UBS announced it will liquidate a USD 2 billion real estate fund acquired during its takeover of Credit Suisse, citing significant investor redemption requests and challenging commercial property markets. The fund, heavily invested in office properties, struggled amid declining property values and rising vacancy rates post-pandemic. UBS determined that winding down the fund was preferable to selling assets at a loss. This decision reflects broader issues in commercial real estate, where companies like Blackstone and Starwood have also faced difficulties. UBS's move aims to protect remaining investors while navigating ongoing market challenges.
Earlier this month, UBS announced that it would liquidate a USD 2 billion real estate fund that it had acquired during its takeover of Credit Suisse. This decision is the latest sign of trouble in commercial property markets, where investors are increasingly opting to sell off their assets.
The fund, which has 80% of its assets in office properties, had been facing significant investor redemption requests. UBS explained that fulfilling these requests would require selling assets at a time that would negatively impact the value for current investors. As a result, the bank decided that winding down the entire fund would be a better option.
Commercial real estate markets, particularly in the United States, have seen a steep decline in property values since 2021. Office vacancy rates have increased following the COVID-19 pandemic, leading analysts to predict further challenges for lenders and property owners.
Other companies in the sector are also feeling the strain. In July, Blackstone Mortgage Trust, a commercial real estate finance company, reduced its dividend. Similarly, Starwood Real Estate Income Trust (SREIT) temporarily limited share redemptions in May to avoid being forced to sell off its holdings.
The Credit Suisse Real Estate Fund International, which UBS acquired, had total net assets worth 1.88 billion Swiss francs (USD 2.17 billion) as of June 2023. UBS had already acknowledged earlier in the year that the fund's value had decreased significantly throughout 2023. According to a fund document dated June 30, 83% of the fund's investments were in office properties. The fund's largest geographical exposures were in the United States (22%), followed by Germany (16%) and Canada (14%).
UBS took over Credit Suisse in 2023 after the latter collapsed due to a series of financial challenges. Since then, UBS has been working to integrate and manage Credit Suisse's assets. In a statement, UBS revealed that by the end of 2023, 36% of the fund's total units in circulation in 2022 had been redeemed.
UBS Fund Management (Switzerland) noted that the process of selling assets over the past 18 months to meet redemptions has highlighted the limited depth of the real estate markets. The company explained that fulfilling the outstanding 2023 redemptions would require selling off the most liquid assets in the portfolio. However, doing so would negatively affect the remaining investors, reduce the portfolio's appeal, and likely lead to more redemptions.
The value of the fund's assets has been in decline, and the portfolio's annualised net returns for the past three years were -10.6%, according to performance data as of June 2023. In the broader context, this move by UBS is part of a larger trend where commercial real estate investments are increasingly seen as risky, especially in markets like the United States, where office spaces are struggling with high vacancy rates. This situation has been exacerbated by the aftermath of the pandemic, which significantly altered the way companies use office space.
For UBS, the liquidation of this fund is a step toward managing the challenges inherited from Credit Suisse. The bank's decision to wind down the fund reflects the difficulties that many commercial real estate investors are facing globally. By choosing to liquidate the fund, UBS aims to protect the interests of its remaining investors, although the move highlights the ongoing struggles in the commercial real estate market.
As the global economic landscape continues to evolve, commercial real estate remains a sector under pressure. Investors and companies alike are being forced to reassess their strategies, and for UBS, this liquidation is a necessary step in navigating the complexities of the market.
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