How to prevent rental voids |

How to prevent rental voids

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18.02.2022 | 6 minutes

According to annual vacancy figures published by the Federal Statistical Office, 60,775 apartments were available for rent in Switzerland on 1 June 2021 – but remained unrented. The same survey shows that this is equivalent to at least 228,336 uninhabited rooms. In addition, 7,066 apartments were less than two years old and had never been rented out. The sole positive about these figures is that 2021 was the first year since 2009 in which fewer apartments were vacant than in the previous year.

However, this good news did not apply in Chessel, a village to the east of Lake Geneva. At 13.9%, its vacancy rate is the highest in the whole of Switzerland in 2021. Solothurn was the canton with the highest rate. This map highlights the geographical distribution of vacant apartments in Switzerland, showing the country as a colorful patchwork with regional hotspots. Upon closer inspection, you will see that rental voids can be a very local phenomenon. In Vouvry, Chessel’s neighboring municipality, the vacancy rate is over 12 times lower at just 1.14%.

Why are there so many vacant apartments? What are the causes? What happens to them? What can you do as a landlord or landlady to prevent them? And what should you do if you end up with one?

We discussed these and other questions with Alexandros Tyropolis, the CEO of Novac Solutions GmbH, a company which specializes in short-term rentals as a means to combat rental voids.

Why is this? An interview with Mr. Tyropolis

UBS key4 mortgages: Do landlords and apartment block owners in Solothurn sleep less soundly than in other places?

Alexander Tyropolis: Indeed, rental voids are not pleasant for private landlords. However, some vacancies are planned and deliberately arranged. Before renovating or demolishing a property, for example, the owners need to decide which is more important: rental income or reliable planning. If it’s the former, they may terminate leases as late as possible even though tenants’ objections could delay building works. However, owners can also terminate leases early and deliberately sacrifice rental income to avoid the risk of deadline extensions. Rental voids can therefore be advantageous.

What exactly is a rental void?

A rental void is when a property is vacant for longer than the time you’d planned to find a new tenant. After that point you incur a loss.

So it’s your own time frame that determines whether an apartment is a void or just hasn’t been rented yet?

In a manner of speaking, yes. But you can also go by the average time it takes to find a tenant. Right now in Switzerland, you have to advertise an apartment for an average of around 33 days until it’s rented, though this also varies depending on the region and size of the apartment. If the apartment still hasn’t been rented after 33 days, you have a rental void. An unwanted one, to be precise.

How do rental voids come about?

Rental voids exist everywhere. However, the reasons for them differ. In large cities, demand is much higher than supply. So if an apartment in Zurich or Geneva still hasn’t been rented after 33 days despite excess demand, then it’s probably too expensive for what you’re offering. Ticino, Bernese Jura and the midlands are an exception – the vacancy rates in these regions are higher for structural reasons.

What kind of structural reasons?

Basically when too many investors have the same idea at the same time and decide to build apartment blocks in the same region. This is especially the case in Solothurn, which has an above-average number of vacant new apartments.

Because they’re too expensive?

If the supply in an entire region is significantly higher than the demand, then price becomes the decisive factor. Private landlords are at an advantage in this situation because they have more options. If they want to and can afford it, they can choose to halve the rent overnight. Pension funds and insurance companies aren’t as flexible because the properties on their books have a fixed accounting value. They use this value to calculate the returns and therefore to set the rents. If a pension fund lowered the rents for its apartments, their return would also go down, so they would have to reduce the value of the investment in their accounts – which of course they wouldn’t want to do. Depending on the circumstances, the fund could face a shortfall because of this adjustment and would have to restructure.

Say I’ve owned an apartment block with ten units for 20 years. One of them is vacant for longer than I’d planned. Would lowering the rent really be my only option? I would then run the risk that the other nine tenants would also want a rent reduction…

You could either reduce the rent – or upgrade the apartments.

By installing a new kitchen or bathroom?

First, I would think about which investment – for each franc spent – would allow me to achieve the most visibly aesthetic impact. This can be something as simple as replacing the old-fashioned brown baseboards with white ones, making the rooms feel more spacious. Or you could remove the old 80s brown flooring and lay a new, lighter floor with wide floorboards. Or paint a living room wall in a chic pastel shade rather than white. Kitchens and bathrooms are the most expensive rooms to renovate but their age doesn’t really matter. A 15-year-old kitchen is no reason not to rent out an apartment, provided it’s well maintained.

But wouldn’t I just be throwing good money after bad with these kinds of renovations?

Depending on the condition of the apartment, you’d have to redecorate before renting it out again anyway. Whether the painter uses white or ice-blue paint, it won’t break the bank. Plus the old 80s flooring has reached the end of its service life anyway, so although it won’t make much difference whether you replace it now or in two years, it could help you find a new tenant quicker. As I said, it’s about getting the biggest bang for your buck.

What if I still can’t find a tenant despite pastel-colored walls, wide parquet flooring and chic new baseboards? Should I install a new kitchen or bathroom after all?

In this scenario you would spend a lot more money but achieve less impact. I would probably lower the rent instead.

But then there goes my return. After all, I can’t put the rent back up again…

If you don’t reduce the standard rent, you won’t have to raise it again later. Instead, you advertise the apartment at half price with a fixed, two-year contract as a special offer. This has three advantages. First, tenants are not automatically entitled to extend a fixed-term contract. Secondly, you will have two years to see how things work out and to prepare different scenarios. And thirdly, after the two years are up, you can terminate the special offer and charge the standard rent again. Since you haven’t raised or lowered the initial rent during this period, after two years it can’t be challenged.

Alexandros Tyropolis, CEO Novac Solutions GmbH

Alexandros Tyropolis
is the CEO of
Novac Solutions GmbH

Novac Solutions specializes in the short-term rental of all types of vacant real estate and offers its clients a full, 360-degree service. It starts by developing a smart, innovative and financially sustainable plan tailored to the potential of the property, market demand, the rental period and the owner’s requirements. It then assumes full entrepreneurial responsibility for implementing the plan and all operations at its own risk (with the involvement of the client). It also handles the administration and the return of the property at the agreed time. Novac Solutions counts both large and small companies as well as private property owners among its clients.

What happens if the situation still hasn’t really improved after two years?

Then you should rethink your strategy. You need to be thorough and pragmatic. If the apartment units can only be rented out at half the normal rent, this property will cost you money for the foreseeable future, so selling it may be the best option.

That’s if a buyer can even be found.

That’s also a question of price, but only if your property is in the worst rental void hotspots. The situation is really dire near Chiasso, for example. But apartments are often vacant for much more trivial reasons.

Such as?

Well, because some owners think that apartments rent themselves without any input on their part! A three-month notice period means that you as the property owner have three months to find a new tenant. Assuming you have to advertise the apartment for 33 days on average to find a new tenant but only wait until the old tenants move out first, you’ll only have yourself to blame for the loss of rental income.

What if I want to freshen the place up a bit before renting it out again?

Does that prevent you from looking for new tenants during the notice period? No. But most importantly, it shouldn’t stop you from putting some effort into the advertisement. I’m horrified by how unfriendly and sloppy some online apartment offers are. Two dim, blurry pictures taken on a mobile phone and some meaningless lines of text full of spelling errors… it’s no wonder no one responds to them!

I guess it goes to show that ugliness is hard to sell!

Exactly! 300 francs for some professional, well-lit photos that show your apartment in the best light is money well spent. Every apartment rental website has instructions on what to pay attention to when writing an advertisement. One easy way to find this out for yourself is by going onto one of the bigger property websites and clicking on 20 random ads. Take note of the pictures and details of the property. It’s likely that 18 of these 20 ads will be prime examples of how not to do it. The other two will be well-written and inspiring. Putting an effort into the ad will dramatically improve your chances of finding a new tenant before the current one moves out.

Owners of mixed-use properties probably also have it quite hard, what with a retail store on the ground floor, offices on the first floor and apartments above. I see empty retail premises everywhere and there just isn’t as much demand for office space anymore, either. What can I do?

The offices you describe probably used to be apartments and so could hopefully be used as apartments again without the need for too much refurbishment. The situation is different for retail premises; online retail is taking more and more business away from brick-and-mortar retailers. The COVID-19 lockdown has only accelerated this trend.

So what should I do if I can’t find anyone to rent the ground-floor store in my block? Board up the doors and windows?

(Laughs) That’s one option – but certainly not the best! It doesn’t matter whether you board up the windows or leave it as a dark, empty shell for passersby to stare into. Either way the building will look run down and unappealing to potential tenants. I would find a way to liven it up a bit, for example, by turning it into a store window gallery with alternating pieces from local artists. Or actually rent it out temporarily.

So another pop-up store?

Maybe, but not necessarily. Let’s say one of our clients has a similar property in Basel. They want to buy themselves some time and see how things develop before deciding what to do with it. Our company could arrange for the property to be temporarily used as a collaborative workspace with fully equipped workstations. You could reserve a desk online and open the door using a code that we would send you once you’d paid for the reservation. In addition to the usual drinks vending machines, we would also put in a machine stocked every day by a local bakery with fresh croissants, sandwiches and cakes.

Are these temporary rentals also possible for apartments?

Absolutely, on a temporary basis and by temporarily repurposing them. Simply rent out your apartment furnished rather than unfurnished. That would appeal to a totally different target group and allow you to compete in a different environment. There are always people looking to move into a new place straightaway, but who don’t yet have their own furniture. These can be expats who’ve just moved to Switzerland, people who’ve separated from their partner or property managers looking to accommodate their tenants temporarily while they carry out a full renovation. It can be families having work done on their house or…

It almost sounds too easy… where’s the catch?

There isn’t one! It is actually that easy. You can rent out the property temporarily or repurpose it permanently. It will mean some periods with a higher tenant turnover and some with no turnover at all. But furnished apartments produce a higher rental income. It also means less pressure from the competition. Don’t forget that you’re only renting out the apartment furnished because when it was unfurnished it was vacant for six months…

The consequences of lowering the rent

Rental voids reduce your income, but not your costs. From a financial point of view, the compromise solution “it’s better to reduce rents by half than earn nothing at all” mentioned above is a sensible one.

Remember that, in the case of investment properties, mortgage loans are secured not just against the value of the land and the property but also against the rental income. This value consists of current and future net rental income. If you were to rent out an apartment now at half the rent, you would also need to halve the income value, i.e., the value of the collateral. If a property loses value, lenders may insist that you repay the agreed collateral, which would mean having to find additional funds from your own pocket.

Questions about how to finance your investment property?

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