Bloomberg News

Swiss Farmers Clash With Traders Amid Bubble in Zug

September 12, 2012

Farmer Philipp Freimann

Farmer Philipp Freimann said, “I recently counted 14 building cranes when looking out of my living room." Photographer: Gianluca Colla/Bloomberg

It took Philipp Freimann just a few seconds to know he didn’t want apartment blocks built on his farmland in Zug, Switzerland’s richest canton, a decision that meant he would give up at least 30 million francs ($32 million).

“I’m healthy and I can work, what more do I need?” said Freimann, 36, sitting on his tractor surrounded by 45 cows and a cherry orchard. “The boom in Zug has reached its limits. Zug doesn’t belong to the Zugers anymore.”

The cost of living has surged in the region, with the average price of a single-family house rising to about 1.56 million francs, twice the national average, according to Zuger Kantonalbank. Today, almost one in three residents in the town of Zug, the canton’s capital, doesn’t have a Swiss passport, a larger share than in Zurich.

The transformation began in the 1950s when Marc Rich and Philipp Brothers started trading commodities on the top floor of the local bank. Since then, low corporate tax rates have helped attract almost 30,000 companies, including Glencore International Plc (GLEN) and Xstrata Plc (XTA), to the area. Neighboring cantons have started to lure companies with lower rents and salaries as Zug is getting more expensive.

The area is a reflection of Switzerland’s economic success, where companies from across the globe kept unemployment levels at less than 3 percent in August, data compiled by the Swiss government show. The jobless rate in the neighbouring euro area was 11.3 percent in July, according to Eurostat.

Fire Brigade

The influx of foreigners also has created frictions in Swiss communities where democratic participation and voluntary work at the fire brigade or the brass band are viewed as more important pillars of society than trading commodities or working for a private equity firm.

“With Zug’s international focus and appeal, it’s obvious that we need to start addressing the question of integration,” said Gregor Kupper, a member of the cantonal parliament of Zug, who helped draft the first integration law of the canton.

Favorable tax laws for the rich and a discrete society have enabled Switzerland to become a haven for affluent internationals. As more Swiss feel overrun by foreigners, the atmosphere has somewhat soured. Cantons like Zurich have cut down on some tax privileges for wealthy individuals, and other regions including Bern and Geneva discuss similar measures.

Quota Introduction

The anti-immigration Swiss People’s Party is campaigning to limit the numbers of foreigners coming to the country. The inflow of less affluent migrants has already prompted the Swiss government to reintroduce quotas for citizens of eight European Union member states.

About 115,000 people live in the Zug region, including 27,096 in the regional capital, which is located about 26 kilometers (16.2 miles) south of Zurich, Switzerland’s biggest city with more than 390,000 residents. As recently as 2008, Zug had the highest income per capita of all 26 Swiss cantons at 74,781 francs, compared with the national average of 48,744 francs, according to Credit Suisse Group AG. Zug still has the top position today, the Zurich-based bank estimates.

Freimann, who produces organic beef for individual customers and the inn run by his sister, was asked in 2009 whether he would want to have his meadow re-zoned so apartments could be built on his land to meet the canton’s surging demand for housing. Freimann said no.

“I recently counted 14 building cranes when looking out my living room window,” he said in an interview on his farm last month. “That’s enough.”

Boom Town

More and more locals share Freimann’s unease about the growing number of new residents. The canton is debating whether recent arrivals should have a personal conversation with local officials about the Swiss view of the citizen-state relationship and public services such as schools.

“We want limited growth, we don’t want a simple boom,” said Peter Hegglin, the finance minister of Zug, whose office faces the construction site for the soon-to-be tallest building in the city at 81 meters (266 feet).

The increase in construction prompted the region to last month overhaul its development plans and lower its population growth target for the next eight years to 124,000 from an earlier projected 127,000.

While the canton enjoys its high salaries, smooth transportation links and attractive jobs, locals “are scared that the rolling train can’t be stopped anymore,” said Urs Bertschi, a member of the town’s legislative body and the speaker of the Social Democratic Party.

Taxation Rules

Zug laid the foundation for its success in 1930, when it introduced special taxation rules for some companies. The strategy started to pay off when the global economy improved after World War II and Zug was able to lure international companies. As tax receipts grew, the canton further cut levies for individuals and companies in the 1960s.

“Zug used to be the tax hell of Switzerland,” said town archivist Christian Raschle, as he sat near Lake Zug in Wirtschaft Brandenberg, an inn opened in 1891. “Today, it is known as its tax paradise.”

The effective average corporate tax rate in Zug was 13 percent in 2011, compared with 18 percent in Zurich and 22 percent in Geneva, according to the BAK Taxation Index. By contrast, median rates were 26 percent in the U.K. and 35 percent in the U.S.

A Credit Suisse (CSGN) study from 2011 declared Zug the most attractive Swiss canton for doing business. It includes factors such as transportation and taxation. A group that has long recognized the advantages of operating in Zug are commodities traders. About 1,500 people were employed in the industry in Zug in 2008, according to the latest official figures available.

Political Environment

“From a business standpoint, Zug is a really unique environment,” said Chris Sam, who moved from California last year to join Sidel International, a packaging unit of Tetra Laval. “It’s a highly educated and skilled workforce. It’s also an immensely stable political environment, which can’t be underestimated in Europe now.”

Global companies such as Amgen Inc. (AMGN:US), the world’s largest biotechnology company, and Siemens AG (SIE), Germany’s biggest engineering company, have added staff in the Swiss canton, pushing up property prices.

Willy Joos, 30, founded a home renovation company in Zug three years ago. Against his wishes, he is moving at the end of September to Goldau, 17 kilometers from Zug.

“I have a great social life here,” Joos said in a phone interview. “My wife and me, we both work full time, but there was no affordable home for us.”

Affordable Housing

The house he bought for 715,000 francs just outside the canton would have sold for at least 1 million francs in Zug, Joos said.

In an effort to provide affordable homes to less wealthy residents, the town built 40 apartments in 2010 and started to rent them out in May. Families and citizens committed to the voluntary fire brigade were given priority. Rents for the apartments, which have all been assigned, were set by the city council based on cantonal law.

Zug voters backed an initiative in June aimed at boosting affordable housing. While more locals leave Zug, the influx of wealthy foreigners has benefitted farmers, car dealers and restaurant owners.

Ferrari Sales

“We cater a lot to the expat community,” said Lianke Thermann, the marketing manager of the Ferrari store where new cars sell from 249,000 francs. “About 30 percent of our clients aren’t native German speakers.”

The number of international employees moving to Zug was expected to decline because of the global economic crisis, said Natalie Albrecht, who offers relocation services to companies and individuals.

“I didn’t experience a drop at all,” she said. “I had more to do than ever.”

The number of students attending the International School of Zug and Lucerne rose by 40 percent over the past five years. The bilingual Swiss International School had long been interested in opening a campus in the region.

“We were looking for a place for almost five years,” said headmaster Jarrod Brauer. “We just couldn’t find the right site in or around the area.”

Urs Bertschi, the politician in the Zug town parliament, is concerned by the flood of new residents.

Swiss German

“Zug is so small and transparent, big masses of foreigners don’t just blend in,” he said. “When the standard language in the restaurant’s garden where I go on Saturday afternoons is suddenly English, it’s irritating.”

Newcomers are finding it difficult to integrate in Swiss society. Their reluctance to learn and speak German to understand local customs and rules has led to misunderstandings between Swiss and foreigners.

“The atmosphere between locals and internationals is getting worse,” said Urs Raschle, the managing director at Zug Tourism, an organization that is more focused on helping new arrivals rather than attracting new tourists. “There is a growing number of internationals who come to Zug alone and don’t see a reason to mingle with the local population.”

Many foreigners meet for an after-work beer in the Mr. Pickwick Pub next to the station.

“We have Swiss and international customers,” said 35- year-old Camilo Soldano, the Argentinean bartender of the pub as he was drawing beer for a British customer sitting at the bar. “The groups sit and drink on opposite sides of the room. They don’t mix.”

Beer Prices

A pint of lager is 8.40 francs, compared with 4.10 pounds or 6.20 francs in the “Fleetwood,” next to the UBS building in the City of London.

Neighbouring cantons are working to increase their appeal as Zug reaches its capacity limits. Bordering Lucerne cut its corporate tax rate below that of Zug.

“A few years ago, companies like Amgen were moving from Lucerne to Zug,” said Walter Stalder, the head of business development in Lucerne. “Today, we see companies moving from Zug to Lucerne. When it comes to the total cost of ownership, real estate prices, salaries, costs and quality of life, Lucerne is very competitive.”

It’s not only the tax rate that’s prompting companies to rethink their allegiance to Zug.

“Zug is reaching its saturation point”, said 32-year-old Vladimir Langhamer, a managing director for oil company OMV AG (OMV), who moved from Vienna 1 1/2 years ago. “In the future, it will be difficult to find office space, difficult to find people, difficult to find apartments in Zug, so that companies will consider other places.”

To contact the reporter on this story: Stefanie Knoll in Zurich at sknoll3@bloomberg.net

To contact the editor responsible for this story: Matthias Wabl at mwabl@bloomberg.net


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