Build instead of slow down: Experts make proposals for tens of thousands of new apartments in the cities

Rents are exploding in cities – and left-wing politicians are resorting to increasingly harsh measures. The Tenants' Association is launching a federal rent and housing protection initiative, which the canton of Zurich will vote on next year.

Opposition is emerging. A group of real estate economists and construction officials warns that political interventions could stifle housing construction instead of promoting it. Since the implementation of housing protection laws in Basel, investments have declined sharply. The group is therefore putting forward a proposal to ensure the financial viability of housing projects in cities. Several terms in municipal building regulations would need to be rethought to facilitate the construction of thousands of new apartments.

Nico Müller, a partner at the consulting firm Wüest Partner, will be the speaker: "There needs to be clear incentives and a fair balance between investors and the interests of the public." To understand this approach, it is worth taking a look at the mechanics and challenges of urban densification.

Let's take the city of Zurich as an example: The Building and Zoning Ordinance (BZO) provides for increased building density in suitable locations and for larger, connected projects. Specifically, this involves what's known as "arealüberbauung" (areal development) – an important tool for urban development. The idea behind it: If more dense construction is going to take place, then it should be of good quality – with well-thought-out architecture, sufficient open space, and above-average living quality.

Today, however, there is a high hurdle in Zurich: A so-called area bonus—the right to build more space than would normally be permitted—is only available if the plot is at least 6,000 square meters in size. Such large areas have become very rare in the city, however.

Real estate expert Nico Müller therefore proposes a significant relaxation: In the future, a utilization bonus should be granted for properties with a size of 3,000 square meters or more – and this bonus should be 30 percent, not just 10 percent as before. This means that 30 percent more usable space than usual would be legally permitted.

Müller justifies the higher bonus as follows: "It would have to be substantial in order to create a real run on the realization of the utilization reserves and thus on inner densification."

The proposal includes a second element: Investors would be required to provide 20 percent of affordable housing, according to a definition of cost rent recognized in the Canton of Zurich. Construction and operating costs are the determining factors.

For Müller, the key point is that the bonus for higher utilization and the proportion of affordable housing must go hand in hand. Because increased utilization increases land value and potential, while lower yield prospects with reduced rents counteract this.

According to Müller, the approach could easily be transferred to other cities. Zug is pursuing a similar idea with the "2000 Apartments for Zug's Middle Class" initiative, which was narrowly approved in a referendum in 2023. This initiative, too, aims to create affordable housing in defined densely populated areas of the city—a share of as much as 40 percent.

But the devil is in the details. In any case, the implementation of the Zug initiative is stalling – due, among other things, to legal uncertainties and the question of whether the 40 percent should also apply to projects already underway. The key question remains: How do you get investors on board instead of scaring them away?

According to Müller, it's crucial to set the right incentives. His approach therefore includes a third aspect: Those who develop such a site should, in return, be exempt from the added-value tax. This tax would instead be paid "in the form of affordable housing." Such a tax is now required in many municipalities when a property increases in value due to increased use or rezoning.

A calculation demonstrates the potential: In the densification zones defined in the city of Zurich's development plan, the expanded area bonus alone—that is, a 30 percent increase in utilization starting from 3,000 square meters—could create around 15,000 additional apartments. Of these, approximately 4,000 would be defined as affordable.

If the 20 percent share is taken into account for the entire area, up to 20,000 affordable apartments would be possible.

Alternatives are notoriously rare. New zoning of building land on the outskirts of cities? Practically impossible. Since 2014, the Spatial Planning Act has focused on densification rather than urban sprawl. Projects on undeveloped land outside of urban centers are declining throughout Switzerland (so-called greenfield projects, see graphic). Densification projects are intended to compensate for this – but often fail due to legal and political hurdles.

The political hurdles for the expert proposal, however, would be manageable: "There's no need for a major political coup—a simple resolution by the municipal council would suffice to revise the area bonus," explains Müller. The key is to be able to build more housing as quickly as possible.

Christian Kraft, Professor of Real Estate Economics at the Lucerne University of Applied Sciences and Arts, supports the proposal. He argues that today's extremely high land prices are pushing even non-profit projects to their limits. Rents calculated purely based on costs are not far from market rents today. "If politicians then demand that we have affordable rents 30 percent below market, then that is de facto a loss-making business," he says.

Kraft therefore believes it's right to rethink the value-added tax: "It's absolutely plausible to provide for a share of affordable housing instead of a value-added tax." Upzoning should benefit not only municipalities, but also those who will later live there. Another advantage of this model: anyone who plans for a specific share of affordable housing can make reliable calculations. "This way, it's clear from the outset what returns are possible for which share of the area," says Kraft.

But how realistic is all this? Let's look at a typical problem case from Zurich: An investor named M., who remains anonymous, paid 35 million Swiss francs for a plot of land measuring approximately 2,000 square meters. Thanks to a revision of the Federal Housing Code (BZO), high density is permitted here, and even 40-meter-high buildings are possible.

But no sooner had the land purchase been sealed than the authorities intervened, demanding a 30 percent share of affordable housing. It's always extremely unpleasant when the rules change in the middle of the project phase, M. criticizes. His original calculation, which he based on the high land price, no longer works.

Clear rules for everyone – as proposed by Nico Müller – would have prevented the problem from arising in the first place. The purchase price would have been lower, but the seller of the property would still have earned millions – and the investor would have been building long ago.

However, Walter Angst of the Zurich Tenants' Association does not believe the proposal would be sufficient: "A lot of affordable housing is constantly being lost in cities." It would be merely "a drop in the ocean."

Either way, it should be common practice to negotiate incentives and compensation for densification. Angst points to Helvetia's Frohburg housing project in Zurich, where the developer voluntarily guarantees a share of affordable housing – without any compensation or waiver of added value.

The city of Zurich authorities have not commented in detail. Markus Pfanner from the Department of Building Construction states: "Such fundamental questions regarding added value compensation and affordable housing are being addressed in the ongoing revision of the Federal Housing Code."