Real Estate Fund: In a move that highlights the current difficulties of the commercial real estate sector, UBS has announced the liquidation of a $2 billion real estate fund it acquired through its purchase of Credit Suisse. The move comes as the office real estate market, particularly in the United States, continues to suffer from falling valuations and rising vacancy rates.
Fund details and liquidation decisionThe real estate fund, with four-fifths of its assets tied to office properties, had been under pressure from investor redemption requests. However, UBS said meeting these demands would require selling assets at an “inappropriate time,” potentially harming the interests of existing investors. As a result, the Swiss bank concluded that a full liquidation of the fund was the most prudent course of action.
The impact of the office market declineThe commercial real estate sector, particularly in the United States, has seen a sharp decline in value since 2021, largely driven by a surge in office vacancies following the COVID-19 pandemic. Analysts warn that both lenders and property owners are likely to face further challenges as the market remains under stress.
Credit Suisse Real Estate Fund International, managed by UBS, had total net assets valued at 1.88 billion Swiss francs ($2.17 billion) at the end of June 2024. The fund’s value had been on a downward trajectory throughout 2023, reflecting the broader difficulties in the sector. According to documents dated June 30, 83% of the fund’s investments were in office properties, with the United States accounting for 22% of the portfolio, followed by Germany at 16% and Canada at 14%.
Market context and challengesUBS’s decision is part of a broader trend affecting the commercial real estate sector. In recent months, other major players in the sector have taken steps to mitigate losses. For example, Blackstone Mortgage Trust cut its dividend in July, while Starwood Real Estate Income Trust limited share redemptions in May to prevent forced asset sales.
UBS acquired the real estate fund as part of its acquisition of Credit Suisse in 2023, following the bankruptcy of its long-time rival due to financial difficulties. The fund saw significant redemptions by investors in 2022: 36% of the total outstanding units had been redeemed by the end of 2023.
Challenges in the sale of assetsUBS noted that the process of selling assets to meet redemption requests over the past 18 months had revealed the “limited depth” of the current real estate market. The bank said that continuing to meet redemption demands would require selling the fund’s most liquid assets, a move that could further reduce the overall attractiveness of the portfolio and lead to further redemptions. As the value of the fund’s assets has continued to fall, the portfolio’s annualised net returns over the past three years stood at -10.6 per cent as of June 2024, highlighting the significant challenges facing commercial real estate investments in the current environment.
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