Switzerland: New Limitation On Holiday Homes In Switzerland

Last Updated: 12 July 2012
Article by Marco A. Rizzi and Yves Meili

1. Background

Switzerland has well known limitations on the purchase of residential properties by foreigners (Lex Koller). Swiss citizens and residents, however, are free to build and purchase unlimited numbers of residential properties at the place(s) of their choice. It has traditionally been within the competence and discretion of each municipality to designate land for construction and to determine what extent of spatial expansion and development is appropriate. Due to strong demand and the seasonality of mountain tourism, popular holiday destinations (such as Verbier, Zermatt, St. Moritz, Gstaad or Klosters) have always had a challenging task in this respect. On the one hand, they have to preserve their landscapes and ensure the affordability of land for local residents, on the other hand they need to stimulate the regional economy and create jobs. At present in the most popular tourist locations, holiday homes often account for some 50 % to 70 % of the total residential market. In these areas, construction has been booming for several years. Attempts to control or limit such activities through local legislation have led to a further jump in already high prices.

2. The Initiative on the Limitation of "Second Homes"

On 11 March 2012, the Swiss voters unexpectedly approved an initiative setting a strong limitation on "second homes". This results in the introduction of a new article in the Swiss Constitution which will impose upon municipalities in the whole country a maximum thres-hold of 20 percent on "second homes", both in terms of number of residential units and of gross dwelling area. The unexpected success of the initiative has created political tensions, as it was approved with a very narrow margin (50.6 % of votes in favour) and, ultimately, due to the support of voters from areas not affected by the initiative's consequences. The new limitation needs to be implemented through federal legislation and will override existing cantonal and municipal regulations. While many questions remain as to how the limitation can and will be implemented and enforced, it has the potential to affect the real estate market of the best-known tourist areas substantially and, hence, their economy in general.

3. What Properties are Affected?

The approved amendment of the Constitution needs clarification in various points. Uncertainty starts with the new constitutional term "second home", which is a novelty. It is not clear under what prerequisites residential space will qualify as a "second home" and therefore be subject to limitation as described above. The Parliament must provide the necessary definitions and specifications to the new article of the Constitution. Whereas in the public understanding the term describes privately owned residential space which is only used on a few occasions per year (notably for holiday purposes), there is no legal definition at federal level. Municipalities that had already implemented cantonal and/or municipal regulation of the "second home" market, created different and heterogeneous definitions. Whereas e.g. in Samedan (Engadin, Canton Graubünden) a "second home" is restrictively defined as any residential unit not serving as the permanent domicile of its resident, other municipalities have a more liberal understanding, such as St. Moritz (being only 7 km from Samedan), which includes temporarily used residential space in the definition of a "primary home" to the extent the same is also used for business or educational purposes.

4. What are the Consequences for Existing "Second Homes"?

It is expected that existing "second homes" will preserve their current status, even in a municipality with a high percentage of this type of property, and can be sold to third parties without any restriction on their future use. Any other solution (such as, e.g., introduction of selling restrictions as a "primary home" only) would raise a number of issues in connection with violation of the constitutional right of property and (material) expropriation. On the other hand, it is to be expected that once a "second home" changes its nature to a permanently used property (or a "primary home"), it will not be possible to convert it back unless the percentage of "second homes" in the respective municipality drops below the threshold again (the municipalities will have an obligation to monitor and report annually on the development of their "second home" markets).

However, if a property is used by a resident with permanent domicile, such property, notwithstanding its actual use, will, again, most likely qualify as a "primary home" and, thus, may only be sold to someone who will use it as a permanent domicile.

5. What are the Consequences for Real Estate in Development and for Pending Projects?

For private investors and property developers, there is widespread uncertainty about the future of their real estate projects in areas with "second homes" above the threshold. Real estate under development should not be affected by the new legislation if a valid construction permit has already been granted. Accordingly, such developments can be finished and used or promoted as "second homes".

For projects that are pending or for which a construction permit has not yet been granted, the situation is different: The new clause of the Constitution states that, from 1 January 2013, any building permits regarding the conversion to or the construction of "second homes" in areas already above the threshold percentage shall be null and void. This means that, until the end of 2012, permits could in principle be issued in compliance with cantonal and municipal laws. However, the recently published guidelines of the Federal Office for Spatial Planning about how to deal with pending and new requests create further confusion as they show a different interpretation, recommending the cantons and municipalities to apply the new clause instantly to all requests filed after 11 March 2012, and to deal with pending proceedings in a "correct and pragmatic way". It is not clear whether the cantons and municipalities will accept and apply these guidelines or whether they will apply their own interpretation and understanding of the new clause, e.g. differentiating between the different constellations and legal nature of pending and new requests. A number of cantons (e.g. Berne, Valais and Freiburg) have already stated that they will only apply the new clause of the Constitution from January 1, 2013 onwards.

6. Outlook

With regard to many of the open questions, it is difficult to make clear predictions. However, it is to be expected that those already in possession of "second homes" are unlikely to lose any rights to their properties or to suffer restrictions on the sale thereof due to the new regulation. To the contrary, taking into account a future shortage of supply in the market for "second homes" arguably the new regulation could stimulate prices for such real estate. A similar development could take place in less popular municipalities that are still below the threshold of 20 percent. As markets for holiday homes in tourist hot spots may become increasingly illiquid and prices even more unaffordable, the demand for holiday homes could shift to nearby municipalities, thus boosting new construction projects there.

On the other hand, individuals and companies in possession of land reserves, "primary residences" and hotels in municipalities already above the threshold could face a loss of value as they will not be further allowed to develop or convert their real estate into lucrative "second home" space. This could lead to another issue: A depreciation of existing real estate, as a consequence of the new limitations, which cannot be used anymore for building high-price "second homes" would lead to a reduction of the value of collaterals for credit facilities and may prompt creditors to demand extraordinary repayments or to restore appropriate collateral. Hotel owners particularly could be put in a difficult situation, as the value of hotel businesses in alpine areas, with typically an average of only eight months of business operations each year, is regularly below the underlying land value on the assumption that lucrative holiday homes could be constructed there. In the past, many hotels have successfully used the possibility of developing "second homes" on their land or within their facilities in order to finance necessary investments in the infrastructure of their hotels.

Everyone, be they landowners, developers or authorities, now await concretisation of the new constitutional clause by the Parliament. Once a clear regulation is provided for, uncertainty about the future possibilities for real estate development in the affected areas will decrease, as the markets will adapt to the new regulatory environment. To date, it is difficult to foresee what exemptions will be granted. It is conceivable that there will be space for the development of alternative property structures in the tourism sector, for example by excluding residential properties from limitation provided they are commercially exploited for a certain number of days per year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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