Almost a million residential buildings in Switzerland need to be renovated by 2050. A new study estimates the total cost at 228 billion Swiss francs. The turnaround could fail due to a lack of economic viability.
In an idyllic residential area in Horgen on Lake Zurich, a family is facing an emotional ordeal. Three siblings have inherited a nearly 100-year-old house with four apartments. The façade bears witness to artistic sandstone work, but also to the traces of time. Their main interest is the desire to preserve the heritage. But their goal clashes with the legal requirements for sustainability.
It quickly becomes clear that the challenges go far beyond superficial improvements. The complex sandstone work on the facade, the inadequate thermal insulation and the outdated oil heating from the 1970s are just some of the many hurdles.
An expensive undertaking
An architect specializing in old buildings estimates the cost of renovation at 2 million francs – shocking news for the family, who are aiming for a sustainable transformation. The energy law in the canton of Zurich no longer allows oil and gas heating. A heat pump with a geothermal probe alone would cost 200,000 francs.
The story reflects the current challenges many owners face. The conflict of moving away from fossil fuels, reducing energy consumption and also keeping finances under control is ever-present.
Economists Marco Schmid and Jörg Schläpfer from the consulting firm Wüest Partner present alarming figures: In Switzerland, 931,000 residential buildings are still powered by oil, gas and electric heating. This means that 62 percent of all buildings are in urgent need of renovation. Second homes and holiday homes as well as commercial and office buildings are not included here.
Ambitious climate targets by 2050
The study shows the dimensions: the comprehensive energy renovation of all these properties by 2050 would cost 228 billion francs, which corresponds to 1.1 percent of Switzerland’s annual gross domestic product. The figure is calculated at current prices, without inflation and any bottlenecks on the construction market.
The long-term goal is clear: By 2050, buildings should no longer emit harmful greenhouse gases. This is required by the Climate Protection Act, which was passed last year with 59 percent approval. Cantons such as Zurich and Glarus have already banned oil and gas heating.
Many private individuals hesitate primarily because the planning is complex and very high costs arise all at once – as in our case study in Horgen.
Loss-making business for private individuals
The economists at Wüest Partner estimate the renovation costs for energy-efficient renovation of single-family homes at around 130,000 francs. They have calculated whether the high costs are offset by an appropriate added value when the property is sold later. The answer is clearly no. For single-family homes, the increase in value is 12 percent lower than the cost of renovation. The situation is even worse for condominiums, with a loss of 24 percent.
Anyone who invests anyway does so out of conviction and not out of financial considerations. Anyone who wants to avoid making a loss has two options: Long-term personal use of the property is more economically attractive, especially since the additional costs are significantly reduced after renovation. Another solution would be to stick with a cheap, minimal variant – and just replace an outdated heating system with a new one.
HEV: “The renovation rate is not enough”
Representatives of private owners, however, have other reasons for doubt. “I don’t think that the turnaround is possible. To do this, the annual renovation rate would have to be increased significantly,” explains Albert Leiser, director of the Zurich Homeowners Association (HEV). In practice, owners are currently faced with too many obstacles: “The arduous path to obtaining a building permit alone deters many from even starting a renovation project.” The framework conditions need to be improved and procedures accelerated.
High-income regions benefit
Another finding from the study is that regional economic power plays a key role. It shows that the higher the local price level, the more attractive the renovation of rental apartments is (see map below). Comprehensive renovations are largely profitable, especially in the expensive cantons of Zug, Zurich and Schwyz.
The strong demand justifies the high costs, and there is scope to claim them for existing tenancies. Above all, it is easier to increase net rents for subsequent new lettings in these market regions. Extrapolated to all tenancies, economists expect a net increase in rents of 4.5 percent.
On the other hand, negative results are seen in Eastern Switzerland, in the cantons of Bern, Jura and Basel-Stadt, where comprehensive renovations are generally simply not profitable. The costs cannot be adequately financed through rent increases because rents are lower than in Zurich or Zug.
The canton of Basel-Stadt is a special case: despite a high willingness to pay on the rental market, only 43 percent of renovations are profitable. This is due to the fact that housing protection in the city on the Rhine restricts rent increases even more than is already the case under tenancy law.
Investors see themselves on track
The majority of Swiss rental apartments are owned by large institutional investors. What do they think about the energy transition? Many are convinced that it can be achieved – but only with reservations. Jean-Pierre Valenghi, Head of Real Estate at Baloise with a portfolio of over 13,000 rental apartments, says: “A complete energy renovation is economical if we can claim the rent increases that are legally permissible up to now.”
In the canton of Basel-Stadt, which, like Geneva, has a strict housing protection law, this is no longer the case: “The framework conditions in Basel-Stadt are so restrictive that we can only pass on a third of the usual share to rents,” criticizes Valenghi. This means that real estate investments no longer work out. “Then we prefer to buy bonds or move to other cantons.”
“Someone has to bear the costs. If they cannot be financed through higher rents, then our insured people and the beneficiaries of occupational pension plans would have to pay for them,” explains the manager of Baloise. Furthermore, more efficiency and speed are needed in the granting of building permits. For the expert, the need for action is obvious: “Given the time horizon that is usual for real estate investments, 26 years to 2050 is a short period of time.” In order to achieve the turnaround, the annual renovation rate would have to be increased from today’s 1 percent to 3 to 4 percent.
«Plan B»: Costs versus Energiespareffekt
The economists at Wüest Partner have also worked out a “Plan B” that only involves replacing technically outdated heating systems with new ones – without any renovation measures such as better insulation or new windows. With total costs of 52 billion Swiss francs, this option would be much cheaper and easier to implement. However, the energy saving effect would be less significant than with more extensive renovations.
Jörg Schläpfer, head of macroeconomics at Wüest Partner, points out the advantages: “If the owners restrict themselves to just replacing the heating system, the financing and profitability are guaranteed.” However, he admits that the economic side of complete renovations is “more difficult”. “Public funding and tax savings therefore make a significant contribution,” he adds. Most cantons pay generous subsidies for renewable heating systems. But the difficulties in implementation cannot be eliminated even with subsidies.