Investing in small and micro apartments

Real estate investment – new trends you need to know about

© Getty Images
07.06.2023 | 5 minutes

There are many ways to invest in real estate, from individual apartments and apartment complexes to office and commercial buildings, hotels and restaurants. Regardless of usage type, for many investors real estate is a lucrative capital investment with high returns. Learn more in our article. The most popular apartment size for investors is the 3-room apartment. However, this article will focus on small and micro apartments, as the demand for such properties will continue to grow over the coming years, according to a study by the UBS Chief Investment Office. What are their advantages and disadvantages? As an investor, does it make sense for you to consider these new types of apartment?

Small and micro apartments: more than just a fashion?

The term “micro living,” i.e., living in a very small space, refers to both small and micro apartments. Below we illustrate the key features of these two apartment types.

Small apartments are increasingly popular

A small apartment is one with one or two rooms. According to a UBS study, between now and 2050, the demand for small properties could increase by an average of 30 percent across Switzerland. This estimate is based on the reference scenario of the Federal Statistical Office, according to which the Swiss population will increase to around 10.5 million by 2050.
In the case of new-builds, the average number of rooms has fallen over the last twelve years. During this same period, significantly more 2- and 3-bedroom apartments have been built than between 2000 and 2010, while the number of 5-bedroom apartments has halved. This trend has gone hand in hand with a decline in average living space per person from 50 m2 in 2005 to 47 m2 today. On average, the size of new apartments has shrunk from 130 to 100 m2.

Micro apartments: less is more

Micro apartments are units with an average size of 30 m2. They are usually offered furnished and can be rented on a long-term basis or for just a few weeks. They are functionally equipped and many offer communal areas such as co-working spaces, fitness rooms and restaurants. They are a more attractive longer-term option than a hotel room, particularly for business travelers, students and expats. However, micro apartments are increasingly being advertised and used as a long-term accommodation solution. In general, the entire rental process can be handled online.
The number of micro apartments on offer is increasing not just worldwide but also in Switzerland, with increasing interest from both investors and renters.

Higher rental prices per square meter

The rental price per square meter for both types of housing is relatively high compared to other types of apartment. For a 30 m2 micro apartment, the average rent across Switzerland as a whole, including utilities, is CHF 1,800 per month. That’s 40 percent more than for a conventional 1-room apartment. There are also significant price differences between cities. Whereas the monthly rent for a micro apartment in Chur is CHF 1,100, in Geneva you will pay CHF 2,500.
As an investor, you can expect to pay more in relative terms for this type of investment, but the higher price is compensated by higher returns. You can find out more in the article below.

Looking for financing for your investment property?

At UBS key4 mortgages, you receive several attractive offers with just one request.

Urbanization, etc. – the factors reinforcing the trend

Below we explain how urbanization, an aging population and affordability requirements are accelerating the trend towards small and micro apartments.

Micro living: the future of urban living

Over the past ten years, city populations in Switzerland have grown at the same rate as across the country as a whole. The trend towards living in cities has started to become more apparent following decades of stagnation. As rents are higher in urban, well-developed locations, demand for smaller living spaces, especially micro apartments, is on the increase. Whereas the average size of an apartment in Switzerland is 100 m2, in cities it is only around 80 m2.

An aging population is intensifying the trend

The highest demand for small apartments is among 20- to 35-year-olds and the over-70s. Those aged between 45 and 59 are mainly interested in large apartments.
According to the Federal Statistical Office, it is the number of people aged 70 and over that will increase the most between now and 2050. They account for around 50 percent of population growth. The demand for small, age-appropriate apartments will increase as a result.

Smaller spaces are more affordable

The trend towards smaller living spaces is due mainly to the sharp increase in rents, which rose twice as fast as household income between 2000 and 2020. Over the coming years, rents are expected to rise much faster than incomes, due in particular to the housing shortage. By the end of 2030, renters will have to live in spaces an average of 10 to 20 percent smaller than today.

Smaller apartments are more climate-friendly

The trend towards greater sustainability is also behind the construction of small apartments and micro apartments because the ecological footprint per person is smaller for small residential units than for large ones. Smaller living spaces not only save on resources such as heating energy, but also require less building material per person to construct.

A woman in an apartment laughs as she unpacks a moving box.

Micro living: is it worth investing?

You now understand the factors behind the trend towards micro living. Even if this trend is not in doubt, it is important to weigh up the opportunities and risks of an investment carefully.

Opportunities: high returns, frequent changes of tenant and increasing demand

Small residential units can be a worthwhile investment:

  • Although small and micro apartments are generally cheaper than larger housing units, their square-meter price is higher. The rents per unit area are around 20 percent higher than for large apartments. As an investor, this means you can obtain a higher rental income per square meter and thus a higher return. This can be illustrated in the specific case of micro apartments, as demonstrated by another study from the UBS Chief Investment Office: the average annual rent for this type of apartment across Switzerland is CHF 800 per square meter. After deducting around 25 percent for ancillary costs, this results in a net income of CHF 600 per square meter. For comparison, this is around 60 to 70 percent per square meter more than the net rent for a conventional city apartment. The average return on investment in central locations is currently between 3.5 and 4 percent.
  • Another advantage is the more frequent change of tenant, particularly in the case of micro apartments, which can be rented for shorter periods. This allows rental income to be adjusted to rising market rents more quickly.
  • In well-developed urban locations, there is an excess of demand for small living spaces. The risk that you will not be able to rent your apartments at average prices is therefore low.
  • Last but not least, you should be able to sell your micro apartments for a good price due to the high demand.

Risks: high construction and investment costs, vacancies and management costs

Despite the promising benefits of these types of real estate, as an investor you need to be aware of the following points:

  • If you are considering building small apartments yourself, you can expect higher construction costs due to the small units. However, these costs are usually compensated by the higher rental income and/or higher returns.
  • Some existing properties have to be extensively rebuilt and equipped, which is also associated with higher investment costs.
  • The higher incomes mean higher losses in the event of vacancies, which can reduce returns.
  • Short-term letting leads to higher administrative costs.
  • If tenants stay in an apartment for a long period of time, you will have to bear any higher usage costs, such as higher electricity and energy prices, yourself.

Regional differences affect returns

As an investor, it is advisable to consider the different levels of potential demand in the cantons before investing. According to an estimate by UBS, the potential demand for small apartments will increase most sharply in the canton of Zug, at over 50 percent. The cantons of Schwyz and Aargau are also expected to see strong growth of over 40 percent. By contrast, in the cantons of Basel-Stadt, Glarus, Neuchâtel, Jura and Ticino, demand will increase by less than 15 percent. The first three cantons are therefore promising for investment in the construction and rental of small or micro apartments.

Questions about how to finance an investment property?

Our advisory team will be happy to help you.

Conclusion: micro living as investment in the future

Small residential units are likely to remain popular in the coming years. Even though the 3-room apartment is still the most popular apartment size among investors, the construction of micro apartments in particular is likely to increase. It is important to understand the current market situation before investing. Which cities are most short of housing and where is the demand for small and affordable apartments the highest? When building or buying small apartments, can you raise the necessary equity to cover the higher construction costs? You need to consider these and other questions very carefully. We will be happy to help you.

Was this article helpful?
Thanks for your vote!

Straight to a non-binding interest rate indication

This could also interest you

Interest rate forecast for companies

UBS Swiss Real Estate Bubble Index