question, Mondaine Ltd., which markets several watch brands, and mb-microtec, maker of Traser watches, argue that the law fails to distinguish between painton tritium and GTLS, where the tritium gas is enclosed in a tiny glass tube and acts as a phosphorizing agent. This creates a self-powered glow that will hold for up to 25 years. “There is no real alternative to GTLS,” says André Bernheim, CEO of Mondaine Ltd., which manufactures and markets among others Luminox watches. These military-style timepieces are in fact favored by a number of special forces, including the Navy SEALs in the USA. “We experimented with Super-Luminova paint, which is more commonly used, but the glow disappears within a few hours.” Furthermore, the company agues, the tritium in the glass tubes is perfectly safe. “You have to use your

imagination: for any gas to escape, you would have to literally crush the watch and probably anything in the vicinity including the person wearing it,” says Martin Grossenbacher, Luminox product manager.

In the spring of this year, Mondaine and mb-microtech launched a campaign to inform Germany’s legislators of the difference between tritium paint and GTLS. mb-microtech, which manufactures GTLS under the name trigalight and uses it in its own brand of watches, the Traser, has produced research suggesting that eating a banana a day or riding up to the 15th floor of a high-rise building, will expose a person to more natural tritium than inhaling the gas from a destroyed watch. As for Mondaine Ltd., it is also quick to point out that their watches have been subjected to a tough contamination test before being sold in the USA. The watches are immersed in water for 24 hours, and the water is then tested for traces of radioactivity.

“In twenty years, we have not failed a single test,” says André Bernheim emphatically. “There is no danger, they are chasing ghosts.”

The efforts of Mondaine and the other companies potentially affected by a full ban have been rewarded. At least five out of Germany’s sixteen federal states have expressed support for making an exception to the amendment for GTLS should it become law. For Bernheim, however, there is no rest: “We are working on a recycling concept similar to Germany’s ‘green dot,’ whereby the consumer can return the watch in the unlikely event he or she no longer wants it. We will then dispose of it appropriately.”

Marton Radkai

YOU’LL BE ENVIED FOR THIS VIEW. AT LAKE LUGANO AMIDST LOFTY MOUNTAINS, THE SWISS CANTON OF TICINO LAYS ITS HEART AT YOUR FEET. YOU CAN ENJOY THIS PANORAMA FROM EVERY BALCONY AND TERRACE OF THE EMERALD LIVING RESIDENTIAL COMPLEX. YOU’LL LOVE THE SILKEN BREEZES AND MEDITERRANEAN CLIMATE, THE SPARKLING LIGHTS OF LUGANO BY NIGHT, AND THE AIR OF DOLCE VITA HOVERING OVER THIS SPECTACU LAR SETTING. HOW CAN YOU BE PART OF IT? IT’S SIMPLE! JUST COMBINE VARIOUS OPTIONS TO MAKE YOUR VISION A REALITY. YOUR HOME — YOUR DESIGN.

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The contemporary architecture of the residential complex combines modern design with tried and tested quality. From the foundations to the panoramic windows and the roof gardens, only top-class materials will be utilised.

The complex is divided into apartments having between 2 1/2 and 8 1/2 rooms, with living space totalling 130 to 470 square metres. Prices range between 8,500 and

15,000 CHF per square metre. The large apartments come with exclusive roof terraces. All of the apartments can be designed according to the owner’s individual preferences and can be equipped with security systems upon request.

The EMERALD LIVING residential complex includes a large spa and tness centre as well as an indoor pool. Renowned landscape architects have been commissioned to create a garden environment that is appropriate to the region’s microclimate. The complex will rapidly become an oasis of beautiful Mediterranean plants.

EMERALD LIVING also includes another exclusive feature. A small design-oriented luxury hotel with a gourmet restaurant will be discreetly integrated into the complex. All of the hotel’s facilities and services can be enjoyed by the residents of the apartment complex (including doorman and concierge services).

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EMERALD CASA SA, VIA CASSARINETTA 10, CH – 6900 LUGANO, FON +41 91 985 20 50 INFO@EMERALD-CASA.CH, WWW.EMERALD-CASA.CH, WWW.EMERALD-LIVING.CH

Break Those Chains Many banks are happy to lock clients into fixed-rate mortgages and have little interest in cannibalizing their own revenues by providing education about client-friendly alternatives. Could it be that proper alternatives are a bit complicated to understand?

Stefan Muehlemann, managing partner at pro ressource, explains why fixed-rate mortgages are a relic of the past.

Interview: Oliver Kaiser, photos: Roli Käsbohrer Oliver Kaiser: Mr. Muehlemann, you finance real estate and manage liabilities and interest rate risks for your clients. Isn’t that the banks’ job?

Stefan Muehlemann: (laughs) Yes, yes, you’re absolutely right.

Let me answer your question with another question. There are 2,500 independent asset managers in Switzerland. Isn’t asset management the banks’ job? Today, many clients – corporate and private – seek help from independent advisors as they feel not optimally taken care of by their banks. They realize that their own interests are not aligned with their bankers’.

What do you mean by “interests are not aligned”?

Well, the primary goal of the banker is to make a nice bonus.

And when does he get one? When he generates a lot of revenue for the bank. And where do those revenues come from? From the client. So if the banker sells expensive products and generates e.g. a lot of trading transactions then the bank’s revenues go up and so does the banker’s bonus. And the client pays it all. Therefore, the bankers’ and the clients’ interests are opposites. I have a client who had his money managed by a small bank from summer 2003 to 2007. The management strategy was “growth,” which means at least 50% stocks. The S&P500 rose about 50% during that period of time. But my client’s portfolio only grew 0.4%. The products in his portfolio were fine but the asset manager turned the portfolio so many times that brokerage fees ate up all profits. Good for the bank – bad for the client.

So what do you recommend to resolve that issue?

That’s quite simple. In order to align interests banks and their employees should only make money if their clients do, too.

Many banks today offer flat fees for their trading clients. That is certainly a step into the right direction. But only few heavily depend on success fees, which would really align interests.

I know independent asset managers who do not charge any management fees and solely depend on success fees.

How do you practice what you preach?

I am more a liabilities manager than an asset manager. My job is to save money. However, my clients’ and my interests are very well aligned. I promise my clients that if through my services they don’t save substantial amounts of money – post all fees, nota bene – I’ll waive my compensation.

And how often have you had to do that so far?

(Smiles) Never.

Can you explain in basic terms what exactly you do and how you do it?

My goal is to save my clients’ money – financing costs to be specific. Clients come to me either because they need new fi-

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nancing or because they want to explore cheaper options for their existing financing. Together, we define what exactly the needs are, taking into account costs, legal, risk tolerance and security needs, taxes, etc. Then, I negotiate with capital providers. Finally, the clients decide for the best solution and I implement it.

And why are you able to reduce costs for the client? If you talk about debt financing, doesn’t it all depend on interest rates, which for a certain currency are the same no matter where?

Banks have found many ways to add fees and margins here and there, like risk premiums, administration margins, profit margins, market spread and others. In spite of what the banks say, these margins are hardly ever transparent to the client. Furthermore, banks use all kinds of base rates to which they add these margins. These are often called names like reference rate, base rate, market rate or IRS for interest rate swap rates. Most of them still include hidden margins. As clients do not have access to global interbank interest rates, they never know what margin they are really paying. I have seen examples of clients paying 2.3 times the margin they were promised by the bank.

Needless to say, it makes a significant difference whether you pay the promised 0.5% or 1.2%.

How about other sorts of financing?

An equity-debt mix is most common. However, there are many other options like leasing, sale & lease-back, zero-equity, securitization, private equity and many more. It depends on the client’s needs, risk appetite, cash flow needs, taxes and other factors. It’s amazing how much time and effort people put into thinking about their investments compared to how little they put into thinking about their financing. I find it unbelievable how, for instance, the bulk of real estate owners still use fixedrate mortgages to reduce their interest rate exposure.

Aren’t fixed-rate mortgages used almost 100% of times to reduce risk by fixing interest rates on a mid- to long-term mortgage contract?

Of course they are. It is very profitable for the bank because it means practically risk-free guaranteed profit for a number of years. The client gets entirely hand-cuffed. And in case he wants to terminate the contract, he pays substantial penalties.

How are these penalties justified?

Part of it is the difference between the contractually agreed interest rate and the one valid at the time of termination. For example, if someone wants to terminate a contract signed two years ago for ten years there will most likely be a profit or a loss from that position because the current interest rate for the remaining eight years will be different from the ten-year interest rate that was agreed in the contract two years ago. Now,

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this can be good or bad for the client, as the interest rate may have gone up or down, which would produce a profit or a loss.

Hence, this penalty or benefit is justified. Problems arise because banks also ask the client to pay their margin for the entire remaining eight years. That is risk premium for risk which no longer exists, admin margin for work that doesn’t need to be done anymore, profit margin for a deal that is non-existent.

That is why it is hardly ever wise to terminate a fixed-rate mortgage. And to answer your question – it is not justified but many banks insist on the contractual agreement and make clients pay.

Are there any alternatives?

Absolutely! There are many products to hedge interest rate risks. I most often use interest rate swaps (IRS) on spot as well as forward starting. With an IRS, a client has all the benefits of a fixed-rate mortgage and at the same time avoids the downsides. Interest rates can be fixed on pretty much any duration but in contrary to fixed-rate mortgages the client stays flexible and can terminate the contract at any point in time without penalty. A potential profit or loss because of rate movements will occur but there is no margin whatsoever to be paid if an IRS gets terminated. Furthermore, IRS are cheaper than fixedrate mortgages and fully transparent.

Another option is to use interest rate option strategies, like a Zero Cost Collar, where the client defines a certain bandwidth in which he is willing to be free-floating – meaning that he is willing to take a certain risk for higher, and a certain chance for lower, interest rates. If the interest rate touches one of the defined bandwidths the client gets locked in. Let’s assume interest rates are 2.5% at the moment. The client is willing to pay as much as 3% but at the same time wants to profit if rates go lower. If rates go significantly lower he or she is willing to give up some of that potential – say at 2%. As long as rates stay within the range between 3% and 2% the client pays those rates. If they go higher than 3% – say to 3.5%, the client is protected and will only need to pay 3%. If they go lower than 2% – say to 1.5%, the client will pay 2%. The beauty of that strategy is that it’s entirely free of cost.

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And how much can people and companies save doing this?

Over the course of the years – millions! Obviously depending on the volume. My clients’ property portfolios range from CHF 5 million to CHF 150 million. The average saving per client is about CHF 3 million over the course of ten years.

What can someone do who is interested in assessing his or her savings potential and learn more about modern interest rate management solutions?

Go talk to an independent expert in that field. There are not too many of us out there yet, but I’m sure the industry will grow quickly.

One last question: Short-term interest rates in CHF, EUR and USD are way below 1% at the moment. Do you recommend people stay in those short-term rates or should they hedge longterm?

That very much depends on the client’s needs. However, we should not forget that we are almost on historic lows in shortterm as well as in longer-term rates. Therefore, even if people fix interest rates for ten, twenty or even more years, it’s still extremely cheap if you compare with rates in the past. But of course, one-month rates below 0.5% is very tempting. What we can say for sure is that the math works. And math proves that diversification is the key to achieve a better cost-risk ratio.

Stefan Muehlemann is a managing partner at pro ressource, an independent finance expert company, which consults wealthy individuals and companies (www.proressource.com). He also teaches in the MBA program at HSG University St. Gallen, Switzerland and holds an MBA from the Tuck School of Business at Dartmouth, USA. He spent 16 years with multi-national financial institutions before joining his family’s company pro ressource in Zurich.

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Cracks In the Façade Until recently, the Swiss property markets were considered relatively impervious to the sustained crisis in financial markets. But this reputation has become a little tarnished of late. In Zurich, too, vacancy rates are climbing, and office rents are going down.

Those willing to rent are profiting from incentives.

Birgitt Wüst While prices and rents for commercial and residential properties were falling sharply worldwide since the market hit its apex, nothing seemed to be happening on the Swiss markets at all – for a while. But in the meantime, the worm has turned.

Clouds are gathering that suggest that value corrections – some of them severe – are in the offing, especially in the area of commercial properties. Stefan Pfister for instance, the Head of Real Estate at KPMG AG in Zurich, reports, “Price adjustments are imminent – in Switzerland, too.” However, these adjustments aren’t coming from exaggerated past prices, but are due to the macroeconomic development, he goes on to explain. By contrast to other countries, such as Great Britain, there were no bubbles here, he says.

He attributes the moderate rent price development to the conservative financing behavior of the Swiss banks, which, he maintains, learned their lessons from the property crisis in the 1990s. On the other hand, the high proportion of domestic and long-term oriented property investors with strong equity also plays a significant role. The current price corrections, according to Pfister, are “driven by cash flow: adjustments to future rent price and vacancy expectations are in motion. Prices for business properties will probably experience increasing pressure, whereby long contract lifetimes still grant a certain stability.”

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Economic weakness This development was foreseeable, as underlying data have shown an economic dimming in Switzerland as well during the past months – and the property markets can hardly stay immune to such developments. Credit Suisse and the Zentrum für Europäische Wirtschaftsforschung ZEW (Center for European Economic Research) conduct a monthly survey to develop indicators both for the general economic climate in Switzerland and for the Swiss service sector. Financial experts are polled regarding their medium-term expectations for important international financial markets as far as the development of activity, of the inflation rate, of short-term and long-term interest rates, of stock market quotations and of exchange rates are concerned. In addition, they are asked to estimate the yield situation of the firms in the Swiss service providing branches: banks, insurance companies, consumption and retail, telecommunication, and overall. In June, already, the analysts were also polled with regard to the development of the property market.

They forecast a worsening of the return potential of properties, especially in the office property segment. In July, economic expectations were even more pessimistic. After a continuous rise during the first half of 2009, the Credit Suisse ZEW indicator dropped by 9.7 points, reaching a neutral level of zero points.

Somewhat less than three quarters (70.2%) of the financial ex-

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perts polled are still appraising the current economic situation as “poor,” only 30% as “normal,” and none of them viewed momentary economic conditions as “good.” Due to these expectations, most of the participants in the poll are anticipating a worsening of the firms’ income/profit situation and their returns on sales. The financial market experts are also forecasting a worsening of the situation on the employment market – more than 90% of those questioned think that an increase of the unemployment rate is the most probable medium-term scenario.

The SECO, too, has corrected its prognosis for Switzerland’s further economic development downwards. The group of experts is estimating a 2.7% drop in Switzerland’s gross domestic product in 2009 – after 2.2% previously. It may be assumed, they say, that the economy will continue to shrink slightly by 0.4% in 2010, despite a sluggish start into a recovery. Before this backdrop, they believe that unemployment will continue to rise sharply in 2010, probably to a rate of 5.5 to 6.0%. Marco Salvi, an analyst at the Zürcher Kantonalbank (ZKB), points out that employment has already started to fall – and that the insecure prospects of a banking location mean a “heightened prognosis risk” for Zurich in particular.

Rent reductions via incentives Up to now, the downward trends on the office leasing markets were mainly making themselves felt indirectly. Incentives give managers and landlords a headache. As Peter Eichenberger, a partner of the Zurich brokering and consulting firm Kuoni, Mueller & Partners reports, premiums for signing new or prolongation leasing contracts in the office property segment are being more and more openly demanded by the tenants. Such incentives are, for instance, rent-free periods, contributions to expansions made by the landlord, and utility cost arrangements more favorable to the tenant. “If these costs are rounded up and converted into cold cash, a 10 to 20% price reduction is easily in the bag,” Eichenberger says. That tenants are in a good negotiating position at present is due particularly to the reduction in absorption of space. Eichenberger points out that demand on the part of financial service providers, banks and insurance companies as well as on the part of multi-national enterprises and industrial firms is shrinking. Rising demand on the part of consulting firms, law offices, educational institutions and clinics cannot outweigh this. “The balance is negative.”

Nevertheless, the Swiss Office Price Index still showed an upward swoop at the beginning of the year. The consulting firm Wüest & Partner (W&P) in Zurich attributes this to mainly high-quality office spaces being offered on the market, elaborating that office space is now vacant even in central business districts. “However,” W&P’s partner Dieter Marmet says, “while the recession grows more severe, it is very probable that a market correction will take place during the coming months.”

Up to now, rents in the top segment of the office markets in Geneva and Lausanne have remained stable; here, prime rents were still climbing during the second quarter. “In the inner city, we are still seeing prime rents of CHF 1,000 per square meter annually,” Marmet says. However, the prime market segment could also come under pressure when new office space now still under construction reach the market.

Elastic valuations As far as the valuation of properties or entire portfolios is concerned, the experts’ estimates differ. Some analysts and market observers aren’t worrying, pointing to the good prices still attained on the markets and the interim financial statements of

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the property firms and funds – which were even better than had been expected. In fact, the Swiss property funds and property firms were able to defy the crisis successfully thus far. The reason for this, as far as the property funds are concerned, is surely their investing mainly in residential properties with stable yields, and also in their being less dependent on outside capital. The Swiss property share companies, which have a higher average quota of commercial properties, also attained far better returns than foreign property firms during the stormy past months.

Nonetheless, Markus Waeber, an analyst at ZKB, is still skeptical. On the one hand, it is true that the market valuation of project developments under construction by PSP Swiss Property and SPS Swiss Prime Site applied according to the new accounting regulations as of this year led to a slight appreciation during the first quarter of 2009. It is said that upward valuations can also be expected for the new building projects on the Toni and Coop areas in western Zurich conducted by Allreal and Mobimo. “But at the end of the year, all in all, the weakened market environment will presumably have a negative effect on the valuation of the property portfolios,” Waeber says, adding that the pressure on office and sales rents is going to reduce the yields of the firms. The ZKB expert assumes that due to subdued economic prospects, property shares will be traded, for the time being, with a reduction on net asset value (NAV). Nevertheless, he comments, the average distribution return of 4.6% expected for 2009 will provide property shares with defensive attributes: “For this reason, this investment will still be in demand, given the volatility of the market environment.”

Swiss properties still in demand The demand for direct investments in Swiss commercial objects also still seems to be unbroken – precisely because of the change in basic economic conditions. The German firm Union Investment Real Estate for instance, a subsidiary of the central fund supplier of the German Volksbanken (People’s Banks) and Raiffeisen banks, made a number of investments in Switzerland during the past months. Most recently, the fund company acquired the office building called “West-Park” in Zurich measuring 26,900 square meters for EUR 104.3 million. With a 94% leasing rate according to yield from rents, and with creditworthy tenants such as the Schweizerische Post (Swiss Mail), the building should be a real “no brainer” for the open-ended property fund UniImmo:Global, giving its new owners no trouble. A few months earlier, in the fall of 2008, Union Investment Real Estate had already acquired for the portfolio of its affiliated fund UniImmo: Europa the project development of the office building called “CityWest Gebäude F.” Dr. Reinhard Kutscher, the spokesperson of the Management Board of Union Investment Real Estate AG, explains this involvement, “Thanks to the stable underlying data of its national economy, Switzerland is an interesting investment location for Union Investment.” The current developments on the Zurich office leasing markets don’t bother him. He says, “The office leasing market in Zurich is stable – and especially ‘Zurich West’ is a dynamically growing office location.” Other foreign investors are also looking around for buying opportunities on the Swiss office property markets, especially open- and closedended property funds from Germany, KPMG expert Pfister reports: “But the yield expectations of the groups of buyers are often incompatible with those of the sellers – for the time being.“

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Construction Sights Total and general contractors in Switzerland will be enjoying full order books well beyond this year. It’s an anti-cyclical business that has to cope with the ups and downs of the economy in a slightly different rhythm. It seems that currently, the positive signs outweigh the negative. We gathered some of the big players to find out in persona.

Interview: Birgitt Wüst, Oliver Kaiser Photos: Roli Käsbohrer How has your company fared so far in the current crisis with regard to incoming orders and time to commercialization? Could you describe the general situation?

Stefan Wehner: We have been doing pretty well. We’re also seeing an active interest in our services and are receiving plenty of requests for quotes. At the moment – fortunately! – there’s no crisis in sight, and we haven’t yet seen any decline in new orders coming in. How things will pan out in 2010, however, is much more uncertain. But you can definitely detect a certain restraint now: for one thing, investors swissbusiness

are checking the various projects more thoroughly, and for another, it is certainly necessary to allow more time than before for marketing, because in these uncertain times you can no longer ignore the fear of job losses. Demand for homes is therefore more cautious than in recent years. The demand for office space is declining as well, as firms are currently more likely to be cutting jobs than seeking to expand.

Peter Mettler: In general, we too have scarcely felt the crisis in our area of work. However, the situation differs depending on investment type. In the

area of industrial buildings we are experiencing a downturn. Due to the current economic situation, responsible parties are assuming a rather hesitant waiting position and are postponing investments in so far as is possible.

Successful developments in the areas of service and administration continue to be realized in large urban areas – in particular in Zurich, Basel and Geneva – as well as their urban surroundings.

Our market is increasingly focusing here and users are present. Residential properties in outstanding settings, here again in particular in the large cities of Zurich, Basel and Geneva, con17

tinue to have excellent opportunities on the market. Nonetheless, saturation is being felt in residential construction and a reduction is expected in the medium term. An apparent downturn in submissions and plans can already be noted.

Martin Kull: We have full order books and a good workload all over Switzerland. However, for any new projects, the decision-making processes are longer and the decision process itself requires additional analyses.

Peter Mettler is President of the governing board and chairman of group management.

He has a degree in architecture and an executive MBA HSG. As a co-founder (1992) and CEO of Bauengineering, Peter Mettler has had a significant role to play in the establishment, development and history of the group to the present day and has lent it his personal style. He has presided over the governing board since 1998, and in 2004 he gained control over the majority of the company.

Bauengineering.com AG, with its headquarters in St. Gallen, is a general and total contractor, responsible for planning and execution. For years, it has planned and realised holistic solutions with more than 110 employees and has assumed comprehensive responsibility for complex construction projects – from the concept all the way through to the handing over of the site as a whole ready for use.

What about price levels?

Martin Kull: The construction prices remain stable at a low level. On the other hand, commercialization prices are defined in accordance with the location and the sustainability of any particular project. The present market situation still allows plenty of room for good projects and reliable project developers.

Stefan Wehner: The difficult past six months didn’t have a real effect on prices. We’ve seen a slight reduction in contractor prices, but not on the scale we anticipated. This is no doubt because individual firms are continuing to have a high workload. However, the situation will get worse in the 3rd quarter of this year, and I think prices will fall.

Peter Mettler: What is clearly becoming evident is the continuing pressure

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on prices, and marketing periods are becoming drastically shorter.

Mr. Muhr, the Steiner Group is active in Switzerland and France. How do the two markets compare?

Henri Muhr: Well, both markets did not experience a real estate bubble such as those in Great Britain or Spain, however, each of these two markets reacted differently to the financial crisis. In France, where we are present through our real estate development company Sogelym-Steiner, which is primarily active in development of office and service segments in the largest French markets of Paris/Ile de France and Lyon, the crises has resulted in massive corrections in volumes and prices. The rental market has massively deteriorated. The reduction of order volume in the region of Paris was particularly pronounced. Investors are very reticent to invest in projects. The consolidation in the office space market has led to an exodus of companies out of city centers to the new welldeveloped peripheries in newly built premises with modern infrastructure.

In these areas, the rents and additional costs are up to EUR 250 per square meter lower than in the city centers.

What about the Swiss market?

Henri Muhr: In contrast, the Swiss real estate market has held up well, so far. Generally, the demand in housing construction – with marked regional exceptions – remains intact and price

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developments in the segments of condominiums and residential apartments are satisfactory. However, due to the deteriorating business climate, the reduced demand for commercial and office space is palpable. Large tenants are not present in the market. This has its repercussions on price developments – they are stable, or decreasing slightly depending on the occupancy rate, and the quality of the building and the location. The valuations are conservative. Foremost, rents must be affordable, which naturally has a direct influence on market valuations.

However, there are still opportunities, like offering companies looking to consolidate their premises office space at attractive prices. Compared to the previous year, the marketing of premises has become more challenging. Although there are still investors with sufficient cash in the market, it has become much more difficult to obtain the financing for new, untenanted objects. So the credo now is “return before time.” This is in contrast to the situation a short time ago. In this market environment, the conditions are increasingly stipulated to the disadvantage of the general contractor.

So negotiating credit lines for new construction projects has become more difficult?

Pascal Minault: In fact, the expectations of some investors have changed for various reasons. We see a less speculative approach with respect to commercial buildings, with higher requirements for guarantees. Plus there’s an increased IRR expectation, due on the one hand, to a higher perceived risk and, on the other hand, to the price reduction of many existing assets thus automatically increasing their return.

Nevertheless, an important investment capacity is available for real estate in Switzerland and investors still want to add high quality projects to their portfolio.

Stefan Wehner: Yes, these negotiations have definitely become more difficult. However, I agree that if the right product is presented in the right place, it will always find backing from an investor.

Henri Muhr: The banks have substantially tightened their risk management requirements in their assessments of real estate financing. They have become more reticent in providing credit and emphasize the financing aspects.

The benefit of low interest rates is neutralized by the banks’ risk mark-up, especially for office and commercial property. Because of the conservative lending policy of Swiss financial institutes, it is very difficult to gain support from foreign investors for equity financing of commercial projects in Switzerland. With regard to residential property, the Lex Koller is another hurdle for foreign investors. It would be interesting to have a few bankers at this roundtable…

Next time around we’ll invite some too.

What is the situation with credit facilities that need to be prolonged?

Peter Mettler: Unfortunately, the banks are currently less inclined to grant loans. In particular when granting credit limits and guarantees, the big banks are very hesitant and are demanding a higher amount of equity capital. Perhaps some of the financial institutions are lacking the necessary equity capital themselves.

Pascal Minault, 45, is CEO and Member of the Board of Directors of Losinger Construction AG. He graduated as an engineer from the Ecole Polytechnique in Paris (1983), and the Ecole Nationale des Ponts et Chaussées in Paris (1989). From 2002–2008, he was CEO of Bouygues UK in London and became Chairman of the Board of Directors in 2007.

With headquarters in Berne and five regional branches in Geneva, Lausanne, Freiburg, Zurich and Basel, Losinger Construction AG today operates in all of Switzerland. Since 1990, Losinger Construction AG belongs to the French Bouygues Group. In 2006, the company took over Marazzi Generalunternehmung AG.

Henri Muhr: The requirements of the banks regarding the prolongations of credit facilities have also become stricter and newly negotiated rates have become more expensive. Nevertheless, possibilities remain in spite of

Martin Kull: The procedures take longer, the projects are much more intensely examined and the required proportion of capital resources has increased immensely. In short, financing models undergo more severe examination. The fact that more owner equity is necessary is certainly an element that makes things more difficult, but at the same time, it is a great advantage for companies that have sufficient capital of their own. swissbusiness

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Martin Kull, 44, CEO and Co-owner, Vice President and Delegate of the BoD of HRS Real Estate AG. His skills are acquisition, development, financing and sale of real estate.

Best contacts with investors, regulators, policy and banks. His fascination lies in the development and commercialization of complex construction projects. He captivates through his unusual and new thinking to the various stakeholders’ needs.

Decades of experience, 180 enterprising employees and an annual construction volume of several hundred million Swiss francs make HRS Real Estate Ltd. one of the leading total and general contractors on the Swiss market, with its key competence in project development. Its headquarter is located in Frauenfeld with eleven branch offices in Zurich, Berne, Basel, St. Gallen, Chur, Vaduz, Crissier, Fribourg, Neuchâtel, Geneva and Giubiasco.

Important projects include: Home of FIFA in Zurich, AFG-Arena in St. Gallen, and PostFinance-Arena in Berne.

Henri Muhr joined the Steiner Group in March 2009 as CEO. He previously occupied various managerial and operational functions in the Bouygues Group in France, Germany, and between 1995 and 2008 in the Group’s Swiss subsidiary Losinger Construction AG. As deputy CEO and member of the Executive Board, he was responsible for all Germanspeaking regions of Switzerland and actively contributed to the growth of the Losinger Group.

The Steiner Group is a total services contractor, offering services in the real estate industry. With 550 highly qualified employees, the Group takes care of real estate projects during the full life cycle of a property, from the development, to project realization, to utilization. In Switzerland, the Group’s head office is in Zurich, and additional branches are located in Lausanne, Geneva, Berne, Basel, Lucerne and St. Gallen. Internationally, the Group is also present in France. Recent projects include the Nanotech-Center IBM and ETH in Rüschlikon; extension of the WEF in Cologny; and “La Tour Oxygène“ in Lyon.

Stefan Wehner, 40, is trained as a structural engineer and undertook further study with evening courses at night school in Zurich to gain his architectural qualification. In addition, he has completed two post-graduate study programs: a course in the Faculty of Construction/Energy and Environment at the School of Technology in Winterthur, and a qualification as an industrial engineer in the Faculty of Business Management at the Private Business School (Bern Technical College). Since 2007, he has been CEO of Halter Generalunternehmung.

Whether as a full-service provider, a general contractor or a partner in a project competition, Halter Generalunternehmung offers comprehensive overall concepts ranging from architecture to economy and ecology.

One of the complex projects was the Lucerne Stadium development with a sports building and two multi-storey residential blocks. Halter Generalunternehmung is an independent business unit of Halter Unternehmungen, an owner-operated Zurich family firm with just under 200 employees.

the difficult market environment. As already mentioned, the prevailing low interest rates combined with higher risk mark-ups almost add up to the previous situation. In real estate development, project financing is daily business. And because the durations of the credit lines are congruent with the project duration, that is, they are negotiated for about two years, the risks can be quantified and are controllable.

of real estate projects, and increase the final price for the end-user. In order to minimize that impact, we make our extensive expertise in project financing available to our clients so that they can benefit from better conditions. In addition, we are currently working on alternative property finance solutions.

tunately. The existing price pressure in the industry will not allow this.

Do changed terms of credit, such as the necessity for higher capital backing, have an effect on pricing?

Pascal Minault: Considering our financial situation, the changes in credit market conditions have no impact on our costs structure, hence on our production costs. These changes may however impact on the financing costs swissbusiness

Martin Kull: The interest rate level is currently very low, perhaps even the lowest in history. The higher risk margins are happily compensated by the present advantageous structure of in terest rates. Because of this balancing effect, no changes are taking place in price fixing.

Peter Mettler: I agree, the additional costs caused by the changed and tightened credit conditions cannot be added on to the market price – unfort-

Have you had to put projects on hold?

Stefan Wehner: We are in the fortunate situation that, to date, only one project has had to be put on hold.

Henri Muhr: We did not have to put projects on ice. From time to time, however, there have been delays in projects due to the economic environment, be it because of the rental situation in the commercial property environment, or due to delayed financing forthcoming from investors. Innovative concepts, sustainable constructions and good locations remain very much in demand. Additionally, the old truth still holds that where there is a tenant, a project can generally be realized without problems.

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Peter Mettler: Luckily, no projects have had to be postponed due to the new credit conditions to date. However, this could happen in the near future.

Pascal Minault: A significant proportion of our clients are financial institutions –property funds and pension funds – whose vocation is to invest all or part of the funds they receive in real estate projects. They have therefore no difficulties in financing their projects.

Having said that, some projects for offices, commercial surfaces and hotels are delayed today due to a temporary decline in demand. We take this opportunity to re-evaluate them and, if necessary, improve them to accelerate their launch. The demand for housing either for sale or for rent remains stable and strong, provided the projects are well positioned. At this point in time, we see no specific problems regarding this market.

In other countries, some project development companies have become property owners, or letting agents, against their will – could this happen in Switzerland?

Martin Kull: We are in the fortunate position that everything that we want to finance or sell, is actually implemented. We benefit today from our rather conservative financing models, which are based on a healthy mix of capital resources and borrowed funds.

Pascal Minault: It is not our vocation, and we make sure that none of the

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contracts we enter into presents such risks.

Henri Muhr: Since we usually only start with the realization of a project when we have found an investor, we hardly have this problem either. Generally, such a situation would hardly arise in the Swiss residential property market. However, in the commercial property market, this risk is higher, dependent on the location, the concept or if the level of sustainability is outdated. The high production volume of the past years will not be completely absorbed due to the economic crisis.

This will result in higher vacancy rates and price adjustments.

Stefan Wehner: I also believe that in Switzerland, as a matter of course, projects are only put in motion if an investor is already available or – in the case of residential property – if enough buyers already exist before work starts. Otherwise, construction would not begin in the first place.

Will you be forced to lay people off – or will you retain your employees because you expect that the market will recover shortly?

Peter Mettler: On the contrary, we continue to search for above-average, gifted and dynamic employees. Our excellent situation with regards orders guarantees a secure job for all those employed.

Henri Muhr: Our business has always been anti-cyclical, so that we have to

assume that we will only feel the upturn toward the end of 2010 or beginning of 2011. In France, we will have to wait longer for the recovery. In order to adjust to the current situation – but also to be prepared for the expected upswing – we have already started in 2008 to adjust the structures of our Group for the new situation. With the reorganization, which was initiated in 2009, some units, or activities, will be expanded, whilst others will be optimized. Individual lay-offs cannot be excluded, and there will also be new hires. We are clearly pursuing the goal of achieving a qualitative expansion of our competencies.

Pascal Minault: We have a portfolio of projects in development that represent several years of turnover. In addition, we work on tenders and negotiated projects for our clients. This situation gives us the right balance between short, medium and long- term demand, and protects us from short-term fluctuations. So we are continuing to recruit talented people for our longterm development.

Do you expect a further process of consolidation within your industry?

Stefan Wehner: Yes, I suspect that further consolidations are inevitable.

But this will primarily affect larger firms.

Martin Kull: Yes, I also assume that this will happen. This process of consolidation has, however, good side effects if you look at it as a „healthy trim down.“

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Henri Muhr: Following the changes of the market situation, there will be opportunities for a continuing consolidation in the construction and real estate markets. Recent mergers, such as between Losinger and Marazzi, Jelmoli and SPS, or Mobimo and LO Holding, open up positive synergy effects in the industry. I am of the opinion that that in the light of overcapacities in the construction and real estate business, there will be further mergers and also new players coming from other countries.

Do you consider going public to procure fresh capital?

Martin Kull: No, we enjoy our independence. Especially in this tough market situation, it gives us flexibility and makes it possible for us to act quickly. We benefit from the flat hierarchy and quick decision-making processes.

Stefan Wehner: No, not at all. The Halter companies are a family business and will continue to remain so. Our objective is to carry out good-quality projects as a medium-sized company, to be a reliable partner into the future

for our project teams, and to be a good employer for our staff.

What do you think of the global governmental stimulus packages?

Pascal Minault: We welcome the recent decisions made by the Confederation, providing financial support to the improvement of quality and energy efficiency of the built environment.

Peter Mettler: In principle, I am not in favor of these initiatives. I am a champion of the free market economy.

The state should only become involved in exceptional cases such as excesses and difficult crises. Its support and the stimulation of the economy should only be offered where sustainability is present, for example for infrastructure and buildings or in education.

Martin Kull: I agree with Mr. Mettler, in principle, I don’t think it is very good. Generally speaking, a so-called “band-aid policy� does not hold very long. But I do understand fully that government support is necessary for certain industries, which on the other hand help to sustain the economy as a whole.

Earthy Assets In order to make a profit on the appreciation value that is higher than the rate of inflation, correct market timing, a promising location and the value stability of the segment being tapped are crucial.

Stefan Pfister and Marcin Paszkowski Positive reports on the economy flowing in at a growing rate. Newly published business figures as well as the encouraging signs offered by numerous advance indicators are stirring up hopes of a recovery after a year and a half of dismal news. With a revival of economic activity and a return to previous growth rates, the danger of higher inflation is also increasing. This is true especially against the background of expansive monetary policy and a high level of national debt in the leading economies. The independence of central banks is being put to the test and might narrow their leeway in providing timely counter-measures.

One option for protecting against inflation and the associ-

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ated devaluation of assets, is through material assets. Real estate in particular is currently being pitched as an asset category that retains its value in the event of an inflationary scenario.

In theory there are various positive correlations between rising consumer prices and property values. A main factor being put forward in Switzerland is the linking with the national consumer price index via indexed rental contracts.

Since, in an ideal world, increasing devaluation of money may lead to nominal salary increases, and certain companies may pass on increased production costs to consumers, this would facilitate the corresponding rent increases

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on the market. Furthermore, greater demand for existing property as well as a short supply of new construction is to be expected due to higher construction costs, which in turn leads to rising real estate prices.

as a result of migration. Thus, to attain an intact potential for rental increases, it is the local demand for space that is crucial rather than the rent indexing achievable within the legal framework.

Stability is a requirement Despite these general interdependencies, the protection against monetary devaluation offered by real estate is not universal. In practice there are other factors determining value, which make it necessary to take a differentiated view.

The most important basic precondition for effective inflation protection is intact market equilibrium. It is the only way that an economic upswing can lead to a shortage in real estate markets and thus to rising real estate prices. In unbalanced markets, as was the case in Switzerland at the beginning of the 1990s, for example, the development of real estate prices is affected significantly by a surplus in supply.

As can be seen in figure 1, real estate prices decreased by around one third between 1990 and 1998 after the Swiss real estate bubble burst. Viewed from today’s standpoint, in real terms, an investor who invested money in Swiss real estate in 1987 lost around 50 percent of the value, and thus considerably decreased the total return on his investment.

However, as no comparably excessive price increases have been apparent since the all time low in 1998, the Swiss real estate market currently offers good entry-level options.

Furthermore, the level of protection against inflation offered by a property is strongly dependent on its location and the extent of competing offers. Despite a growing supply of space, rental and real estate prices are rising considerably in prosperous economic centers that have a high population growth, whereas real estate values in economically weak regions are coming under pressure

Watch out for offices Finally, the value stability of a building is also closely linked to its usage. Residential real estate is proving to be more robust over the long term than commercial real estate. The Swiss real estate rental price index for residential properties has risen, adjusted for inflation, by around 28 percent since 1970, whereas office real estate has fallen by -23 percent (see figure 2). This result is surprising because rental agreements for office space as a rule are linked 100 percent to the inflation rate, while rent adjustments for residential real estate are, for the time being, subject to significantly narrower limits by the legislature. The reason that office rental rates increase less than the inflation rate over the long term has to do with their greater dependency on the economy. During phases of economic downturn, prices for rents are often lowered in the wake of negotiations. The volatility of rental prices in commercial real estate is, however, considerably less marked in central locations in large economic centers.

General protection against monetary devaluation does not exist in real estate. In order to achieve a real estate investment that yields long-term profit, the decisive factors are correct market timing, a promising location, and value stability in the segment of use.

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Stefan Pfister is Partner and Head of Real Estate; Marcin Paszkowski is Manager Real Estate, KPMG AG, Zurich, Switzerland.

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IMMOBILIEN BUSINESS 路 Juli 2009

www.immobilienbusiness.ch

Property Valuation in Stormy Times In times of market imbalances and low liquidity, the choice of method for determining fair value is a burning issue – and not only for subprime securities but also for investment properties. As the following article shows, the different approaches used in international valuation practice may produce divergent results in terms of current market value.

Dr. Andreas Bleisch In recent months, many countries have seen the slide in housing prices accompanied by a similar drop in the value of investment properties. The relevant office sector indices, for instance, show a 29 percent fall in the USA and a 37 percent slump in the UK over the past 18 months (see diagram). This has naturally prompted investors to ponder the long-term value and risk profile of their holdings. Yet, the relevant indicators are not easy to monitor. There is a dearth of reliable, up-to-date transaction price indices for investment properties, mainly because they – unlike owner-occupied housing – are not homogeneous, readily tradable products. Given the uniqueness of any particular property, its transaction price cannot be directly used to infer the current market value of another property, let alone market-wide indicators. It is possible, however, to observe trading returns and square-meter rates over time in order to establish indicative price trends. But this requires the capability to monitor large volumes of arm’s length transactions, which – particularly in Switzerland, where these are subject to confidentiality provisions – is not always given.

Inventory values An alternative method involves monitoring the stock market performance of listed real estate companies and real estate funds. These securities prices are, however, also influenced by the overall financial market environment. Such distortion can be eliminated by using the inventory values of properties

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rather than the securities prices as these are not simply transaction prices but actual market values estimated by experts. This method was adopted for calculating the indices shown in the diagram. The downside of this approach is that inventory values are often determined only once or twice yearly for posting in financial statements. The required data are thus issued only periodically and with a time lag.

Moreover, these inventory values are especially difficult to determine in periods of crisis. For the estimation of fair value, financial reporting standards such as the IFRS prefer a markto-market approach based on the use of verifiable transaction prices and data for comparables. Particularly in Anglo-Saxon countries, valuation practice is heavily reliant on the use of such benchmarks. Yet, problems may arise in times of low market liquidity and market imbalances when, except for emergency sales, transaction activity grinds to a halt and reference data consistent with the standard definition of fair value are at a premium. In such a climate, it is difficult to meet the requirement that properties should exchange between “a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

What’s the price The “fair value” principle implicitly assumes markets that are in equilibrium. In some countries, though, the volatility

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Source: NCREIF, FTSE, edited by Wüest & Partner

spawned by severe market imbalances is directly reflected in the inventory values. Recent examples from Australia and Japan show how mark-to-market valuation practice can wipe vast sums off the value of entire portfolios. The consequences for the affected property companies can be devastating: depreciation not only threatens their existence, but can trigger further emergency sales and still lower prices, with a wholesale market collapse as the ultimate result.

As a secondary option for determining fair value, the accounting standards also permit the more analytical mark-to-model approach, which tends to be favored by valuers in Switzerland.

Only arm’s length transactions worthy of the name are used to calibrate the valuation models. In the absence of suitable data, the previously monitored levels are simply extrapolated, there by excluding market imbalances from the equation. There is no real justification for allowing the volatility of the overall market to be exaggerated by attaching undue importance to isolated sales effected under pressure. Were the Swiss market also to suffer a crisis of plummeting demand and emergency selling, its direct impact on inventory values would probably be less significant than in the above-mentioned countries. This does not, however, rule out the possibility of assets in Switzerland coming under pressure. Such a development is still conceivable should a long-term shift occur in the fundamental market parameters (see box).

Dr. Andreas Bleisch is Partner at Wüest & Partner AG, Zurich.

He is responsible for the valuation of several Swiss real estate portfolios, funds and companies.

Market values of Swiss investment properties under pressure?

Unlike in many other countries and contrary to the expectations raised by share price trends, at least for real estate stocks, the inventory values of major Swiss portfolios held up well in the past year. On average, the financial statements presented virtually unchanged values for commercial properties and even showed residential property as having appreciated by about two percent. In forecasting performance for the rest of this year, it is useful to consider a number of fundamental market parameters essential to the valuation of investment properties: first, the projected future rental income; second, the projected future running and maintenance costs; and third, the yield expectations in respect of the net result remaining from the first two cash flows. These parameters are the cornerstones of the DCF method now regarded as the standard investment property valuation technique.

With regard to rental income, Switzerland’s rented housing market has greatly profited from the influx of foreign workers in recent years. However, this trend is likely to be curtailed by the gloomy economic outlook, which will lead to a flattening-out of prices even if new-build housing development also slows. The office sector looks set to suffer an effective collapse in demand. At the same time, as many premises are let on long-term leases with rental income contractually secured, investors will encounter no immediate problems, except where tenants become insolvent. For new lets, the market is likely to tighten and vacancy levels look certain to rise. Yet, as recent crises have shown, Swiss real estate investors have staying power and would rather sit out vacancies for a certain time than attempt to remain competitive by cutting rents.

As yet, the second key value driver, the projected running and maintenance costs, hardly poses any risk. The imswissbusiness

minent decline in property development and lower commodity prices will generally push down the cost of newbuild and refurbishment works. New tax incentives for energy-efficient refurbishment may additionally improve the prospects for investors.

Discount rates, as the third value driver, express investors’ yield expectations with regard to the net cash flows from their properties. Given the present turbulence in many other investment classes, Swiss real estate has become a highly prized option among investors. The demand overhang, particularly for residential property, and the recordlow interest rates bode well for the stability of discount rates, at least for standard properties with good covenants at favorable locations. The supply of large commercial properties may, however, temporarily rise. In the period before the subprime bubble burst, numerous foreign investors spent large sums of cheap money on accumulating sizeable Swiss commercial portfolios. Some of these will now seek a premature exit while the market is still in good shape and before they become entangled in inevitable refinancing difficulties. However, it is doubtful whether they will find buyers willing to enter into transactions based on the low yield levels previously paid for.

Should the situation turn critical, this will doubtless be due to falling rental income. Developments will hinge on whether or not the current recession deteriorates into a paralyzing depression. The worst-case scenario would be widespread job losses and a decline in purchasing power, with a long-term drop in property returns as the upshot. This has yet to happen. The chances of the Swiss investment property sector escaping a fullscale melt-down thus remain good, at least for the time being.

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Between the Tremors The crucial question on any investor’s mind: At which particular point of the real estate cycle do we currently stand? Since real estate cycles can last several years, we can only roughly predict where we stand. Timing, however, is the crucial element for success.

Ulrich Braun Foreign real estate investments provide investors with broader diversification as well as participation in selected growth markets, in addition to the overall obvious advantages associated with real estate. At the same time, investors should be on the lookout for high quality. This process already begins with the selection of an investment vehicle that should be as similar as possible to a direct investment in terms of structure. Listed real estate investments have something of a disadvantage because their trend runs parallel to the volatile stock markets.

Opportunistic real estate investment vehicles with high external financing are more like private equity investments than real estate with regard to liquidity, risk and return.

Well-suited instruments are open or semi-open vehicles that are focused on core investments. “Core� is defined as good locations, stable and secure cash flows and being less dependent on external debt. In the real estate asset al-

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locations of qualfied and private investors, the core segment accounts for 80% or more of property investments.

When to strike The cycle should play the most significant role for investors who want to put their money in the international real estate market.

During an upswing of five to seven years, global real estate markets can gain ground in the double-digit range annually, but also lose ground again at the same pace. More conservative real estate investments in the core segment can temper the fluctuations, but not prevent such swings. Consequently, it is important to actively manage the cycle and, in turn, create added vale.

Managing the cycle means reshuffling portfolios in the last third of the cyclical phase at the very latest, divesting the riskier assets and realizing gains. At the same time, investors should not underestimate the requisite timing and costs involved. In

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fact, three to nine months can elapse before such transactions have been settled. In most cases, the costs are well compensated for by the double-digit returns that can be realized on international real estate markets. Furthermore, in this phase of the cycle, investors should use the proceeds for reducing external debt and building up cash positions. The available funds boost negotiating flexibility and allow investors to take advantage of the opportunities that emerge in downswing phases to acquire high-quality real estate at attractive prices.

Real estate cycles do not run parallel to the economy, but rather with a time lag. Nevertheless, real estate markets are strongly dependent on overall economic conditions. Rising or falling employment levels, disposal incomes and consumer sentiment have a significant impact on real estate markets. Hence, an analysis of the relevant general economic and structural conditions should always be carried out prior to making any real estate investments.

The prevailing economic environment paints a picture that is anything but favorable at present. The year 2009 will be marked by a worldwide recession, with forecasts calling for a contraction in global gross domestic product of 1.0%. In fact, the global economy is stuck in the most severe recession since the Second World War. Because nations nowadays are tightly networked through international trade, no region of the world will to escape this trend unscathed. Even the growth engines of previous years – countries such as China and India – will likely record noticeably declining growth rates. Forecasts point to contractions in GDP growth ranging from between 2% and 5% in the developed economies, even based on the condition that the announced monetary and fiscal policy measures taken by individual countries will lead to positive effects.

The right buyers The impact of recession on international real estate markets – which is primarily directed at the office, retail and logistics sectors – is a fate that cannot be avoided. Vacancy rates will climb, leading to pressure on rent prices. Even more significant is ensuring high occupancy rates for existing properties and securing leasing contracts for the medium and long term. Owners must constantly keep a close, watchful eye on the credit rating and quality of tenants amid a recessionary environment.

Public-sector or similar tenants, in particular, as well as favorably positioned and well-capitalized companies, do offer security in this climate.

Investors with substantial amount of freely available funds will number among the beneficiaries of the price trend on international real estate markets in the coming 18 to 24 months. The increase in property yields that began already last year should continue in 2009 too, even intensifying in certain individual markets. This trend will pose severe refinancing problems for investors who have utilized considerable amounts of borrowed capital. In some cases, refinancing may be impossible. Accordingly, high-quality properties will succeed in entering the market, with returns that emerge only once every 20 to 30 years.

The focus is on cities and countries where real estate prices have already plunged considerably. Nevertheless, investors should proceed particularly selectively in these locations, too.

In addition to pure return considerations, first-class locations, credit ratings of tenants, leasing contracts with durations as long term as possible as well as attractive rent-increase mechanisms all constitute important decision-making criteria with regard to the due diligence process.

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Fast corrections Experience has shown that transparent real estate markets with high trading volumes (such as the UK) and substantial utilization of borrowed capital undergo the most rapid corrections amid downswing phases. Accordingly, the British real estate market has been the first to commence its correction course in Europe, recording price discounts of between 30% and 45% already in 2007/2008. Yields on first-class office properties have already surged by 200 to 280 basis points since hitting their low point – so the correction is far advanced. Moreover, the UK real estate market should continue to offer particularly attractive buying opportunities in the second half of 2009 and in 2010 too.

In the Asia-Pacific region, Australia certainly ranks among the attractive target countries as well, with a market that is similarly transparent and professionally functioning s that of the UK and functions in the same manner. The country also saw a noticeable decline in prices in 2008. As a commodityrich nation, Australia’s economy could also bottom out again at a more rapid pace since it is closely interrelated with the fast-growing markets of China and India. Numerous markets where the door is open to core investments – such as Japan, Singapore, Hong Kong or South Korea – follow the trend in Australia with a time lag.

In the Americas, the focal point from the timing perspective is directed particularly at the real estate markets in Chile and the USA, in addition to the relatively stable Canadian market.

The real estate market in Chile has become increasingly professional in recent years, its economy is robust compared with other economies on the continent, and the country is broadly diversified in terms of export destinations.

The corrections on the commercial real estate markets in the USA moved in a comparatively moderate range in 2008. So pressures on prices here should continue to prevail for a somewhat longer period of time. However, conditions in the world’s largest as well as most liquid real estate market should pave the way for investors to realize returns again starting in 2010 at the latest – a situation that was last seen at the onset of the 1990s.

The time is ripe In fact, international real estate investments are increasingly becoming an essential, integral part of any modern asset allocation. Although quick profits can hardly be expected in the current environment, longer-term-oriented investors should reap rewards from the emerging possibilities and opportunities. Suitable investments include quality office properties with long-term leasing contracts and tenants with solid credit ratings, excellently positioned shopping centers (in Europe, in city centers wherever possible) with sound anchor tenants, as well as real estate in the healthcare and senior housing sectors, which are less vulnerable to economic cycles and benefit from secular demographic trends. In the final analysis, investors may never quite get the right timing for a buying opportunity. But they should not miss the second-best chance.

Ulrich Braun is Head of Real Estate Strategies & Advisory, Credit Suisse, Zurich

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Old Profits New lifestyles and demographic developments are going to transform demand for residential space sustainably during the coming years. Investments in the senior citizens’ apartment sector are thought to be crisis-resistant and are becoming more and more fashionable.

Birgitt Wüst Switzerland is getting older. Due to longer life expectancy, the number of people over 60 will increase by 30% by 2020, while the population under 60 will stagnate. The need for living space suitable for senior citizens is thus going to grow – even if an “apartment for old age” is definitely not yet on the agenda for many Swiss, as the newest poll for the Age Report showed (see box). Another foreseeable result of the general aging of society is a sharp rise in the need for space in nursing homes. This has to do with a dwindling population plus the growth in the number of patchwork families as well as single households. In the future, there will most probably be fewer and fewer people willing and able to nurse at home. This all begs the question: What will “living space for old age” ideally be like. And might it be developed.

A last hurrah In the Suisse Romande, it is customary for senior citizens to stay in their homes until they have to move to a nursing home.

In German-speaking Switzerland, at least there are already a few intermediate stages between one’s own apartment and a nursing home – and rising interest in alternative forms of living in old age shows that many senior citizens of various ages would like to switch to a more comfortable environment. Usually, their financial situation makes it impossible for them to 32

fulfill this wish, for dwellings suitable for senior citizens have a price tag. Rents for the 2-room to 3½-room apartments owned

by Tertianum – currently earning CHF 166.5 million annually with 19 residential complexes for senior citizens – thus range between CHF 5,000 and 9,000 a month. Markus Maurer, the Tertianum Group’s Director of Development and Consulting, says that, at the moment, two new residences are projected. At present, the residence called “Bellerive” is under construction in Lucerne according to the designs drafted by the architectural firm of Rüssli Architekten AG; it is scheduled to open in the coming spring. One year later, the residence called “Sphinxmatte” designed by the architectural firm of GWJ Architekten will be opened in Solothurn. In Lucerne, 68 apartments for senior citizens are being built, or, more precisely, forty-eight 2½ and twenty 3½-room apartments with a balcony, or a terrace with garden, ranging in size between 55 and 85 square meters of living space. In addition, there will be four 3½-room apartments measuring between 91 and 104 square meters with a balcony or a terrace in a restored villa. There will also be a restaurant and a wellness area, as well as a hairdresser and podiatrists’ offices. At Tertianum’s Sphinxmatte project – for which the general contractor is Allreal, the investor of the CS Real Estate Fund Living Plus – four buildings connected by a covered pavilion will be built. They are going to have room swissbusiness

for 66 apartments adapted to the needs of senior citizens, with a loggia and 21 single nursing rooms, a garage and a parking lot, a restaurant, a public cafeteria and a wellness area.

Market earns best As in Tertianum’s other residential complexes, the new houses in Lucerne and Solothurn will also be offering additional services included in the price of rent such as round-the-clock emergency standby service, a choice of one main meal a day (three-course menus), as well as weekly cleaning of the apartment, reception services and minor technical household assistance. In addition, the inhabitants have an option on admittance to the nursing home. According to Maurer, the investment volume for an average Tertianum complex – that is, a residence with 80 apartments and 20 rooms – lies between CHF 45 and 50 million.

The construction of a new residence, he explains, is usually financed by pension funds, insurance companies and investment funds. For their involvement in residential complexes for senior citizens, the institutional investors can receive a return of 5.5 to 6.5%, which is on the average for properties – though it is not exorbitant, it is relatively secure. Tertianum’s manage-

“Old age” arrives later

Unfortunately, there are no precise statistical data on residences suitable for senior citizens in general in Switzerland, as such details are not yet been asked for when apartments are counted. New knowledge was obtained by the most recent report on aging for which 1,248 persons of 60 years of age or more were polled in the German-speaking part of Switzerland. This poll shows that women and men in their third phase of life (between 65 and 79) here are highly satisfied with their lives – thanks to good economic security, good health and a commensurable dwelling environment. The majority of Swiss senior citizens are satisfied with their dwellings. According to the “Age Report 2009: Einblicke und Ausblicke zum Wohnen im Alter” (Insights and Perspectives Regarding Dwellings in Old Age), most of the Swiss would prefer to stay inside their own four walls as long as possible, even in old age – although it is clear that this is often irreconcilable with ageinduced physical limitations. At the same time, an animosity on the part of many senior citizens towards living space suitable for old age cannot be overlooked: Under a third (28%)

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ment is thus expecting increasing demand even now, despite the ongoing financial crisis. “Demographic development is in contrary motion to the momentary economic situation,” Maurer says. “While we do notice short-term modifications in the economic environment, we aren’t as hard hit as other business segments.” Of course, the solutions offered for “living and dwelling in old age” do have to be market-oriented.

St. Gallen sets standards Other suppliers such as the Alters- und Wohngenossenschaft (Senior Citizens’ and Residence Cooperative) Logiscasa founded in 1996 in St. Gallen take a similar view. Its first settlement, the quarter called “Flurgarten Leben und Wohnen im Alter” developed in 1999, was expanded last year by a project called “Linsebüelguet,” which has the same number of units. Logiscasa is supported by the Community of the Inhabitants of St. Gallen (Ortsbürgergemeinde), which operates a geriatric clinic and senior citizens’ residence called “Bürgerspital” on a parklike area more or less to the east of the city center. This offer was supplemented by apartments for senior citizens, whereby Logiscasa was careful not to pass the CHF 1,000-limit for a

of those polled spoke out against an apartment for old age in the first poll in 2003. The number rose to 40% in 2008.

The report on aging states that the “idea of an apartment for one’s old age is associated with acceptance of one’s own aging, but most people between 60 and 75 do not feel old and do not want to be categorized as old.” Outmoded ideas about this form of dwelling presumably reinforce this aversion still more, the poll comments, adding that as long as dwelling in one’s own four lovely walls is still possible, senior citizens put off thinking about handicaps that might come along with old age. On the other hand, the fact that most older people want to live independently at home as long as possible means a great opportunity for external nursing and other services.

The “Hauspflegehilfe” (Home Nursing Assistance) firm already discovered this market niche for itself three years ago.

It intermediates housekeepers or companions to live with the elderly in their homes. By contrast to many Eastern European workers here, Swiss housekeepers have equal rights and equal wages.

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2-room apartment. The apartments, surrounded by attractive and spacious green areas, are conceived in a manner suitable for senior citizens and the handicapped; the blueprint delineates only the bathroom and the kitchen, whereas everything else can be modified at will. In case a walking frame ever becomes necessary, no thresholds are in the way. And as the bedroom isn’t completely separate from the living area, a bedridden person can still participate in whatever is going on. Persons confined to wheelchairs can ascend from the underground garage to their apartments unhindered. The inhabitants of the Linsebüelguet can take advantage of the facilities of the nearby senior citizens’ home – such as the restaurants, the indoor swimming pool or the hairdresser – or make use of the individual services offered such as cleaning, washing or meal deliveries.

Logiscasa made quick progress with the marketing of its 2 and 3½-room apartments: it is said that one simple flyer the size of a normal sheet of paper issued at the citizens’ meeting was sufficient to rent out all of the apartments before construction even started. The long waiting list shows that it would probably be worthwhile to carry out still more construction stages in St. Gallen.

Linsebüelguet, copyright: Bauengineering.com AG

Will it recycle?

Models combining independent living with service providing are also in demand elsewhere – assuming that the neighborhood is “suitable.” The place itself has to be right as well as its image. Today, Mr. and Ms. Switzerland make quite high demands on residences for their old age – whether for ambulant service providing or for stationary living and service providing concepts. Qualifying criteria for the location are connections to public transportation, shopping facilities for daily needs that can be reached on foot, as well as proximity to a center with social, housekeeping, nursing and therapeutic services.

Besides, the need for security also increases with age – meaning not only the obvious need for social and physical security: the question also arises of how secure – over a long period of time – the organizers and operators of the residential and service providing offer to be chosen are. Answering this question isn’t always simple in a segment into which more and more suppliers are crowding. With the boom in the segment of senior citizens’ properties, the question might also come up for investors in this area of how high and how sustainable the returns on their investments will be. With growing competition and numbers of apartments and beds, overcapacities might threaten – at least theoretically – and with sinking occupancy figures, returns would also shrink, sooner or later. Tertianum’s manager Maurer admits: “As a matter of principle, a growing

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number of competing suppliers does go together with a danger of overcapacities for living and dwelling in old age.” However, he continues, the theme of “living and dwelling in old age” and the management of pertinent offers is always linked to the competence of the suppliers – therefore, in his view, the danger of mid-term overcapacities is rather slight. “Besides, the future will permit a variety of living concepts,” Maurer believes.

Whoever wants to be completely sure might find a hint from Georg & Ottenströer helpful. With regard to the develoment of new nursing homes in Germany, the Hamburg-based property consultants are already warning that overcapacities may be expected after 2040. For this reason, they recommend the planning of other possible uses before construction: it would thus be a good idea if the buildings involved could also be used as apartment houses or hotels. Perhaps the Swiss should act accordingly.

Communal living a flop According to the Age Report 2009, new forms of dwelling for senior citizens are being soundly rejected: 71% of those polled spoke out against a common household, and 58% were even against a so-called residence for the elderly. At present, moving into an “old age commune” is a serious alternative only for very few people. In general, older people are not accustomed to running a household together with others who do not belong to their own families. This will probably not change very much when the first baby boomers arrive on the scene. Although many people who were born in years of high birthrates between 1946 and 1979 tended towards unconventional forms of living at least during their youth, they become increasingly adjusted as they grow older. Communes are out – which may also be due to the fact that not only good experiences were made with living together with others in younger years. Most of the baby boomers now thus live as couples. A more promising alternative seems to be a number of people’s getting together, buying a house and converting it so that it is suitable for old age. One example of this, for instance, is the “Andere Wohnformen” Verein (Alternative Forms of Dwelling Association) in Berne: with the “Stürlerhaus” and the “Haus Sein” (Being House), its approximately 60 members were able to establish two households. At the moment, this association is putting further projects on track, one of them on Burgunderstrasse in Bümpitz. However, the “Hausgemeinschaft” (common household) will probably not be the generally valid solution for the elderly, either.

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Rattle Your Jewelry The idea is simple and not so much different from your average direct real estate investment project – buy a house, refurbish and sell on. This here, however, is something else altogether.

In 2008, the Geneva-based Swiss Development Group purchased the old Hotel du Parc in Chardonne with a clear-cut investment strategy and target group: the ultra-rich who are either looking for an exclusive apartment in Switzerland or for even more income and would like to rent it out themselves.

CEO Nicolas Garnier refers to the apartments as “the first branded hotel-residences for sale in Switzerland.” The brand is delivered by the international luxury hotel group Kempinski Residences that will provide five-star hotel services through the Mirador Kempinski Mont-Pelerin, a stone’s throw away from Hotel du Parc. Hence the name for this first project “Du Parc – Kempinski Private Residence.” After a visit to the inaugural festivities, we had a few questions for Nicolas Garnier.

Mr. Garnier, are there any successful examples of the Du Parc formula in other countries?

Yes there are similar luxury service residences in France, England and America. Although they do have exceptional components, nothing can really be compared to the outsanding site of Du Parc. We like to compare the site with the Trump tower or the Hyde Park residences in London, however each project has its own very different personality.

There were some reservations on the part of the local authorities regarding the project. What were they worried about?

Swiss Development Group was the only developer to look at the old hotel with the aim of renovating instead of tearing it down. In general, the locals really appreciated that vision.

However, the reservations by the administrative services were about keeping the historical parts of the building as well as integrating the complex in the natural environment. The building will meet the highly demanding environmental Swiss standard “Minergie,” which allows to passively save up to 50 percent of energy compared to a usual construction project.

The Du Parc will be given back its past glory of the early 20th century. swissbusiness

And how did you tackle these hurdles in the end?

Our goal was to work along with the authorities, not against them. They understood it and the realization is the result of a true partnership. We have been working together on many subjects such as looking at the project as a global entity – main building and park building combined into a single landscaping concept – and also on the economic side to maintain primary residences and limit the number of vacation housing.

What advise would you give investors with a similar idea?

The message is quite clear. We show that the project fits in with the local authorities’ goals through a close partnership. We also open the doors for the local residents by means of different initiatives: evening discovery events with presentations of the project on site, newsletters and of course the direct exchange with the neighbors and all interested people.

What exactly is the price span for the apartments?

Let me point out that the investment does not only cover just an apartment but a complete concept, a set of services and amenities, like an indoor spa, movie theater, cigar lounge, concierge, hotel services by Kempinski, business center, etc. For some units a second unit is provided in the park building to welcome guests. The price span ranges from CHF 4 to 24 million.

And how many have been sold already?

We have not yet really launched the sales campaign, and we are pleased to have already registered four reservations and are just about to conclude two sales.

Considering the company’s background, are you focusing on a Russian clientele?

We can only sell eight apartments to foreigners so therefore our focus remains on Swiss residents already residing in Switzerland or those returning to the country.

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Green Was Never So Blue The Passat TSI EcoFuel is Volkswagen’s latest addition to a rapidly growing family of vehicles which are all grouped under a new umbrella brand: BlueMotionTechnologies.

Business Unusual In its short history, the Swiss limited partnership has not been a success story. Promoters and investors have been reluctant to use this investment vehicle, perhaps incorrectly. In fact, the Swiss LP could be attractive to investors in real estate private equity. Dr. Alexander Wyss of Baker & McKenzie Zurich explains.

Alexander Wyss The investment vehicles traditionally used by real estate developers are development companies in the form of stock corporations or limited liability companies. Such companies are earmarked for investments where investors are “locked in” for a certain time period, usually several years. This closed-ended character is typical for private equity investments, but also for investments in real estate development projects where the funds are blocked during the development period.

New legal entities Swiss collective investment schemes (investment funds) are governed by the Federal Act on Collective Investment Schemes (CISA), which replaced the former Federal Act on Investment Funds. It modernized Switzerland’s legal environment for investment funds and introduced new legal entities. Four investment schemes are available: Contractual fund and SICAV (investment company with variable capital) as open-ended investment vehicles; SICAF (investment company with fixed capital) and limited partnership as closed-ended investment vehicles.

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Since January 2007, Swiss law has offered an alternative to the real estate development company: the limited partnership for collective investments (LP). Yet almost three years after its launch, the Swiss LP is hardly a success story: so far, only a handful of LPs have been approved by the regulator, the Swiss Financial Market Supervisory Authority (FINMA). The majority of promoters and investors seem to prefer less regulated foreign limited partnerships or, in the area of real estate, traditional development companies or open-ended contractual funds.

So is there any reason why real estate developers and investors should actively choose the LP as an investment vehicle?

In particular for tax reasons, in certain circumstances, the LP could be an attractive vehicle for real estate private equity investments. Investors should carefully analyze the pros and cons of an LP. It is possible that the tax benefits outweigh the regulatory costs. Furthermore, the LP is widely used abroad, and foreigners are familiar with its structure.

Structure of a limited partnership The limited partnership is a legal entity based on a limited partnership agreement (LPA). The LPA sets out in detail the rights and obligations of the partners who form the partnership. There are two categories of partners: the limited partners (investors) and – typically one – general partner (GP). The lim-

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ited partners are not involved in the management of the partnership, and they are only liable for debts up to their share in the partnership. The GP is responsible for the management and the operations of the partnership. Its liability is unlimited.

Apart from the LPA, the GP issues a prospectus that describes the investment process and the risks associated with investments in the partnership.

Regulatory framework As mentioned above, a Swiss LP is subject to approval by the FINMA, and there are a couple of regulatory constraints. The GP must be a Swiss corporation with a minimum capital of CHF 100,000. It can only serve as GP of one LP, and it requires a FINMA authorization. The GP may delegate certain operative activities to an investment manager or adviser. Another rule is that only qualified investors can be limited partners. Qualified investors not only include institutional investors but also high net worth individuals and individuals who have entered into an asset management agreement with a professional asset manager. At least five investors must be invested at the latest one year after the launch of the partnership. A real estate LP is only entitled to invest in real estate development or refurbishment projects. In other words, investments in existing buildings are not allowed. Apart from this limitation, no other regulatory constraints exist as regards risk diversification, permitted investments, or leverage. For instance, it is possible to invest in only one real estate development project. Upon completion of a project, the developed property is either sold or held by the LP, at least for a certain time period. Profits (capital gains or rent income) can be distributed to the investors or re-invested, all in accordance with the terms of the LPA. Only the part of the commitments earmarked as “fixed capital contribution” (so-called Kommandite) is blocked until the liquidation of the LP. The fixed capital contributions are usually kept rather small whereas the lion’s share of the capital contributions is variable (so-called Zusatzkapital). A real estate LP is subject to Lex Koller. It is deemed foreign-controlled if more than one third of its capital contributions are provided by foreign limited partners or if the GP is controlled by foreigners.

Taxation issues While in general LPs are tax transparent and thus no tax subjects, LPs with direct, rather than indirect, real estate investments are tax subjects for Swiss income tax purposes. Direct real estate investments are investments in Swiss or foreign properties where the LP is the direct owner of the property.

Other real estate investments, notably investments in shares in real estate companies, qualify as indirect real estate investments. On the level of the LP with direct real estate investments, the following taxes are levied: Rent income generated from direct real estate investments is subject to reduced federal income tax (4.25% instead of 8.5%) and, at least in certain cantons, benefits from special income tax rates (e.g., in the canton of Zurich, 50% reduction of tax rate

Seven LPs so far

As of June 2009, seven limited partnerships (LPs) have been approved by the FINMA, two of which are earmarked for investments in real estate development projects. Both of them are located in the French speaking part of Switzerland. The approval process for several other real estate development LPs is currently pending.

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compared to the ordinary tax rate applicable to companies).

Privileged tax rates generally apply to realized capital gains from the sale of Swiss properties directly held by the LP if the property is located in a dualistic canton (such as Geneva or Zug). A dualistic canton is a canton that does not levy special cantonal real estate capital gains taxes on LPs. If a property located in a monistic canton (such as Berne or Zurich) is sold and capital gains are realized, special cantonal real estate capital gains taxes will be levied. The applicable tax rate for LPs is not privileged. The reduced federal income tax is also applicable in connection with realized capital gains.

On the investor level, dividends distributed to investors are income tax free for Swiss investors as long as such dividends are derived from income or capital gains of direct real estate investments. In addition, the dividends are not subject to Swiss withholding taxes. The management fees received by the GP are subject to Swiss income taxation. The asset management services provided by the GP to the LP as a collective investment scheme are exempt from value added tax (VAT).

According to current Swiss tax practice, carried interests in the form of disproportional dividend distributions will not be accepted by the Swiss tax authorities in general but are rather considered additional compensation for asset management services. Alternative structures for tax optimized management incentives may be discussed with the Swiss tax authorities.

In view of the above-mentioned taxation principles, any promoter who wishes to launch a real estate development fund that invests in properties located in Switzerland should carefully analyze the applicable tax situation in the relevant cantons.

Unfortunately, no fund structure is tax efficient in all Swiss cantons. Depending on the location of the project, the strategy, and the investor base, it may be worthwhile to develop real estate projects in a regulated Swiss LP rather than in a traditional development company.

Outlook Fund structures like the Swiss LP should be a commodity or at least be close to a commodity. Only then will they be widely used, and only then the benefit-cost ratio is satisfactory. For the time being, and contrary to the contractual fund, the Swiss LP is not yet a commodity. Interested practitioners including lawyers, accountants and the FINMA are currently establishing best practices with regard to the Swiss LP. Unfortunately, the LPA template provided by the Swiss Fund Association and the Swiss Private Equity & Corporate Finance Association does not yet fully comply with international standards. Yet, it is expected that rather sooner than later Swiss best practices will evolve, which will also result in lower set-up costs. This development, together with the current trend away from offshore to onshore structures, favors the Swiss LP. Furthermore, as far as Swiss LPs with direct real estate investments are concerned, there may also be a tax benefit, notably in comparison with the double-taxation of development companies. The benefit may be higher or lower, depending on the canton where the properties are located. In certain cases, the benefits are substantial and outweigh by far the set-up and running regulatory costs connected with an LP. It is likely that the Swiss LP will play a more prominent role in the near future, and this is particularly true for LPs invested in real estate development and refurbishment projects.

Dr. Alexander Wyss is Co-Head of the Real Estate Transaction Group of Baker & McKenzie’s Zurich Office.

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Shaky Supplies Almost every sector is now feeling the impact of the global economic crisis. The building materials and supply industry that provides raw materials and both semi-finished and finished products to construction companies is no exception. Sven Siepen of Roland Berger Strategy Consultants Zurich reports.

Sven Siepen On the whole, 2008 was still a good year for the Swiss building material industry. Toward the end of the year, however, new orders for housing and commercial construction projects took a dive – and further deteriorated in the first quarter of 2009. Civil engineering, where volumes are higher, has fared less badly. Yet everyone is feeling the effects of pronounced volume- and price-driven pressure on revenues and profits.

The issues facing market players are critical: How bad will the economic crisis get? How long will it last? What form will it take? What risks and opportunities does the crisis present?

Will the Federal Council’s stimulus packages help? How can companies best prepare themselves for the fallout from the crisis? What action can they take?

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The facts and figures In recent months, we have talked to many of the top people in the building material industry in an attempt to answer these questions. Fifty-nine companies from Switzerland and Germany took part in this survey. Since it is the most important target market for the Swiss building material industry, Germany was deliberately included in the study. The seniority of the respondents reflects the very keen interest that industry players clearly have in these vital issues. Nearly 80 percent of the questionnaires returned were filled in at board level. Companies of all sizes took part, with annual revenues ranging from just over CHF 1 million to CHF 30 billion. Almost half represent the housing construction segment. swissbusiness

The informed responses received paint a clear picture of the mood in the industry. At the same time, they provide a concise overview of what can be done to beat the crisis.

The downturn According to Euroconstruct, the industry expanded at a rate of nearly 3 percent per year between 2000 and 2008 – slightly faster than Switzerland’s GDP. Since then, however, almost two-thirds of respondents are experiencing the negative effects of the crisis. Nor has the crisis bottomed out: the worst is expected to come in the second half of 2009 and in 2010. The vast majority of respondents expect the crisis to last two years, although almost a third anticipate three or more lean years.

Interestingly, company size seems to have little bearing on respondents’ conclusions. Companies involved in the renova-

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tion business generally tend to expect a more short-lived crisis than their counterparts in the new building segment. Broadly speaking, Switzerland is more optimistic than Germany. Most Swiss respondents expect the crisis to be over in two years; and no respondent from here believes it will last more than three years. On the other hand, almost no one in Switzerland sees an end to the crisis within a year. Almost all study participants predict declining revenues in 2009 and 2010, due more to lower volumes than lower prices. The trend in costs will not be sufficient to make up for the drop in revenues. Fifty-eight percent of respondents therefore anticipate falling profits too.

A small group also expects an increase in receivable days, financing costs and costs in general. They believe that this in turn could make it more difficult to obtain credit and lead to liquidity problems.

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Unstimulating stimulus The majority of respondents believe they will benefit from the government’s economic stimulus packages, pointing to the expectation of general renovation and road building projects to substantiate this view. Large companies, rather than smaller ones with a narrower focus, expect to reap the greatest benefits.

Housing construction suppliers anticipate fewer opportunities than suppliers to the civil engineering sector. Swiss companies reckon that the effects will be felt later than in Germany. (The Swiss stimulus packages were decided on a little after those in Germany.) At the same time, half of the participants believe the impact will be only moderate. The main criticism leveled at the packages is that the positive stimulus will be short-lived.

If this is true, respondents argue, the order intake will slump once again as soon as the government support programs expire. In other words, the fact that the packages are not sustainable will simply postpone the crisis. Moreover, respondents expect delays in calls for tender and the award of projects as construction officials become buried in work. A further criticism is that only certain construction segments will be favored, while housing and new construction will miss out.

Slimming

Sven Siepen, who spearheaded the study at Roland Berger Strategy Consultants Zurich, sees clear confirmation of the study findings: “The sting of the economic crisis was felt earlier in Germany, and German stimulus programs were ratified earlier too. The same market developments are now affecting Switzerland after a slight time lag.” The Principal of the Engineered Products/ High Tech Competence Center, which also serves the building material industry, further notes that “The crisis in Switzerland also gives companies the chance to emerge stronger than they were before. To do so, they must quickly shed the excess pounds they put on during the years of plenty. However, they must do this without losing their ability to pursue the anti-cyclical market development that can help them increase their share of an otherwise saturated market.”

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The participants see insolvencies as the biggest threat to small companies, followed by market consolidation, especially in housing and large customer project development. Swiss respondents in particular also see the danger that foreign groups will penetrate the market, taking advantage of the open door offered by a generally flat market valuation. On the other hand, they see the chance to streamline their own organizations, increase their market share and acquire other companies as valuable opportunities. Switzerland takes a rather more optimistic view of the available opportunities than its northern neighbor.

Fighting back The companies surveyed are adopting a raft of measures to combat the crisis. Most focus on cutting costs, shoring up their finances and optimizing working capital. Actions to reduce costs concentrate primarily on optimizing other operating expenses that have no direct and painful impact on operations, and that can thus be implemented quickly and without difficulty. They include reducing travel expenses, insurance costs, the number of management layers, training courses, marketing activities, rents, consulting fees, IT costs and internal services such as finance, human resources and internal auditing. Screening efficiency in all areas and adjusting processes accordingly is a further key lever. In production and administrative functions, headcounts are being adjusted in line with the needs of the market. Little or no reduction in sales forces is planned.

Companies are clearly reluctant to jeopardize their future market development. Swiss and German companies alike have recognized the increasing gravity of the situation. Most have therefore set two top management priorities: overcoming the crisis and sticking to existing strategies.

For further information or to request a copy of the study, please contact: Sven Siepen at Roland Berger Strategy Consultants Zurich: sven_siepen@ch.rolandberger.com swissbusiness

Projects in Switzerland Switzerland boasts various outstanding large-scale real estate development projects.

Some of the most interesting are presented here.

DELTA – administrative building, Crissier Construction of a high-quality administrative building is planned on the site of an old workshop with a warehouse for construction equipment. The new building is required to meet current standards in the areas of service provision, sustainable development and energy efficiency. The commercial building at a prime location, which includes restaurants, complies with the MINERGIEECO standard and is carbon-neutral. As general contractor, Implenia Real Estate is responsible for project development, leasing and construction.

Short summary: total area: 15 000 m2, ground floor/5 levels/attic, structure

Königareal central housing development, Arbon In October 2007, Implenia Development Ltd. acquired a property in the center of Arbon for construction of the Königareal housing development in accordance with the MINERGIE-ECO standard .In addition to other future tenants, Migros signed a letter of intent to rent some of the 4 800 m2 retail space on the ground floor as an anchor tenant. Several other future tenants also signed letters of intent to rent parts of the 3 200 m2 office and service space on the first and second levels. Attractive city apartments will be constructed on an area of more than 4 000 m2 and a total of 279 parking spots will be available.The complex will be sold in its entirety to an institutional investor.

Volta West and Volta Zentrum, Basel Downtown Basel is changing – by moving the Northern bypass road largely underground, through traffic as well as city traffic and traffic coming into or out of the city have been largely relocated.

This was the prerequisite that enabled the city development office to relieve the Äusseres St. Johann quarter from traffic and to introduce long-term enhancements to the residential neighborhood. The projected reactivation of the St. Johann train station should help the new city train station to become the hub of public transportation.

Volta West – short summary: construction volume: approx. 40 million Swiss Franc; architects: Itten + Brechbühl AG, Basel, Degelo Architekten, Basel; occupancy: 128 rental apartments, 1 400 m2 of commercial space and 122 parking spots; building volume: 73 200 m3.

Volta Zentrum – short summary: construction volume: approx. 50 million Swiss Franc; architects: Buchner Bründler AG, Basel; occupancy: 74 rental

Zurich, the Home of FIFA For us it is of immense significance that we were given the opportunity to build the headquarters in Switzerland for the most important sports organization in the world and for its current 208 member clubs. Around 300 employees work in this high-quality environment. The global importance of the organization and the sporting spirit of football / soccer are beautifully expressed in the architecture designed by Tilla Theus. She placed the construction like a luminous sculpture for the world of football / soccer onto a playing field on the Zurichberg. With this building of such strong character, Zurich has been given yet another imposing landmark. The high-quality materialization, its complex logistics and the technology for this zero-energy building made it a truly unique challenge.

Builder: International Federation of Football Associations FIFA , Zurich Total contractor: HRS Real Estate Ltd. Architects: Tilla Theus und Partner AG, Zurich Project: Office and administration building Key Facts: Volume: 170,000 m3; area: 11,400 m2; parking: 240 spaces Description: Administration building for 300 workplaces, conference centre and auditorium with 200 seats, areas for transport services, storage and archive. Outdoor area: pitch (international dimension), a belowground locker room building consisting of four team locker rooms, conference rooms etc.

Construction period: June 2004 to April 2006

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Prime Tower, Zurich The 126-meter high Prime Tower – one of the tallest commercial buildings in Switzerland – should emerge as a future landmark of Zurich by the year 2011. The structure combines spectacular architecture with the greatest flexibility of utilization, offering rental floor space spanning more than 40,000 square meters for roughly 1,600 to 2,000 employees. The 36 stories, designed especially to meet the needs of larger services companies, each comprise 1,100 to 1,200 square meters of rentable floor space. With the annex buildings Cubus and Diagonal as well as the commercial building Platform the Prime Tower represents an overall real estate complex incorporating personnel restaurant, lifestyle lounge, gourmet shop as well as studios, retail floor space and event halls. The total investment volume for the four buildings amounts to around CHF 355 million, with a project realization period of January 2008 to May 2011.

Investor: Swiss Prime Site AG, Froburgstrasse 15, CH-4601 Olten, www.primetower.ch

Platform, Zurich Platform is a seven-story commercial building projected for location on a property site spanning roughly 6,600 square meters along the railroad tracks next to the railway station Hardbrücke, Zurich, which represents a noticeable horizontal counterpart to Prime Tower. The planned new structure will be situated on a triangular property site. The centerpiece of the building features a spacious atrium, forming an entrance hall illuminated from above. Next to the entry way, which incorporates the reception area, cloakroom and waiting zone, the ground floor is designed to include further areas for public use, such as a personnel restaurant, cafeteria and auditorium as well as logistics zone with delivery area. A public restaurant is planned there as well. Platform is part of the integrated complex which includes the Prime Tower plus the two annex buildings Cubus and Diagonal. The total investment volume of the four buildings amounts to around CHF 355 million, with a planned project realization period of January 2009 to May 2011.

Investor: Swiss Prime Site AG, Froburgstrasse 15, CH-4601 Olten, www.primetower.ch

PostFinance-Arena, Berne The PostFinance-Arena ranks as one of Europe’s largest event halls, with its seating and standing capacity for more than 17,000 people. Thanks to its architectural design, the PostFinance-Arena is able to hold a variety of events. With a view toward the Ice Hockey World Championship 2009, the stadium has been totally renovated and expanded. Besides the existing structures, by end of August 2009 the new arena complex comprises a building containing office and retail floor space of roughly 7,100 square meters, a training hall, a new outdoor field with dressing rooms as well as a parking garage. The investment volume amounts to approximately CHF 100 million.

Investor: Swiss Prime Site AG, Froburgstrasse 15, CH-4601 Olten, www.swiss-prime-site.ch

Andreaspark H60/G2, Zurich www.steiner.ch Gross floor area: 61,880 sqm Type of use: Office and administration buildings Status: A Legally valid construction permit has been received Architect: Theo Hotz AG, Zurich This project is situated in the emerging suburb of Leutschenbach in Zurich Oerlikon and is part of the Andreas Park complex. The Zurich airport and the city itself are 12 respectively 15 minutes away by car. This concept is for the realisation of an attractive and modern office building.

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SüdPark, Basel

www.suedpark.ch

An extraordinary building block with an exciting façade is being built on the site of Basel’s railway station. The ground floor will host a Coop supermarket in an area measuring around 2,200 sq m (23,680 sq ft). Approximately 8,000 sq m (86,111 sq ft) of service and office space will be used by the new trade centre of Basel Cantonal Bank. The entire residential part of the building will become SÜDPARK sheltered housing; around 100 one to three-room flats designed especially for the elderly, established by the Atlas Foundation.

Builder: Schweizerische Bundesbahnen, Berne Architect: Herzog & De Meuron, Basle General contractor: Bauengineering.com AG, Basle

Restoration and Extension of the University of St. Gallen The buildings of the University of St. Gallen have been hopelessly overcrowded for many years.

The project “Restoration and Extension of the University of St. Gallen” involves both the adaptation of the existing building to today’s needs and the construction of necessary extensions. The valuable character of the premises will be duly protected. Voters have approved a budget of CHF 83 million for the construction of a new sports hall and the extension, restoration and reorganisation of the main building. The third stage and thus the five-year construction period for the overall project will be completed in April 2011.

Builder: Baudepartement des Kanton St. Gallen Architekt: ARGE architekten:rlc ag / Bauengineering.com AG, St. Gallen

“Zwicky Areal” Housing Development, Wallisellen The special properties of the Zwicky site – its industrial past on the banks of the River Glatt – are to be conserved as an unmistakable “genius loci” and reinterpreted in a modern vein. The most important historic buildings will be retained and play a central role in the future development.

Around 16,700 sq m (179,757 sq ft) of residential floor space (169 housing units with 1½ - 5½ rooms) and 1,320 sq m (14,208 sq ft) of commercial floor space will be built in stage C. The builder is the Swisscanto Investment Foundation. The project was developed by Swissbuilding Concept AG. Builder: Swisscanto Investment Foundation Site: Zwickystrasse 2 – 36, Wallisellen General contractor: Bauengineering.com AG, Zurich

“arrivada” Housing Development, Chur

www.arrivada.ch

“arrivada” is located in front of a majestic mountain panorama and next to the railway, just two minutes walking distance from Chur railway station. The project provides for the construction of 136 residential units, including 29 freehold flats, in an area measuring around 14,250 sq m (153,386 sq ft). The five building blocks have a volume of upwards of 90,000 cu m (3,178,320 cu ft).

Builder – rental flats: Migros Pensionskasse MPK, Zurich Builder – freehold flats: Baugesellschaft BG Bahnareal E4 and E5 c/o Zindel AG, Chur Site: Gürtelstrasse 56-86, Chur General contractor: Bauengineering.com AG, Chur

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Neuchâtel, Football Stadium La Maladière

www.hrs.ch

his combination of sports, shopping and recreation space was developed by HRS and realized in the form of a Public Private Partnership Builder: City of Neuchâtel / Swisscanto Immobilien Management AG, Zurich / Publica PensionTotal contractor: skasse des Bundes, Berne / Coop Immobilien AG / HRS Investment AG Architects: HRS Real Estate Ltd. Project: Geninasca-Delefortrie SA, Neuchâtel Key Facts: Football stadium / shopping centre Volume: 450,000 m3; stadium seats: 12,000; sales area 28,000 m2; parking: 930 spaces Description: A football stadium, a shopping centre with 60 stores, a parking area as well as a fire department barracks and six multifunctional sport halls give the superstructure the characteristics of a small, self-sufficient city. This project was developed and realised by HRS in PPP. Construction period: August 2004 to Spring 2007

Basle, Stücki Shopping Centre

www.hrs.ch

his combination of sports, shopping and recreation space was developed by HRS and realized in the form of a Public Private Partnership Builder: Tivona Eta AG, Basle Total contractor: HRS Real Estate Ltd. Architects: Diener & Diener Architects AG, Basle Project: Shopping center, incl. a hotel Key Facts: Cubic content: 563,000 m3; Selling space: 32,000 m2 Description: New construction of a shopping center, including a hotel with 150 rooms and an office building.

120 shops, restaurants and service providers form an ideal mix. The shopping center will also have a parking garage of around 820 parking spaces Construction period: August 2007 – September 2009

Brugg-Windisch, FH Markthalle

www.hrs.ch

A Public Private Partnership project with the Canton of Aargau and the local Community of Brugg.

Builder: Total contractor: Architects: Project: Key Facts: Description:

Construction period:

HRS Real Estate Ltd. HRS Real Estate Ltd. Büro B Architekten und Planer AG, Berne Multifunctional building Volume: 244,000 m3; area: 60,000 m2 The Canton of Aargau leases the space needed by the North-West Switzerland University of Applied Sciences (FHNW). The City of Brugg is involved in planning of a city hall. HRS organised an architectural competition for this development and is realising this building together with Publica as client, investor and total services contractor. With the campus project, the Canton of Aargau is making a substantial contribution to the strengthening of the FHNW. In the future, the Technical University and the Aargau locations of the Pedagogical University as well as the University for Economy will be concentrated at the site.

2009 to 2011

Lake Geneva Park, Morges www.steiner.ch Gross floor area: 47,040 sqm Type of use: Hotel, office, retail and residential Status: The construction permit has been applied for Architect: Pfister Schiess Tropeano Architekten Superb situation next to the railway station in Schaffhausen perfectly connected to the public and privat transport networks. It has urban apartments as well as retail and service areas prominently positioned. The office building has flexible layout options.

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Oertig Areal, Wright-House, Opfikon Within the scope of the Glattpark project, the largest settlement area in Switzerland, construction of a new city quarter is planned on a site of 670 000 m2, providing residential space and working space for about 14 000 persons. Approximately 20% of the project has already been completed.

Implenia Development Ltd. has acquired a prime location property in order to build a residential / commercial building. A fitness center and a restaurant are planned on the ground floor and small apartments or apartments for seniors on the first floor. Implenia is still seeking an investor.

Key figures: investment costs: 66.0 million Swiss Franc; architect: Fischer Architekten Zurich; 2 800 m2 of retail space, 114 apartments, 115 parking spots; public transportation grade A, building volume: 71 700 m2

www.steiner.ch Brunnmatt A1 + A2, Cham Gross floor area: 10,580 sqm Type of use: Hotel, office and retail Status: Application for hotel usage submitted Architect: Webereinhardt AG Brunnmatt, with its attractive and modern architecture, is very conveniently situated between the central business districts of Zurich and Lucerne and only 5 km’s from the city of Zug. It is well connected to the public transport system and road network.

Urbahn, Schaffhausen www.steiner.ch Gross floor area: 22,330 sqm Type of use: Office and administration buildings Status: A Legally valid construction permit has been received Architect: CCHE Architecture SA A top quality, modern concept near Lausanne, only 20 minutes from Geneva by car. Situated in the immediate vicinity of many multinational companies.

Baar, Central Hospital and Care Centre in the Canton of Zug

www.hrs.ch

HRS was responsible for the largest construction project ever undertaken in the Canton of Zug. After three years of construction work, the facilities were handed over right on schedule.

Builder: Total contractor: Architects: Project: Site: Key Facts: Description:

Construction period:

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Canton of Zug represented by the Department of Building Construction of the Canton Zug, foundation of Central Hospital Baar and Canton of Zug Consortium HRS Real Estate Ltd. / p-4 AG, Zug Burckhardt + Partner AG, Zurich Central Hospital and Care Centre Direct connection to the road network of Baar Central hospital: 162,000 m3; Care Centre: 32,574 m3; parking: 348 spaces The Cantonal Hospital includes an emergency ward, six operating rooms, a protected operating site, a health care centre, doctors› offices, an obstetrics clinic and patient rooms with 184 beds.

The new Care Centre is in the immediate vicinity of the Central Hospital and ensures stationary care. In addition to meticulous planning by all participants, the technically demanding building required substantial improvisational skills.

Hospital: June 2005 to August 2008 / car park: 2006

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Sportarena, Lucerne Building area: Type of use: Investment amount: Completion: Developer: General Contractor: Contact:

www.swissporarena.ch 40’000 sqm Football stadium, sports building with office and retail areas, two high rise buildings with apartments CHF 260 mio.

Summer 2012 Halter/Eberli consortium Marques AG, Lucerne and Iwan Bühler, Lucerne Halter/Eberli consortium www.halter-entwicklungen.ch

Limmatfeld, Dietikon/Zurich www.limmatfeld.ch Building area: 87’000 sqm Type of use: A new little city for 3000 habitants and 1000 workplaces. Apartments, retail and business areas Investment amount: CHF 600 mio.

Completion: several phases from 2009 to 2016 Developer: Halter Entwicklungen Architectural master plan: Prof. Hans Kollhoff, Berlin Architecture: Baumschlager Eberle, Vaduz; Gigon Guyer, Zürich; Prof. Hans Kollhoff, Berlin; Prof.

Adolf Krischanitz, Vienna; and otherswww.halter-entwicklungen.ch General Contractor: Halter Generalunternehmung, Caretta Weidmann and others Contact: www.halter-entwicklungen.ch

Bahnhofsquartier Schlieren Building area: 8’300 sqm Type of use: residential, office and retail center Investment amount: CHF 80 mio.

Completion: Summer 2011 Developer: Halter Entwicklungen Architecture: weberbrunner architekten, Zürich General Contractor: Bauengineering.com AG Contact: www.halter-entwicklungen.ch

Hard Turm Park, Zurich www.hardturmpark.ch Type of use: residential, retail, business, hotel Investment amount: CHF 640 mio Completion: three phases from 2009 to 2015 Developer: Hardturm Immobilien AG/Halter Entwicklungen consortium Architecture: ADP Architekten AG Zürich; Patrick Gmür Architekten AG, Zürich General Contractor: Halter Generalunternehmung Contact: www.halter-entwicklungen.ch

Hard Turm Park, Zurich www.hardturmpark.ch Type of use: residential, retail, business, hotel Investment amount: CHF 640 mio Completion: three phases from 2009 to 2015 Developer: Hardturm Immobilien AG/Halter Entwicklungen consortium Architecture: ADP Architekten AG Zürich; Patrick Gmür Architekten AG, Zürich General Contractor: Halter Generalunternehmung Contact: www.halter-entwicklungen.ch

amRietpark, Schlieren/Zurich www.amrietpark.ch Building area: 44’000 sqm Type of use: residential, retail, business, hotel and park Investment amount: CHF 400 mio.

Completion: three phases from 2009 to 2015 Developer: Halter Entwicklungen Architecture: Novaron GmbH, Galli & Rudolf Architekten AG, SLIK Architekten GmbH, EM2N Architekten AG General Contractor: Halter Generalunternehmung Contact: www.halter-entwicklungen.ch

Limmatfeld, Dietikon/Zurich www.limmatfeld.ch Building area: 87’000 sqm Type of use: A new little city for 3000 habitants and 1000 workplaces. Apartments, retail and business areas Investment amount: CHF 600 mio.

Completion: several phases from 2009 to 2016 Developer: Halter Entwicklungen Architectural master plan: Prof. Hans Kollhoff, Berlin Architecture: Baumschlager Eberle, Vaduz; Gigon Guyer, Zürich; Prof. Hans Kollhoff, Berlin; Prof.

Adolf Krischanitz, Vienna; and otherswww.halter-entwicklungen.ch General Contractor: Halter Generalunternehmung, Caretta Weidmann and others Contact: www.halter-entwicklungen.ch

Bahnhofsquartier Schlieren Building area: 8’300 sqm Type of use: residential, office and retail center Investment amount: CHF 80 mio.

Completion: Summer 2011 Developer: Halter Entwicklungen Architecture: weberbrunner architekten, Zürich General Contractor: Bauengineering.com AG Contact: www.halter-entwicklungen.ch

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Green Was Never So Blue The Passat TSI EcoFuel is Volkswagen’s latest addition to a rapidly growing family of vehicles which are all grouped under a new umbrella brand: BlueMotionTechnologies.

Good Fences Make Good Neighbors Of all the legal cases involving real estate law, obstruction of view is a classic. The Federal Court of Justice had to deal with one of the many variations of this scenario yet again. Prof. Dr. Andreas Furrer of MME Lawers in Zurich sheds some light on the current proceedings.

Andreas Furrer What a nightmare for Z: he lives on a hill near Lake Zug with a marvelous view of the lake below and the hilly landscape and the peaks of the Swiss Alps in the background. Then, X, a new neighbor, arrives on the scene. X is unhappy that the view from the BBQ-area a few hundred meters above his villa allows picnickers to partially see into his garden. In order to protect his privacy, X plants a thicket of high thuja-trees. However, Z is not amused. The thuja thicket completely obstructs Z’s view of the lake, leaving him nothing but a dark, dense green thicket to look at. Z feels cramped and believes the quality of life in the villa is considerably impaired. Because no amicable settlement was possible, Z initiated litigations against X based on Art 679 and 684 Swiss Civil Code (SCC) on all three levels of Swiss jurisdiction (Federal Court of Justice, SA_415/2008 decision of 12 March 2009); all three courts working on the case estimated the value of the legal dispute to be a maximum of CHF 200,000.

One man’s ceiling…

Litigation in general is agonizing; between neighbors, it is even worse. Since 2000, there have been 269 reported cases relating

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to neighborhood affairs; of which 40 have been reported since 2008 (some of them dealing with the noise of Zurich Kloten’s air activity). One could imagine that Z carefully considered the purchase of his villa and the beauty of its surroundings before presumably paying several million Swiss francs for the property. Further, one could imagine that Z prudently examined all tax issues associated with the property investment and checked to ensure zoning laws precluded further development. He may even have considered the background of the families in the neighborhood. In short, Z believed he had found his dream home. Instead, he is now immersed in expensive, irksome litigation. … is another man’s floor However, let’s consider this scenario from the other perspective: X might have bought his villa not only for its magnificent view but also to secure his privacy. He is uncomfortable by the picnickers who stare into his garden from the BBQ-area above his property. Prior to planting the thujas, he carefully checked the relevant cantonal law to ensure the thicket complied with all public ordinances and other legal requirements. Z may refer

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to Art 688 SCC: “The cantons are authorized to set minimum separation distances for plants depending on the type of land and plants involved or to oblige the landowner to permit the overhanging branches or encroaching roots of fruit trees and to regulate or annul his right to take the fruit from such branches.” Based on these considerations, Z does not believe he has an obligation to come to an amicable settlement with Z. The conglomerate of Swiss Federal and cantonal law The Federal law sets forth the rights and duties of neighbors primarily in Art 684 pp and Art 679 SCC. These rules are based on the principles of mutual consideration and respect of the reciprocal interests. In addition to the general rule in Art 684 (see description in the box below), there are further rules that specify (a) the conditions for excavation or construction work, (b) the minimum separation distances (set by cantonal law), (c) various restrictions on plants (Federal and cantonal rules), (d) conditions related to water flow and water conduits (draining pipes), (e) the requirements for construction of pipes and installation of cables under adjacent (i.e., neighboring) property, and (f) the rights of access to land (right of way by Federal and cantonal laws). Most cantonal laws specifically set forth detailed rules relating to permissible plant species and dimensions as well as the minimum distances between plants and procedures and time limits for maintenance of such.

However, all these rules deal exclusively with positive intrusions and/or positive rights that neighbors may assert against each other. Many legal commentators point out that a major shortfall of these rules is that they fail to include legal protections for negative intrusions (such as an obstructed view of a lake). The long and controversial academic discussion was finally terminated by a decision of the Federal Court of Justice in 2000, in which the Court ruled that such negative intrusions fall into the scope of Art 684 SCC (see FCJ 126 III 452, Cons. 2).

The federal and cantonal law discussed above raises the question of whether plants that conform to the cantonal law may still conflict with the federal law even if there is an explicit cantonal competence to determine such law. In the ruling mentioned above, the Federal Court of Justice decided that such plants must conform to both cantonal and federal law. In most cases, cantonal laws are much stricter than the more general federal ones so that Z in most cases can rely on the cantonal law.

Undoing the knot Based on these considerations, in the case mentioned above, the courts involved had to balance the interests of both parties, Z’s view of Lake Zug against X’s desire for privacy and all associated financial interests. In most cases, such a balance of interests is already guaranteed by the cantonal laws. The Court referred to the principle of proportionality and made clear that there are less drastic ways of securing Z’s desire for privacy. Therefore, it upheld the decision of the Higher Court of Zug that required X to limit the thujatree thicket to a maximum height of 1.5 meters.

The broad discretion of the courts in applying Arts 684 and 679 SCC makes it difficult to assess the mutual rights and duties of neighbors. Even clear cantonal law does not ensure legal certainty since the general federal law overrules the relevant cantonal law. This leads to a very difficult situation: both neighbors can assert good arguments from their perspective. Furthermore, experience usually shows that among neighbors, there are other latent problems that emerge from discussions about trees and fences, the emission of smoke or the emitting of noise. Most neighbors are inclined to resolve such conflicts through discussions based on common sense, good faith and even humor. However, these latent problems can seriously impede an amicable settlement.

For such difficult cases, the rules outlined above may also lead to a solution based on common sense and good faith (but rarely will the parties find humor in these rules). The role of the lawyers involved in the dispute should still be to find, based on these rules, an amicable settlement in the interest of their clients. However, if such an amicable settlement cannot be reached, lawyers and courts may find a balance between the interests of the parties involved, as illustrated by the case of Z and X. Such an approach ultimately leads to the (unanswered) question of whether the two neighbors involved in the litigation have also found a way to settle all other disputes that are in fact hiding behind the actual question the court ruled on.

Prof. Dr. Andreas Furrer is partner at the law firm MME Partners in Zurich and Zug and holds a chair for Private Law, Private International Law, Comparative Law, and European Business Law at the University of Lucerne. You may contact the author by andreas.furrer@mmepartners.ch

The law Art 684 SCCL: “1In exercising his ownership rights, including in particular the right to run a business on his land, every landowner is obliged to refrain from any excessive interference with the neighboring properties.

2 Especially prohibited are all injurious emissions of smoke, soot, noxious vapors, noise or vibrations that are not justified by the location Art 649 SCC: “Where a person incurs or is at risk of danger because a landowner exceeds his ownership rights, he can sue for abatement of the damage or prevention of any threatened damage and for damages.”

Translation: Stephen V. Berti/Craig Hilton; Handkommentar zum Schweizer Privatrecht, Zurich, 2007

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No Objections If neighbors agree among themselves to raise no objections to changes in zoning plans and building permits, the waiver of the objection may not be done in the form of an easement. Nor is it possible to record the waiver in the Land Register.

Christopher Tillman The Swiss Federal Court had to rule on a contractual clause that stipulated the waiver of objections, appeals and complaints in public construction and planning law. The parties signed a contract that contained the following clause: “The respective owners of parcel No. 1 undertake to raise no claims with any public authority, against this zoning and to file no objections, appeals and complaints and no petitions. Furthermore, the respective owners of parcel No. 1 undertake not to raise any objections to the construction project of the respective owners of parcel No. 2 on this parcel.” This waiving of objections was conceived as an easement and was to be reported to the registry of deeds for permanent entry. The subject of the Federal Court’s ruling was the legal issue as to whether the waiver of an objection against a zoning change or a construction project on the neighbor’s parcel could be turned into the subject of an easement. As for the possibilities of objecting to a zoning change, a waiver, according to the Federal Court, may not be the object of an easement under civil law, for the plain reason that the zoning change must be decreed in a public planning procedure that the parties, as landowners, may not have access to.

Public law steps in The Federal Court determined that the possibilities of objecting to a building permit application as well as to subsequent zoning plans are regulated by public law. The minimal guidelines of Switzerland’s Land-use and Planning Law (Article 22 and 23, section 2) must be considered: Cantonal law must provide at least one appeal against administrative orders and zoning plans that rest upon the Land-use and Planning Law and its implementation provisions. These federal legal requirements apply in particular to all building permit approval procedures relevant to Land-use and for all zoning plans.

Even if the objection to the construction is not by “popular complaint,” as it were, it is not only the owners of the neigh58

boring parcels who are warranted to object or file a complaint.

Rather, depending on the actual situation, more distant neighbors can raise objections, or tenants and lessees as well as environmental organizations (Article 55 Environmental Protection Law) and the community (official objection). The owner of the neighboring parcel may, as a rule, legitimately raise an objection against the construction project. Nevertheless, the legitimation is not drawn from ownership rights. Rather, this is determined by federal and cantonal law. Property rights to the parcel are only relevant insofar as the owner is regularly affected by a construction project on the neighboring parcel according to the public definition of legitimation and has an interest in objecting that is worthy of protection.

No easement Hence, the permission to raise an objection does not come from property law, but is an instrument of procedural law. And so, according to the ruling of the Federal Court, agreeing to a waiver of objection “cannot be reified in the legal mantle of an easement, because the object of an easement can only be the acquiescence of an intervention, which the affected owner can defend against with a property suit (positive easement), or the omission of the use of the property, which represents a proprietor’s authority to which he would be entitled (negative easement).” In the actual ruling, therefore, the administrator of the register of deeds, who is in charge of examining whether the filed law is suitable by its nature to be recorded in the registry, rightly rejected recording of the waiver of objection (Federal Court ruling BGE 131 III 414 ff.).

Christopher Tillman LL.M. (Exeter UK) is the responsible partner at Lutz Rechtsanwälte in Zurich (lawyerlutz.ch) for construction, engineering, real estate (including the law of restrictions on real estate acquisitions by foreigners) and landlord and tenant law issues. christopher.tillman@lawyerlutz.ch swissbusiness

Essential Reads The book review is brought to you by Bergli Books in Basel – a fine shop specializing in books in English. www.bergli.ch

Dead Aid – why aid is not working and how there is another way for Africa

Free – the future of a radical price

Waste – uncovering the global food scandal

by Dambisa Moyo, global economist and strategist at Goldman Sachs with a Foreword by Niall Ferguson

by Chris Anderson, editor-in-chief of Wired Magazine

by Tristram Stuart, a writer and prominent critic of the food industry

Poverty persists in spite of the millions our society is contributing to aid in Africa. And now this glamorous and smart Harvard and Oxford economist who comes from Zambia is brazenly claiming Africans would be better off if we cut aid to Africa! Her argument is based on an alternative. She wants governments to find money for development through international and domestic financial markets.

To achieve sustainable long-term growth there needs to be a new approach that enables Africans to assume control over their economic and political destiny. She shows how even the poorest nations can prosper with improved access to capital and to markets. Niall Ferguson has written the foreword admiring her expertise and conviction.

The “radical price” this guru of the information age is talking about is zero. In his interesting “10 Rules of Abundance Thinking” he claims that “If it’s digital, sooner or later it’s going to be free.“ Another rule: “You can make money from Free.” Having an abundant choice of free options may be making the world a better place and benefit consumers but it is also killing companies. This book brings up some realities that are confusing economists. How is it possible that so many people now will do all sorts of things for free that other people regard as work? It also illustrates the dangers implicit in this radical system and explains how some of these businesses work. Where this trend is leading us is shown by his listing of 50 business models built on the concept of free.

We all know we should waste less food but it is difficult to avoid when we have so much of it around us. And wastage has become an integral part of the manufacturing process. Who dares to serve food that is beyond the “eat-by” date?

One reviewer of this book claims that the author’s zeal for foraging seems to have threatened his sanity as he collects thrown-out goodies from organic food shops. Reading this book and some of its findings (60 percent of all processed salad ends up in a waste bin), will make you want to check on what is being kept at the back of your fridge. You will think twice at the shop before grabbing that perfect fruit and round potato. The author takes us from Yorkshire to China, from Pakistan to Japan and introduces us to some inspiring ways to make the most of what we have.

978-1-84614-0006-8

978-1-9052-1148-7

978-0-141-03634-2

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The End of Food

Animal Spirits – how human psychology drives the economy, and why it matters for global capitalism

Fool’s Gold – how unrestrained greed corrupted a dream, shattered global markets and unleashed a catastrophe

by Paul Roberts, author of The End of Oil and lecturer on business and environmental issues.

by George A. Akerlof, winner of the Nobel Prize in Economics in 2001 and Robert J. Shiller, author and professor of Economics at Yale University

by Gillian Tett, social anthropologist and British Business Journalist of the Year in 2008

Thanks to relentless cost-cutting in our modern food economy, cheap food is being produced to meet our uncurbed appetites. But cheapness is not so good for our bodies or for the environment in which it is produced. To document the economic realities behind modern food, Paul Roberts travels the globe, visits pig farms, chicken ranches and giant food processing factories. In vivid narrative, he considers the critical concerns of both producers and consumers in a global context. When it comes to options, half the world has none, half too many. And for those of us who have too many, the nutritional value of the food we eat is declining. Reading this book will make you have a closer look at the food you buy and observe on your plate and to yearn for what “good food” can be.

From blind faith in ever-rising housing prices to plummeting confidence in capital markets, “animal spirits” are driving financial events worldwide. This book aims to challenge the economic wisdom that got us into the currant crisis, and puts forward a fresh vision that can transform economics and restore prosperity. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government.

Simply allowing markets to work will not do it. They detail the most pervasive effects of animal spirits in contemporary economic life and set a framework of factors to show that the rules governing the operating of markets are not handed down on stone tablets but are made by human beings.

This book explores how the collapse of the financial system happened and why it was not foreseen. In the mid 1990s, at a hotel on a private Florida beach, dozens of bankers from JP Morgan gathered for what was to become a legendary off-site meeting. Besides partying, this team of individuals with a supreme sense of loyalty to each other and to the bank had a more serious purpose. They assessed the possibility of building a business around the new-fangled concepts of credit derivatives. When the team dispersed, the innovations spread far beyond their original intentions, producing perversions in the mortgage market that ultimately culminated in disaster. Part real-life thriller, part investigation and expose, this searing narrative takes you deep inside the world of complex finance.

978-0-547-08597-5

978-0-691-14233-3

978-1-4087-0167-6

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The Oily Slope On July 11, 2008, with economies around the world tanking and vacation time drawing millions in Europe and the USA to the roads, oil traded for a stunning USD 147.27 per barrel, a peak if there ever was one. By December, however, the economic crisis had pushed the price way down to a low of USD 32 per barrel in December. It has recovered substantially since and the signs seem to be pointing upward.

Michael A. P. Sager The recent rise in the price of oil has no doubt been triggered by hopes of an economic upswing. Likely, too, is the disciplining of production behavior on the part of OPEC, the cartel of twelve petroleum-exporting countries that control some 40 percent of the world’s crude oil production and three quarters of global crude oil reserves. Since October 2008, OPEC has agreed on the largest ever cutback in oil production.

Production has been reduced by 4.2 million barrels a day (a barrel being the equivalent of 159 liters). In June, the International Energy Agency (IEA) increased its forecast for global oil consumption for the first time since last year.

At 83.3 million barrels, demand is now expected to be only 2.47 million barrels lower a day than in 2008, having been revised from the previously forecast year-on-year decline of 2.56 million barrels. One of the main reasons behind this upward revision is the rising demand in China, where oil imports rose substantially in May due to the country’s economic stimulus programs. Indeed, the economic boom enjoyed by China in the past few years was the main reason behind the oil price explosion in the first place. In 1990, China was still exporting five times more oil than it imported. But by 1993, it was already importing more oil than it exported. OPEC estimates that approximately 23 percent of the increase in demand for oil over the next 30 years will stem from China.

Dwindling supplies Based on the current demand level, the IEA believes that a further four oil-producing countries the size of Saudi Arabia would be needed to offset the existing oilfields drying up in the next ten years. According to a statement made by the management of Total S.A., oil prices of at least USD 80

to 100 a barrel would be required in order for the extraction of oil from the large new oilfields found in Brazil and China and from the oil sand reserves in Canada to be profitable. In its June report, the IEA also warned that investment cutbacks could result in new record oil price highs as soon as the economy regains momentum. Planned investments amounting to USD 170 billion have been shelved around the world since 2008, according to the IEA. This corresponds to more than 35 percent of global expenditure for exploration and mining in 2008. The IEA expects there will be a shortfall of 12.5 million barrels a day by 2015.

Daily demand is currently pegged at approximately 84 million barrels a day.

Taking these facts into account, investing in oil is an attractive long-term option for investors with the right risk profile. However, there is currently the risk of “contango” losses on oil index-based securities as these are always based on futures. Sellers must regularly sell matured futures in order to buy contracts with longer maturities. If the prices of the future contracts are higher than those of the matured futures (as is currently the case), they are in contango and will incur losses. Thus, investment in oil stock, i.e. in companies in this sector, is a wise alternative as these have as of yet not experienced the same price increase: while the price of oil has increased by more than 120 percent since its low in December 2008 (WTI currently at USD 72), the DJ STOXX Oil & Gas index has “only” risen by a good 40 percent since bottoming out at the beginning of March 2009.

Michael A. P. Sager is Managing Director, Berenberg Bank (Schweiz) AG

Source: Thomsen/Reuters

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Art Times

Pieter Brueghel the Younger (1564–1637/8), A Flemish Village in Winter with the Massacre of the Innocents, oil on oak panel, 122 x 170 cm. Sold at Sotheby’s London in July 8, 2009 for GBP 4,633,250 The scene of the Massacre of the Innocents, referring to the text of Matthew II:6, is set in a snowy Netherlands landscape. Probably there is also a political content in the painting, since Spanish Netherlands was confronted in the 16th century with the heretical Protestants movements, which it violently suppressed.

One of the truisms of tough economic conditions is that people tend to look for known havens. Who could have said it better than Charles Dickens’ famous Mr. Gradgrind: “Two and two make four, and nothing more.” And that in a book called Hard Times. In the art sector these days, all eyes are also looking backward.

Only a short time ago, contemporary art with its golden calves and diamond-studded skulls was stealing the show from the Old Masters. Nowadays however, with world economy suffering, collectors and art investors once again seem to trust the well-tried values, endeavoring to avoid risks. The buying spree of successful hedge-funds managers and investment bankers, who have been delving into contemporary art, has stopped and the speculative pressure of contemporary art prices has evaporated. On the other hand the Old Master paintings have demonstrated less explosive price-trends and with a limited supply of high quality works, they once again carry the promise of secure investments.

Old values The July auctions of the two leading London auction houses, Christie’s and Sotheby’s, have reconfirmed the price stability of Old Master paintings and highlighted their attraction.

The auction proceeds of the Evening Sale 2009 at Sotheby are higher than the ones of 2006 and 2007, and this while only 48 lots came under the hammer. The great auction volume of the sale of July 2008 must be observed bearing in mind the larger number of lots (91), while the 2005 result was affected by the exorbitant price paid for one single painting (Canaletto, Ven-

ice), which fetched GBP 18.6 million (see box). The Sotheby’s auction of 2009 did not only confirm the on-going attraction of Old Masters, but also exceeded expectations, when a painting of Pieter Brueghel the Younger (1564–1636), A Flemish Village in Winter with the Massacre of the Innocents, estimated GBP 2.5–3.5 million, achieved GBP 4,633,250 (hammer price with buyer’s premium). That price record came on the hills of another peak price which had been paid for this same artist’s painting The Procession to Calvary in Sotheby’s July 2006 auction. That latter painting, originally estimated at GBP 2.5–3.5 million (same range as that of the above mentioned 2009 auctioned work) changed hands for GBP 5,160,000. Both works are based upon and influenced by compositions by his father, Pieter Brueghel the Elder, a painter regarded as one of the greatest Flemish masters of the 16th century. The high price is due to the very size and to the excellent artistic quality of these two works. Seizing the favorable moment of the revival of Old Masters, the London dealers created for the first time the Master Paintings Week, coincidental with the two prestigious auctions in the City. During that week, starting on July 4, 2009, 23 of London’s leading galleries along Bond Street and St. James put on a complementary show, celebrating Old Master paintings with the aim of welcoming in their galleries the collectors and curators who travelled from several countries to the City for the said auctions. The week was reported as successful, with plenty of visitors every day and significant volume of sales. The Master Paintings Week will be held again next year, from July 3–9.

Elsbeth Wiederkehr

Sotheby’s London: Old Master Paintings/Evening Sales July 2005–2009 All over results in GBP 2005

2006

2007

2008

2009

44,284,800

22,887,200

25,582,400

51,529,900

26,134,050

53 Lots

67 Lots

68 Lots

91 Lots

48 Lots

Canaletto: 18,600,000 64

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The Hatchet Man The role of the Chief Human Resource Officer is constantly increasing in importance but at no time has it been so thriving as it is now. In turbulent times CEOs and their executive team should have a close ally in their CHRO, says Ellie Filler, Partner and Managing Partner CHRO Practice Europe at Heidrick & Struggles.

Ellie Filler There is no time like economically trying times for leaders to ensure they have the best talent to move forward. It’s all about having top talent in place to fix the multitude of new problems that arise for organizations. Leaders need to act boldly with regard to their teams whilst at the same time ensure motivation, hope and confidence. It’s all about the people in the organization, the ability of the management team to come together and remain flexible to make good sound decisions. It’s also about knowing what needs to be acted upon and being able to motivate the larger organization to get things done. Excellence of execution, commitment and personal accountability become even more crucial. The CEO needs to be able to define the vision and direction and have his/her people make it happen. The ability to ensure that messages are heard clearly all the way around the globe with consistency and local adaptability are working in sync. Having a deep knowledge of your people, the danger spots and gaps in certain emerging skills is a key differentiator.

CEOs are the real talent managers of their organizations but they cannot do it without the help of the Chief Human Resources Officers. The role of the CHRO has evolved significantly over the last 15 years, from administrative and operational towards more of strategic part of the business helping to respond to customer needs and increase confidence from investors. Progressive CEOs are increasingly relying on their CHROs to do this whilst more traditional organizations are still relying on HR for retrenchments and other administrative work reverting to the more “traditional” ways of managing human capital.

In proactive Swiss organizations, we are seeing a trend towards proactive talent mapping – who is out there, who can help my organization survive and grow over the next three years? HR takes the role of driver and guardian of the types of people that are being attracted to the organization doing so in a very structured and planned way. We have observed a greater shift towards value delivery whilst a strong focus on upholding company values by current and future employees is a focal point. This is juxta-

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posed against more traditional HR management practices of cost cutting and strict policy monitoring, kind of like a police force.

Today’s reality in Switzerland It has been an interesting time to observe how the CHRO is supporting his/her CEO and executive management team. The support and results of organizations are variably based on several factors. Some are rooted in the sheer experience of the CHRO – operational excellence versus a real strategic partner, deep knowledge of the business realities, a person who can see what is around the next corner. The opposite is the CHRO with steady focus on policy and process, who might make it clear what is to be done, but is divorced from the actual business strategy. A number of organizations continue to be steeped in process and rules over commercial common sense.

We have spoken to the CEOs of these organizations. They are now seeking to replace people with these skills with a true business advisor and a full member of the executive team, who can, in commercial terms, make a difference to the organization particularly in these times. There has been a shift over the years in Switzerland towards CHROs who have a business background and have never worked in HR. This has proven to be successful, as they bring business know-how. What is critical, however, is that the teams that surround this individual have the HR know-how about compensation matters, all the way to individual development, attraction and retention. There has been a trend globally, but particularly in Switzerland, of having the CHRO report to the operations head rather than CEO in some organizations. This raises some interesting questions.

Back to the numbers Most CHROs are now being called on to do the “hatchet man” role. The degree of personal satisfaction for the CHRO of course decreases particularly where the CEO does not ask for advice and is not prepared to listen to what his/her CHRO is

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saying. In a number of cases the CHROs have complained to say that they feel they have really been making progress in terms of strategy and human capital alignment and now it’s all reverting back to pure numbers and much shorter term fixes. Their worry is that all the years spent creating a corporate culture reflecting the way we do things around here, is reverting to headcounts and fear-based decisions.

Some are feeling detached from the core of the business and decision-making.

Switzerland is a very diverse environment with large corporations, both Swiss and multinationals, small and medium enterprises and, finally, privately-owned organizations. All are faced with a similar economic environment, but they deal with issues in different ways. A greater division seems to have emerged between corporate headquarters and regional operations. The corporate center has realized that greater flexibility is needed at the local levels to keep business nimble. Issues in Asia, for example, differ from those in more mature markets; hiring freezes while keeping costs down can potentially hurt local regional growth and development. While most organizations have imposed hiring freezes, some organizations have preferred to go down the route of talent management and continue to be very active in ensuring that talent from the outside is continuously introduced into the organization even if not with an immediate hiring effect. CEOs and their CHROs are aware of the need to continue to build and in some instances rebuild the

brand through effective interactions with key talent outside the organization. Additionally, we have seen a greater number of “risk-based promotions” being made within organizations, giving high potential people the chance to step up and get involved sooner than anticipated in their personal development plans; this requires a thorough knowledge of your own people. Training and development budgets have been severely cut and CHROs are working with their executive teams to create avenues for on-the-job development. Smart companies are making fast decisions and giving opportunities to their own people thereby demonstrating trust and support to their key people for the future. The CEO is spending increasing amounts of time on communication with their people above and beyond the call of external media presence. It’s no longer all about motivational speeches and positive results but about giving negative messages but also hope for the future. The CHRO supports the CEO as the guardian of culture and talent.

Where this focus and close symbiotic relationship exists we are seeing a continued loyalty from their staff despite some pretty challenging circumstances, decreased monetary rewards when compared to previous years. Organizations where people are heard, where they have a sense of their CEO being solidly “in the driver’s seat,” and have a clear, honest vision of what is going on, clearly have a greater chance of pulling through these challenging economic times.

The matter with HR We asked Ellie Filler about the changing role of HR. You mention a shift towards CHROs who don’t necessarily have an HR background. What’s wrong with HR education and training today?

There are several aspects that make a great CHRO. Tertiary education is certainly critical and helps with theoretical and general knowledge base, reading financial statements and understanding how profit is derived is certainly something that HR disciplines do not always teach, however, what is more critical in developing an outstanding HR person is their level of involvement from day one in the business, how much have they been willing for example to interact and visit customers, manufacturing sites, sit on the trading floor, etc. In other words is there a culture in their organization and in their personal development that has forced them to really sink their teeth into the business. Some companies have gone to great lengths to ensure that their HR people actually work in the business and make sideways steps several times in their careers between the business and the HR functional discipline.

Are CHROs aware of this changing role?

The CHROs in Switzerland in larger and more progressive organizations are very well aware of their changing roles, they are simply being asked to do more and very quickly come to realize how far they are being stretched. In smaller organizations it appears to be inconsistent. There is sometimes a sense that some are not aware of the change in requirements and these CHROs

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are often finding excuses for their relationship change.

In the past we have also seen a shift from personal recruitment to depersonalized assessment. Not always for the better, I think. Don’t you think HR needs a paradigm shift soon?

Depersonalized recruitment and assessment only happens in situations where HR has taken and implemented a product without seeing the “service.” We are aware of many organizations that do use assessment but when it is done well it has a strong context and candidates actually come out feeling very well and even more excited at the prospect of joining that company. They see it as a challenge, but again it has to be managed well.

How should CHROs react towards their CEO when they feel their efforts are not being acknowledged?

CHROs can only try to influence their CEO and executive team through facts and create a direct business link with their proposals. Highly experienced CHROs will do so, however, as in all situations, if there is no buyer at the other end, then at some point make the decision to move on until that CEO reaches a “human capital-deeper level of awareness.” I have often heard successful CHROs comment that they are very careful about their due diligence in joining an organization, and assessing a CEO’s appetite and understanding that talent is critical to success is one of those factors.

As told to Oliver Kaiser

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Yes, Ma’am It seems as if in the recent economic crisis female top managers did a better job than their male colleagues. On average, their strategies were less risky and implied less strategy changes. As a consequence, the economic performance of women-managed firms or portfolios was more convincing than that of firms or portfolios with conventional male dominated management.

Renate Schubert and Peter Cavigelli

This, by the way, is still the most typical structure you can find all over the world. Of course, the female management success is an average phenomenon – there are hundreds of examples of excellently managed firms or portfolios with a majority of top male managers. On the other hand, there is a great number of women and men who do not conform to their gender stereotype. And there is increasing empirical evidence suggesting that a high proportion of female managers have saved companies from suffering too much loss when stock prices were dropping.

Given these facts, two questions remain. First, what are the reasons for the differences in male and female strategies? Second, why is the proportion of women in top management so low in spite of their success? This second question has been investigated for decades and several reasons have been identified, including discrimination, division of labor in families, institutional frameworks, etc. Although many studies have been conducted, little change has taken place. From a scientific point of view, this second question is no longer of specific interest although more enforcement would be needed from a political perspective, of course.

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A different approach The more interesting question however is the first one: Why do men and women behave differently with respect to the management of economic affairs? The differences are related to three key behavioral characteristics that distinguish men from women. Women are less inclined to take risks and gamble. Rather, women tend to avoid competition and look for cooperation instead of competition. Finally, women typically judge their skills in a realistic and careful, sometimes even understated way.

Men, on the other hand, are more likely to choose high-risk strategies and they love gambling, they tend to seek out competition and they tend to be over-confident. When there is a sign of a crisis, it comes as no surprise that it will intensify if individual executives believe that they know a particularly cunning way of squeezing profit out of a situation, especially if they also want to show their competitors what they can do. “Female” behavioral patterns however are better suited to study upcoming problems in a careful but pragmatic way and hence to strike at the root of the problems rather than to amplify them. Women are problem-oriented and are not focusing too much on being better than their competitors. They know about their capabili-

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ties and are looking for competent assistance if necessary. This implies that especially in times of crisis, women are much more likely to quickly develop successful counter-strategies.

Given these insights, a third question arises: Does the success of female in top managerial positions mean that the fate of an economy should rest entirely in the hands of women? Certainly not. What is an advantage during a crisis, may be a disadvantage in “normal times.” In “normal” growth periods it is important to be innovative and to take risks in order to stand out from the competition and to optimize one’s own economic position. In this regard, companies are comparatively better off with men. In growth periods the success factors are playfulness, competitiveness and excessive self-confidence – and here men clearly take the lead.

The right mix What follows is that firms being confronted with “good and bad” times would do well to work with mixed-gender teams.

Teams composed of the more innovative men and the more careful women would represent a robust strategy for a company. Yet, given the low female participation ratios this would imply that we should have significantly more women on all levels of organizations and especially in the supervisory boards and executive boards. Increasing women’s participation ratios appears as a promising way to improve the overall success of firm or portfolio management.

However, since “male” and “female” behavior is not restricted to men and women respectively, a first step for companies to improve their overall performance could be to foster more “male” and “female” characteristics among all company members. Women, for instance, on the basis of additional information, would become more willing to take risks and, similarly, men would become a little more cautious. The more women would take on the above-mentioned “male” characteristics and men the “female” ones, the better, it seems, could be the economic prospects of success for individual companies and therefore also for the national economies as a whole.

Unfortunately, such changes in behavior are not easy to effect.

The fact that women are more careful and more risk-averse, for instance, could have a number of causes: on average, women

tend to have or make decisions about smaller budgets than men, they tend to value social networks and not just economically successful projects, or they may lack experience, for example, in dealing with competition. Many of these explanations cannot just be done away with as they have typically accompanied women from childhood and changes would require a lot of personal and framework changes. Therefore, not only attitude changes but mainly an increase of mixed-gender teams is of particular importance. And incidentally, a number of studies confirm that the productivity of such teams is greater than that of similar teams only consisting of men or only of women…

Executive decisions In order to install more gender-mixed teams companies have to ensure in a systematic way that women play a greater part in the decision-making processes and that they are appointed to the upper levels of management. As is always the case with successful changes, such strategic initiatives require commitment from the top levels of management, i.e. the board of directors and executive management. Prominent business leaders have recently begun to demand greater gender diversity. The management of firms as well as of portfolios would profit from more diversity – and this would imply gains for the society as a whole. Hence, the next steps must consist in measures to reduce the barriers which hinder companies from bringing more women into top management positions. As already mentioned many of these barriers are well known. Now, the time has come to pull down those barriers and to compete for the best female top managers.

Prof. Renate Schubert is professor of economics at the Swiss Federal Institute of Technology Zurich (ETH) and head of the Institute for Environmental Decisions (IED). For many years, her research interests have included gender, risk and decisionmaking in financial and environmental contexts.

Peter Cavigelli is delegate of the board of directors of Swiss performance academy AG in Zurich and has many years of consultancy experience in the area of performance management.

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Green Was Never So Blue The Passat TSI EcoFuel is Volkswagen’s latest addition to a rapidly growing family of vehicles which are all grouped under a new umbrella brand: BlueMotionTechnologies.

A Passat drives into a filling station – and goes past all the pumps. The driver stops the car and gets out at an unimposing post. He connects his car to an unusual hose and fills up.

There is nothing obviously different about this Passat, but it has launched a new era of natural gas-powered cars. This is a Passat TSI EcoFuel with a 1.4 liter TSI engine which is supercharged twice over (the car has both a compressor and a turbocharger) to deliver 150 PS and is no different to drive than if it were powered by petrol – except that it has much lower emissions. And then there is the low fuel consumption: the car consumes only 4.4 liters of natural gas (carried in three pressurized tanks underneath the vehicle) for every 100 kilometers. This model has been designed to be capable of using either petrol or natural gas. If the gas tank is empty, the Passat automatically switches to petrol – but the car still remains economical thanks to TSI technology.

All members of the BlueMotionTechnologies family are fitted with innovative technologies to provide an effective reduction in environmental pollution. BlueMotionTechnologies is the interplay of technologies that VW owners can already use to drive economically and with consideration for the environment. Besides its energy-efficient and low emission engine, like those found in many existing TDI and TSI models, the TSI EcoFuel also has the DSG double clutch gearboxes.

The cleanest diesel The Passat BlueTDI is even cleaner, although not quite so economical. It offers the best combination of power, economy and the lowest emissions. The 2.0 liter TDI with common rail injection has an output of 143 PS and the saloon version consumes 5.2 liters for every 100 km driven (137g CO2/km). But what re-

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ally distinguishes the BlueTDI is its multi-stage exhaust cleaning system, which makes it the cleanest diesel of all time.

Not only does the BlueTDI direct the exhaust gases through the SCR oxidation catalytic converter and the diesel particulate filter, it also has a “laundry” that filters out the nitrogen oxides (NOx), converting them to nitrogen and water. The “selective catalytic reduction” and the “AdBlue“ additive help to render the nitrous oxides harmless.

As well as developments which make production vehicles ever more eco-friendly, for Volkswagen the future means BlueMotionTechnologies, for example a hybrid Touareg. The prototype is powered by a 52 PS electric motor up to 50 km/h.

This engine is strong enough to allow the large SUV to keep up with brisk city traffic. But when sharper acceleration is required, the compressor supercharged 3.0 liter V6 TSI (333 PS) engine kicks in and gives the Touareg a powerful boost. It’s a car with real future. This vehicle has the “parallel hybrid drive“ on board, a system that Volkswagen will develop to production maturity and which is acknowledged to have the greatest chance in cars such as the Touareg. Once again, the purpose here is fuel savings and reduction of CO2 emissions and pollutants.

“The Volkswagen Group is already the world’s greenest vehicle manufacturer” Dr. Ulrich Hackenberg, the Group Technical Director, stated recently. Drivers will not have to wait long until this promise of sustainability comes true for them – the new Polo in a BlueMotion version will be available soon, bringing with it sensationally low consumption and emission figures.

There could be no more convincing way of implementing the claim of placing eco-friendly technologies at affordable prices within the reach of everyone.

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Trio Infernal Cabernet Sauvignon is a wonderful grape. Lucky me, I was recently being faced with two of the best editions produced to date, plus a 100-year-old bottle of Château d’Yquem.

There are numerous reasons why people drink wines: some like to get drunk, some don’t really care, some like to appear sophisticated, some want an accompaniment for their sumptuous delicacies, while others aim to discover deeply complex worlds of flavor and taste, resulting from the unique collaboration between nature and men. Obviously, not all wines suit people who go for the latter reason.

Moreover, those wines need to be characterized by terroir, vintage, grape treatment, selection, picking, processing and impeccable storing after bottling at around 12° to 14° degrees with humidity being around 70 percent. On a recent occasion, two friends and I decided to open three bottles, which met all the above requirements: Sassicaia 1985, Heitz Martha’s Vineyard 1974 and Château d’Yquem 1908.

Italian godfather Quite a few wine enthusiasts agree that the 1985 Sassicaia probably is the best Italian wine produced to date – and this is quite a statement considering all the great Tuscanys, Amarones and Barolos Italy offers every year. Having had this beauty for the second time, I can confirm that it is a stunning masterpiece of what one can achieve with the Cabernet grape: Nearly black in color, the nose exhibits wonderful hints of cedar wood, toasty oak, pipe tobacco and black-raspberries. On the palate, massive concentration merges with shocking purity and nobility. In addition, plenty of sweet tannins and a wonderful balance add a surreal level of quality to this elixir. Sassicaia 1985, ti amo!

American beauty I was last in Napa Valley – an hour northeast of San Francisco – in 2007 when visiting the Screaming Eagle winery.

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It is the site of the Heitz winery, which produces one of the Valley’s most famous wines, Martha’s Vineyard, which is named after the picturesque island south of Cape Cod, Massachusetts. And as you may guess, their 1974 Cabernet is seen as one of America’s greatest wines produced throughout the 20th century. Showing a dark purple color, the bouquet beautifully smells of cassis, cedar wood, toasty oak and raspberries. Interestingly, this nose bears a striking resemblance to the one from Sassicaia 1985. In the mouth, plenty of sweetness, laser-like focus and a monumental concentration blow it all – this terrific wine meets all my expectations and leaves no unanswered questions.

French affair There’s not much to say about Château d’Yquem, which probably is the best sweet wine producer in the entire universe with a history going back to the 17th century. One thing is for sure though: the older, the better. Hence, the nearly black(!) 1908 Château d’Yquem promised to provide a shocking tasting experience – in a good way. Beautifully rich and powerful, there was this complex perfume of crème brûlée, coffee, Grand Marnier and caramel, followed by layers of sweet, opulent fruit and excellent balance whereas the finish went on and on. One hundred years of storing had a great influence on this magnificent beauty but I assume that 50 or more years would do no harm either.

Your wine aficionado, Nicolas swissbusiness