Zurich, Switzerland

Swiss real estate versus Nestlė: That's a close call…

While I've been quite happy holding my Nestlė shares over the last ten years (+125%), my good friend, Lars, has recently outpaced my returns in Nestlė with some impressive gains in local real estate.

Swiss commercial real estate has typically been a conservative investment with a modest yield. The total return on Swiss property has been consistently profitable for years as supply continues to tighten in an otherwise small area driven by bullish demographics. But prices have recently started to rise rapidly in some parts of Greater Zurich.

Lars, a Swiss citizen and one of my best friends for years, has recently doubled his money on residential real estate in Zurich. And a recent investment made a few months ago has already appreciated by some 20%.

I've rarely heard of people doubling their money on Zurich real estate – commercial or residential – in such a short period of time. But that's what's happening in Switzerland.

So, over the last 12 months Lars has outpaced my Nestlė shares. In Swiss franc terms, his top-performing real estate deal has gained more than 100% versus about 50% for my Nestlė.

The level of speculation in domestic property prices in some parts of the country has risen to new heights. This tells me that we might be at the cusp of a Swiss property bubble in some cities as interest rates remain very low; Swiss 10-year mortgage rates are about 2.5% -- pretty darn low.

As we now know all too well, low interest rates provide the seeds for real estate speculation and, eventually, a collapse in prices. The consequential price tag of a real estate crash usually leads to a banking crisis and protracted economic hardship for that nation. The United States, Ireland, Britain and Spain are all victims of wild real estate speculation and are now paying the price for years of rampant speculation.

In Zurich, where I spend most of my free time in Europe (I adore everything Swiss - except UBS) the market is now clearly a "seller's" market; I've been tempted to enter some deals with Lars but at these levels I think I'll stick to my Nestlė, which recently hit a fresh high.