Eva Somm (name changed) inherited a 75-year-old house last year, and decided to have it converted and renovated. She faced one surprise a er another. To repair the roof she contracted expensive roofi ng and carpentry work. Expenditure: 35,000 francs. Then the roofer pointed out that some rotten beams needed replacing in the roof structure, which extended the work by two days. The roofer then demanded a disproportionately high surcharge of 5,500 francs. Eva Somm was trapped: fi rst, because of time pressure, as she wanted to move into the renovated house as quickly as possible. And second, because she was unlikely to fi nd another cra sman at short notice.

Three typical cost trapsIn practice, it o en costs a lot of money – and stress – to take charge of a building project or conversion. To make sure you’re well prepared, note the following points carefully:

Building and converting: How to avoid the fi nancial traps

• Surprises and modifi cations work out disproportionately expensive. Renovation work in particular involves a great deal of uncertainty. The building structure o en turns out to be defective. Thorough prior clarifi cation is essential, for

example to check the condition of the roof structure. Allow-ing extra reserves when planning your budget is a must.

• Tolerance limits mount up. Depending on the planning stage, the architect is allowed to call on a margin of tolerance, such as ±20 percent of the cost estimate for the preliminary project (see page 3). But if an extra 10 or 20 percent gets added to the cost of every part of the project, nasty surprises are inevitable. The only way to avoid this is to establish clear guidelines. Make sure that extras and modifi cations can’t be used each time as a pretext to completely review the whole project. “If the customer wants to make certain changes, this does not mean total liberty to redefi ne the entire project,” emphasizes Othmar Helbling, building consultant and member of the Chamber of Independent Advisors in Real Estate

matters (KUB) svit.ch/kub.

Continued on page 2

Newsletter on the topic of home ownership Spring 2016, Issue no. 1

UBS immo news

Many building or conversion projects turn out more expensive than expected when you do the fi nal accounts. Nobody likes having to pay extra, so you should plan the project, your budget, and the fi nancing very thoroughly from the start.

Building and convertingHow to avoid the fi nancial traps – Page 1

Building and conversion costsAre cra smen’s off ers binding? – Page 3

Real estate expertResidential property: the gap between wishes and reality – Page 4

2

Continued from page 1

• Check the services in the off er very carefully. If the off er simply states “paint the rooms” for example, that is far too vague: What about

the preparation and masking stages? Are several coats of paint included? Does the off er cover travel, materials, and VAT? It is important for the

services and building work to be fully defi ned before you confi rm the order.

Specifi c building fi nancing is a big advantage when you have building or renovation work done on your house or apartment. Whether you’re con-structing a new building or renovating an existing one, it’s a simple, hassle-free way to make all your payments. UBS off ers two alternatives:

UBS Building FinancingUBS Building Financing is suitable for both new builds and conversion projects. It is normal to set up a construction account with a bank to pay all the costs of the project. The bank receives the bills from the architect, contractors, cra smen and suppliers, and pays them from the construction account – provided that the architect and building owner have approved them and the amounts are within the set budget. With a construction account, you can keep a constant eye on all your payments and your account balance.

The interest rate on building fi nancing is variable and depends on conditions on the money and capital markets. Quarterly credit commission is due in addition to interest. If you wish, you can take out a mortgage during the construction or conversion, either at the start of the project, or staggered over the implementation phase. Provided it is a construction loan, you don’t have to make amortization payments. On completion of the work at the latest, the construction loan will be replaced by a mortgage that attracts interest and usually has to be amortized. You are of course free to pick the mortgage product ubs.com/mortgages.

UBS immo news no. 1/2016

UBS Mortgage Overdra FacilityThis option is a particularly fl exible fi nancing solution, for conversion work for example. If you are planning to renovate your kitchen for 30,000 francs for instance, the limit will be set accord-ingly. As soon as the fi rst bills arrive from the cra smen and the suppliers, the payments will be made fl exibly and easily via the UBS Mortgage Over-dra Facility. The credit limit does not have a set term, making it indefi nite. It is up to you to decide how much of the limit to use up, and when to make the repayments. You can also use the money fl exibly as needed. If you refur-bish your kitchen in the spring, then want to make additional renovations in the summer, you can simply draw on the UBS Mortgage Overdra Facility again. The only limit is the agreed maximum amount.

The maximum amount depends on the real estate collateral available on your home, and the usual guidelines for real estate fi nancing. The lending standards and fi nancial feasibility of the current mortgage plus your Mortgage Overdra Facility have to be met. You can get a UBS Mortgage Overdra Facility for amounts from 25,000 to 200,000 francs. The interest rate is variable and depends on conditions on the money and capital markets. For more details ubs.com/mortgages.

Ask for professional helpFor particularly large and complex projects, it can be worthwhile to call in a real estate fi duciary service. The most important aspects here are know-how and careful controlling of the building site – the fi duciary can base his/her opinion on on-site visits, photos, or information from the architect. Accord-ing to specialist Othmar Helbling, care during the construction phase is as important as establishing the limits from day one: “For private individuals in particular, it can pay off to have all the contractual documents and cost estimates checked by an independent organization.” For example, an external advisor can tell you in good time if the question of liability for additional costs has been le out, or is insuffi -ciently addressed. They can also give you an independent opinion on whether the cost assumptions are plausible.

Dear Reader,

Construction costs a lot of money, and is usually very stressful. That’s why it’s so important to be familiar with the basic terms and rules associated with building. Many real estate owners don’t realize that they have the most to lose at the beginning of their project: Have you chosen an architect who will give you serious, professional advice? Do you want the top option, no matter how much it costs, or would you prefer a solution that comes at a reasonable price? What can you do to avoid diffi culties? Our main article shows you where the traps are lurking.

A project should be defi ned and budgeted down to the last plug socket before it even starts. However, a budget is only useful if it is realistic, and if you compare it regularly against current expenses. Some building or conversion projects still turn out more expensive than planned. Our article on page 3 shows you what is and isn’t legally acceptable when it comes to extra costs. We hope you’ll fi nd this an interesting read.

Editorial

Roger von MentlenHead of Private Clients

UBS Switzerland AGP.O. Box8098 Zurich Mortgage line: 0800 884 558 ubs.com/immonews

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UBS immo news no. 1/2016

Are the costs stated in offers binding?Under the law, there are basically two possibilities when awarding a con-tract. The fi rst is for invoices to be issued according to the value of the work done, i.e. based on the time taken, amounts used and surface areas for fl oor coverings, walls painted, etc. If you choose this option, the price off ered is not really binding, because at the end of the day, the contractor invoices you according to the eff ective costs. This is referred to in the trade as “scheduled work”. Unless otherwise agreed, this is the normal method for invoicing – and you run the risk of the project ending up more expensive than what you accepted. The other option is “fi rm commitment”: the off er is binding and the contractor must complete the work for the price off ered.

How can you make sure you won’t have to pay extra?If you want a fi xed all-inclusive price, you must make this very clear, preferably with written confi rmation or a contract. This must include all the details: material and travel costs, preparation work, VAT, etc. Sample contracts for cra smen’s work can be useful, such as those available from the Swiss Association of Real Estate Owners (HEV) hev-shop.ch “Formulare & Verträge” (Forms &

Contracts). It’s also important for owners to tell the contractual partner or architect how much fi nancial leeway they have: the maximum aff ordable budget, limits arranged with the bank, etc.

What needs to be in the offer? The off er should be as detailed as possible. Even for smaller orders, it’s worth viewing the property on site before awarding the contract. This lets the cra sman or contractor assess the specifi c situation accurately. It also means they can’t claim at a later stage that additional costs were necessary due to special circumstances. According to Pavlo Stathakis, attorney at the Swiss Association of Real Estate Owners (HEV): “Clients usually ask for several off ers, then award the contract to one cra sman.” He recommends drawing up a written order confi rmation that repeats the services ordered and their price.

Where does the 10-percent rule come from?A Swiss Federal Court judgment (BGE 122 III 61) on a serious cost-overrun case is frequently quoted. The court concluded that the client must be able to rely on the cost estimates given by an architect. However, a tolerance of 10 percent is acceptable. In practice, people o en say that you have to toler-ate diff erences within this area – unless the client has clearly agreed on other conditions, or on an all-inclusive price. According to the standards of the Swiss Society of Engineers and Architects (SIA), architects are permitted a clearly regulated tolerance limit: for preliminary projects with cost information, tolerance of ±20 percent; for construction or conversion projects worked out in detail, tolerance of ±10 percent.

Where can homeowners get advice in the event of a dispute?The fi rst point of contact is the legal service of the regional sections of the Swiss Association of Real Estate Owners (HEV) hev-schweiz.ch. Legal advice up to a certain level is free of charge for members. You can also ask other associ-ations and organizations, independent client advisors, or other experts to check the facts and suggest a compro-mise, depending on the situation. Homeowners can also contact specialist associations such as the Swiss Society

Are cra smen’s off ers binding?of Engineers and Architects (SIA) sia.ch, the Swiss Association of Painters and Plasterers (SMGV) smgv.ch, or other specialist organizations, which investigate such cases and suggest solutions. For disputes above a certain sum, you may want to consider getting a construction attorney. Pavlo Stathakis of the HEV adds: “Contrary to widespread opinion, you can’t always save on legal fees by calling in an attorney at the last possible moment, but you can o en do so by involving an attorney as soon as possible as your representative.” In retrospect, it’s o en clear that it would have been smarter to get advice from an attorney at the start of negotiations and when signing contracts, rather than when serious problems arise.

Am I allowed to hold back payments to use against the contractor?The basic principle also applies with payment terms: the conditions set out in the contract must be observed. It o en makes sense to agree with your con-struction partners to fi nance the work in stages. If one stage is not yet complete, or if there are defects, payment for this part can be held back until the work is fi nished. Any payments made should correspond to work already completed at the building site, deliveries of material, or visible progress in the construction work.

Avoiding disagreements and discrepancies due to additional costs when building is possible. Invest plenty of time in writing accurate requests for proposals and clear agreements. We list the most important questions and answers.

Publication detailsPublisher: UBS Switzerland AG, Lending SolutionsPublished several times a year in German, French, Italian and English.

This publication is intended for information only and is not intended as a recommendation, an off er or a solicitation of an off er. Before making a decision, you should obtain relevant professional advice. Please note that UBS reserves the right to alter its services, products or prices at any time without prior notice. Certain products and services are subject to legal restrictions and cannot be off ered worldwide on an unrestricted basis. Reproduction in whole or part is prohibited without prior permission from UBS.

© UBS 2016. The key symbol and UBS are among the registered trademarks of UBS. All rights reserved.

Calculated in terms of occupancy costs, Swiss residential property has been less expensive on average than rental property since the middle of 2014. Faced by stagnating income, however, fewer and fewer households can aff ord to buy their own home.

Adjusted for infl ation, the price of residential property is at the same level today as at the height of the last real estate bubble at the start of the 1990s. The UBS Swiss Real Estate Bubble Index, which measures imbalances in the owner-occupied housing market, rose again last year, and settled in the risk zone. Yet a er 16 years of sometimes sharply rising residential property prices, credit restrictions seem to be taking eff ect on a broad scale. Last year, nomi-nal off er prices for owner-occupied apartments increased by just 1.5 percent, and for single-family homes by 2 per-cent. Due to stagnating incomes and increasing numbers of empty properties, prices should stabilize this year – and for owner-occupied apartments, we even forecast a slight fall of 1 percent.

Loan bottlenecksSince 2008, buying residential property has been much more aff ordable thanks to falling mortgage interest rates. Annual occupancy costs have since dropped by an average of 20 percent. Since the middle of 2014, the running costs of residential property have fallen below the rental costs of a comparable property – for the fi rst time in 15 years. The number of households wanting to buy residential property has risen accordingly.

And yet it is more and more diffi cult to get the necessary fi nancing. To avoid creating a credit bubble, banks have to stick to aff ordability and other regula-tory guidelines when issuing mortgages, such as the amount of hard equity paid in, and amortization obligations. As a result, and since income has scarcely risen at all compared to residential property prices, the circle of potential buyers has grown smaller. In 2008, half the households in Switzerland met

the income conditions to qualify for 80-percent fi nancing of the purchase price of a 120 square meter new-build apartment. Today, only a quarter of households do so.

Average households are increasingly turning away from expensive regions to places with aff ordable real estate. This is why prices for homes in Eastern Switzerland and the central region increased the most last year. While a new 120 square meter single-family home in the canton of Zurich is now only aff ordable for around 25 percent of all Zurich households, a similar prop-erty in the canton of Thurgau would be within the budget of 65 percent of Zurich households.

High-price segment under pressureAnother result of the credit constraints is to put pressure on prices in the high-price segment. Since 2008, the number of apartments available in Switzerland with prices of over 10,000 francs per square meter has tripled, whereas demand has mostly stagnated. In the canton of Geneva for example, more than half of all the real estate put up for sale last year cost over 10,000 francs per square meter. And yet just a quarter of Genevan households can aff ord a 120 square meter home in this price bracket. Off er prices in the area around Lake Geneva have been falling for the past three years. Similar eff ects can be seen in many premium locations in German-speaking Switzerland. Prices fell considerably in 2015 in many of the most expensive municipalities on Lake Zurich and Lake Zug.

Racing to catch up in (still) inexpen-sive citiesIn many previously inexpensive locations there’s a race to catch up. Condominium ownership has become more expensive in many cities. In several, such as Aarau and Fribourg, price increases have even hit double-digit percentage fi gures. The city of Basel, where prices shot up by 7.5 percent, enjoyed positive eco-nomic growth and relatively low prices compared with other major economic centers. In Bern and most medium-sized

cities in the central region, owner-occupied apartments still rose by an average 2 to 3 percent. Due to lower occupancy costs, buying in these locations is sometimes much cheaper than renting. On the other hand, the occupancy costs of residential property in Zurich, Lausanne and Geneva are just as high or higher than the rental costs of an equivalent apartment.

What’s ahead in 2016?We expect sluggish economic growth this year, with slightly positive per capita economic performance. Construction is leveling off at a high level, whereas demand for living space is falling. There is a lot of evidence to suggest that mortgage interest, and hence the occu-pancy costs of residential property, will remain very low. The central banks will determine the level of development over the next few years. However, it is unlikely that the Swiss National Bank will increase the base rate before 2017.

UBS immo news no. 1/2016

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Real estate expert Residential property: the gap between wishes and reality

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Sources: ESTV, Wüest & Partner, UBS Real Estate Focus 2016

Household income needed as a percentage of median household income

below 90 110 to 125

90 to 110 125 to 150

over 150