Easing the lofty expenses faced by tenants

Finding the right apartment is not always easy Keystone

The high cost of renting accommodation or business premises in Switzerland is made even more onerous by the hefty damage deposits required.

Avoiding such daunting payments up front is possible through a service offered by specialised insurance firms, whose business continues to grow even as the Swiss economy slows down.

Tenants’ organisations, while recognising the benefit, warn that a high price is attached to such services.

Landlords in large Swiss cities typically demand three months’ rent as security from tenants in apartments and other forms of housing.

Small enterprises face steeper deposits, amounting in some cases to six or even 12 months’ rent for commercial leases.

Insurance companies provide a guarantee that frees up this money, which would otherwise be blocked in a bank account, in return for an annual premium, an initiation fee and administrative costs.

Rising rents

With Swiss rents still rising, demand for such insurance is increasing, says Sophie Onkelinx, marketing and communications director for Swisscaution, the leading rental deposit insurance company in Switzerland.

“We are seeing more people in difficulties,” Onkelinx told swissinfo.ch.

“The rent for apartments is higher than it was two years ago, so for people moving into a new one, they face a much higher deposit.”

The appeal of the deposit guarantee service is that people can use money for furniture and furnishings or other purchases, rather than putting the money into a bank account to which they have no access, she said.

“It’s easier for renters…  that’s why it works for us.”

Swisscaution can also provide guarantees to tenants who have already paid a deposit, freeing up cash otherwise frozen in bank accounts.

The company deals with more than 2,000 real estate management companies across Switzerland that accept its guarantee of up to SFr15,000 in place of a deposit.

Tenants pay a five per cent annual fee in addition to an administrative fee of SFr20, both of which are subject to a five-per-cent federal tax.  

The company charges an initiation fee of SFr231 in the first year before levying the annual premium in succeeding years.

Price to pay

But not everyone is cheering the rise of such companies, including the Swiss tenants’ association.

Deposit insurance “can render a service to those who would be otherwise unable to rent an apartment”, Francois Zutter, a lawyer for the association’s Geneva chapter, told swissinfo.ch.

“But you pay a lot for this.”

The payments mount particularly if tenants continue to pay premiums for ten or 15 years, Zutter says.

As an alternative, “it might be cheaper taking out a small loan at a bank (to cover the deposit)”, he said.

The tenants’ association recommends that if people do take out such insurance they try to save money to pay the bank guarantee as soon as possible to avoid paying premiums year after year.

Zutter notes that such “insurance” does not in fact insure the tenant against damage or other future charges levied by the property owner when a rental agreement is terminated.   

“People don’t always understand that.”

Commercial premises

Swisscaution and other similar companies, such as EuroKaution, are regulated by Finma, Switzerland’s financial market supervisory authority.

An emerging sideline for such companies is providing guarantees for small companies that lease commercial premises.

Security deposits for such leases can be prohibitive, particularly for small shops and restaurants in high-rent districts such as Geneva’s city centre.

For example, the family owners of Running Planet, a sports shop, reportedly paid a deposit of SFr90,000 – 12 months’ rent –  to secure a  lease last year for 300 square metres of space near the city’s central shopping precinct.  

Patrice Galland, chairman of the Vaud chapter of the Swiss union of real estate professionals, defends the need for such guarantees.

“Business is business,” Galland recently told Agefi, the French-language business journal.

“From the moment they take on a tenant they [the real estate company] assume the accompanying risks,” he said.

“Above all it is the evaluation of the profile of the renter that will determine the number of months [for the security payment] demanded by a property owner.”

First-time businesses face higher payments. A variety of other factors come into play, including the commercial vacancy rate, location and type of business activity.

Tight rental market

There is a direct connection between Switzerland’s generally tight rental market and the demands that landlords can make on tenants in the commercial sector, says Hervé Froidevaux, a partner designate at Wüest & Partner, the real estate consultancy.

The Swiss real estate market in general remains “at the strongest level in 15 years”, Froidevaux told swissinfo.ch.

Extremely low vacancy rates for rental accommodation are expected to maintain an upward pressure on rents despite some new construction, he says.

Commercial rents are also likely to remain stable in the major cities.

In light of the slowing economy, some weakening though can be expected for commercial and office space on the periphery of major cities, he says.

In its latest report, Wüest & Partner highlighted a national rental housing vacancy rate of just under one per cent.

“Next to no rental apartments were vacant in the cities of Zurich and Geneva” as of June 2011, the report said.

Froidevaux says the economic slowdown forecast for 2012 and intensive new construction will have an impact on the real estate market but only in the medium term ­— about two years from now.

NEW INSURANCE

Swisscaution, the leading rental deposit insurance company in Switzerland, has recently diversified its offering with a product for property owners and managers.

It provides insurance against tenants failing to pay the rent. A five-per-cent premium is charged based on the coverage for unpaid rent sought, up to SFr15,000 per apartment.

But owners of dozens of apartments may negotiate lower rates for block coverage, the company says.

A one-time fee of SFr100 is applicable along with an annual management fee of SFr50.

MARKET CONDITIONS

In the mid-1990s, some real estate management companies in Geneva were so desperate to secure tenants they were offering leases with one or two months’ rent. It was a rare window of opportunity at a time when vacancy rates rose as high as 1.66 per cent in 1994, for example, a level not seen since.

The rate for small (one- and two-room) apartments hit 4.5 per cent the same year, according to cantonal government figures. Hence the need for incentives to attract tenants.

By comparison, the most recent statistics for the canton from June 2011 put the vacancy rate at 0.25 per cent, leaving landlords in the driver’s seat.

The level has remained at between 0.15 per cent and 0.25 per cent for the past decade, a reflection of the demand for housing outstripping supply in Geneva during a period of steady economic growth.

As a consequence rents have risen steadily and real estate management agencies have been able to pick and choose among new tenants.

Canton Geneva has the lowest vacancy rate in the country, followed by Zug, Basel Country, Basel City, Vaud and Zurich.