How is the purchase of a commercial property financed in Switzerland?

The pillars of commercial real estate financing

To secure financing for commercial real estate , you need to understand the banks' risk metrics. It's less about emotions and more about hard numbers and scenarios.

Equity capital: The 50 percent hurdle

The biggest shock for many investors is the equity requirement. While a loan-to-value ratio of 80 percent (debt capital) is standard for residential properties, this limit is significantly lower for financing commercial real estate .

• Loan-to-value ratio: Banks typically only finance 50 to 70 percent of the market value. This means you need to contribute 30 to 50 percent equity to finance a commercial property .
• Hard equity: A crucial difference compared to homeownership is the prohibition on withdrawing pension fund assets (2nd pillar) and pillar 3a savings for purely investment properties. Therefore, to finance commercial real estate, you need "hard" equity: bank deposits, securities, or unencumbered real estate.

The loan-to-value ratio depends directly on the type of property. A modern office building in Zurich city center is more likely to receive 65 percent debt financing than a specialized factory building in rural Thurgau. The higher the risk, the more equity the bank requires for financing commercial real estate .

Affordability and cash flow: The property pays for itself

When financing commercial real estate, the bank does not primarily check whether you can afford the house, but whether the house can finance itself.

The rental income must cover all costs.

• The calculation: The net rental income must be sufficient to pay a calculated interest rate (usually 4.5 to 5 percent), the amortization and the ancillary costs.
• The surplus: Banks often require a small surplus after deducting these calculated costs to secure financing for commercial real estate . If the property's return is too low, the financing will fail , even if you have sufficient equity.

Amortization: Rapid debt reduction

Another critical aspect of financing commercial real estate is the repayment speed.

Commercial properties are subject to faster technological change and higher wear and tear risks than residential properties. Therefore, banks are stricter.

• Repayment period: While you have 15 years to repay the second mortgage for residential properties, when financing commercial real estate the debt often has to be reduced to a loan-to-value ratio of 50 percent or less within 10 to 15 years.
• Burden: These high amortization rates put a massive strain on cash flow. You therefore need to ensure that rental income is high enough to cover these annual payments on the commercial property financing without experiencing liquidity problems.

The "third-party usability" (fungibility)

This is the magic word in the loan application for any commercial property financing .

The bank is asking itself the question: "If the current tenant moves out or goes bankrupt, how easy will it be to find a new tenant?"

• High fungibility: A standard office building or retail space in a good location is easy to re-let. This facilitates commercial real estate financing .
• Deep fungibility: A cold storage facility, a laboratory, or a custom-built production plant. Here, the risk of vacancy is enormous. Banks value such properties more conservatively, which makes financing commercial real estate more expensive or requires more equity.

Anyone buying a specialized property must expect the bank to assess the market value lower, which will close the financing gap for commercial real estate. enlarged .

Commercial mortgage models

Similar to residential financing , various financing models are available to you for commercial real estate .

• Fixed-rate mortgage: Offers planning security. Since commercial leases are often fixed for 5 or 10 years, it makes sense to secure the financing of the commercial property with a matching term (i.e., with the same duration). This ensures a secure margin.
• SARON mortgage: Offers flexibility and often lower interest rates, but carries interest rate risk. It is often used as part of a mix for financing commercial real estate .

Alternative financing options

If a traditional bank mortgage is not suitable for financing commercial real estate or if equity capital is limited, there are alternatives:

• Leasing: Real estate leasing is common in the commercial sector. A leasing company buys the property and you rent it. This protects your balance sheet and liquidity, but is often more expensive than traditional commercial real estate financing .
• Crowd-financing: Several investors pool their resources. This is often used for larger projects when an individual cannot manage the financing of a commercial property .

Conclusion

The question "How is the purchase of a commercial property financed?" leads to a clear answer: conservatively and with strong equity. Financing a commercial property in Switzerland generally requires 30 to 50 percent equity and a strong, verifiable cash flow from rental income.

Never underestimate the amortization burden. Many investors fail not because of the purchase price, but because of the annual repayments, which drain their liquidity. Solid financing for commercial real estate must also be able to withstand periods of vacancy . Before buying, absolutely check the property's potential for alternative uses – it's key to convincing the bank of your project.

If you want to analyze whether the rental income of your desired property is sufficient for bank-compliant affordability or which banks currently offer the best conditions for financing commercial real estate , Loft provides neutral calculation tools and market comparisons.

Glossary

• Commercial real estate financing: Raising capital for the acquisition of non-residential properties (office, warehouse, sales), characterized by high equity requirements.
• Fungibility (ability to be repurposed): The measure of how easily a property can be adapted for other purposes or users. High fungibility facilitates the financing of commercial real estate .
• Loan-to-value ratio: The maximum percentage of the property's market value that the bank will lend. For commercial real estate financing, this is usually a maximum of 50–70%.
• Amortization: The scheduled repayment of the mortgage. It is often higher and faster for financing commercial properties than for residential properties.
• Investment property: A property held primarily to generate capital income (rent). This is the standard case for any commercial real estate financing .