Bloomberg News

Geneva Mansions Sell at Discount as Tax Scares Expats: Mortgages

August 26, 2013

Geneva's Millionaire Mansions Slump Amid Tax Hazard

Geneva luxury home prices are tumbling as buyers are spooked by proposals to end tax breaks for foreign millionaires and the number of multinationals moving to the city slows. Source: Naef Prestige Knight Frank via Bloomberg

Real estate broker Alexander Koch de Gooreynd relayed a difficult message to a client last June: the 39.5 million Swiss-franc ($43 million) asking price for his eight-bedroom lakefront villa in Geneva was too high.

The 8,600 square-foot (800 square-meter) home with yacht mooring, wine cellar and kennels in Collonge-Bellerive, where Saudi Arabia’s King Fahd built a summer palace in the 1970s, had been on the market for nine months. The seller took his advice and the house sold for 31.5 million francs in December.

“The heady days are over,” said Koch de Gooreynd, head of London-based Knight Frank LLP’s Swiss residential team, adding that the house might have fetched the higher price two years ago. “Vendors are becoming much more realistic.”

Geneva luxury-home prices, among the highest in the country, are tumbling as buyers are spooked by proposals to end tax breaks for foreign millionaires and the number of multinationals moving to the city slows. Houses in Geneva worth at least 6 million francs have declined by as much as 25 percent in the past 12 months, said Sebastien Rohner, a Geneva-based broker at Barnes International Luxury Real Estate.

“I’ve never known a slump like this before,” Rohner said. “Wealthy people are still attracted to Geneva, but they are taking their time and renting before buying.”

Market Stagnation

The slump in Geneva’s luxury market comes as the average house price in the city declined 1 percent to 2.6 million francs in the first half of 2013 from a record high in 2011, according to data compiled by Wuest & Partner AG, a real estate consulting firm with offices in Geneva and Zurich. House prices in Geneva more than doubled in the previous 13 years, while values in the rest of Switzerland rose 53 percent, Wuest & Partner’s figures show.

“In regions like Zurich and Lake Geneva, where house prices have reached a pretty high level, there is stagnation or a modest correction,” said Robert Weinert, a market analyst at Wuest & Partner in Zurich. “Prices have reached a level where not many people can afford them.”

UBS AG (UBSN)’s Swiss Real Estate Bubble Index rose in the second quarter as mortgage lending in Switzerland increased 4.3 percent from a year earlier, exceeding a gain in disposable household income of 1.4 percent, the country’s biggest bank said on Aug. 5.

To prevent a repeat of the property-market crisis of the 1990s, which hobbled economic growth for years, the Swiss National Bank sponsored the introduction in February of a capital buffer, which forces lenders to hold an extra 1 percent of risk-weighted assets tied to residential mortgages.

Cooling Market

That helped cool Geneva’s housing market by pushing up the 10-year fixed home loan rate to 2.4 percent from 1.8 percent in February, Weinert said.

Geneva, less than a two-hour drive from the ski resorts of Chamonix and Verbier, has used low taxes, political stability and quality of life to lure more than 900 multinationals, including Procter & Gamble Co. (PG:US), commodity traders such as Gunvor SA and hedge fund managers, Brevan Howard and BlueCrest Capital Management LLP. In 2009, Dinara Kulibayeva, second daughter of Kazakh President Nursultan Nazarbayev and the billionaire owner of Halyk Savings Bank, bought a house in the Geneva suburb of Anieres for a record 74.7 million francs.

The influx of expatriates has slowed, sapping demand, said Claudio Saputelli, an economist at UBS in Zurich and co-author of the bank’s quarterly bubble index report.

“We’re not seeing as many expats moving to Geneva,” said Saputelli. “The market has become more and more difficult for high-end apartments.”

Tax Break

Germany’s Merck KGaA last year announced plans to close the Serono unit it bought from billionaire Ernesto Bertarelli in 2007, resulting in the loss of 1,250 jobs in Geneva.

Wealthy foreigners were also drawn to Geneva by a 150-year-old tax break that enables them to avoid paying income tax via an expenditure-based levy known as a forfait. Geneva’s Socialist Party in January 2012 submitted the 10,000 signatures necessary to force a vote on abolishing the program. While the Geneva government and a majority of the canton’s lawmakers voted in June to reject that proposal, the initiative prompted the canton to consider revising the tax break by September 2014.

“This indecision, it kills the market,” Koch de Gooreynd said. “It’s any concern that things might be about to change.”

After Zurich became the first canton to abolish the forfait in 2009, with almost 53 percent voting against the system, 97 of the 201 beneficiaries of the tax left the canton. About two-thirds of them relocated to other parts of Switzerland.

Negotiating Room

Asking prices for luxury homes in Geneva fell by an average of 9 percent to 14,829 francs per square meter since peaking in 2011, according to UBS. In the suburbs of Florissant and Malagnou, east of Geneva’s old town, the drop was 24 percent.

The decline is probably even steeper because the numbers are based on advertised asking prices and weaker demand is enabling buyers to negotiate better deals, said Saputelli.

“More and more prices are under discussion,” Saputelli said in a phone interview. “That wasn’t the case two or three years ago, when demand was so high that you had no chance to bargain the price down.”

The decline will probably continue for another 12 months, said Christian Kraft, head of Swiss retail estate research at Credit Suisse Group AG. (CSGN)

Scared Buyers

The number of new buyers has fallen by half, said David Colle, managing director of Luxury Places, a Geneva-based brokerage. “People are scared a little bit, they’re just waiting,” he said. “There’s less demand, there’s less buyers coming every day to us.”

In Cologny, another of Geneva’s millionaire lakeside suburbs, there are 10 to 15 homes on the market for more than 10 million francs compared with just one or two back in 2011, Knight Frank’s Koch de Gooreynd said.

“Buyers are increasingly savvy now, especially with such a big selection out there,” he said. “Still, Switzerland remains one of the key markets for people to invest, relocate their business and bring their families due to the safe and secure environment, stable economy and the high quality of life available.”

To contact the reporters on this story: Simeon Bennett in Geneva at sbennett9@bloomberg.net; Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Phil Serafino at pserafino@bloomberg.net; Rob Urban at robprag@bloomberg.net.


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