UBS Liquidation of Big Credit Suisse Real Estate Fund Is a Sign of the Times

Since its takeover of Credit Suisse, UBS Group has taken actions to close out risky positions. That it decided to liquidate the CS Real Estate Fund International should be no surprise, as Reuters reported. But the reason — at 83% of held assets, an overinvolvement in office properties — is a sign of the times.

The Credit Suisse Real Estate Fund International had total net assets worth about $2.17 billion at the end of June 2024. Reuters said that during 2023, the fund’s value had fallen “significantly.” Bloomberg noted that the presence of other properties in the fund was 5.5% parking, 4.7% retail, 3.6% warehouses, 2.7% hotels, and 0.3% residential. Country exposures were the U.S., 22%; Germany, 16.3%; Canada,13.7%; 13.0% U.K.; 10.6% Poland; and 24.5%, others.

“The process to sell assets over the past 18 months to meet … redemptions has demonstrated the limited depth of the real estate markets,” UBS Fund Management in Switzerland said, as cited by Reuters.

UBS had written off Credit Suisse bonds in March 2023, wiping out holders. Pacific Investment Management was the largest holder of the Credit Suisse bonds, with about $807 million of the securities. Invesco had about $370M of Credit Suisse’s AT1 debt, while BlackRock’s exposure was reportedly about $113M. AT1 bonds were the lowest-ranked bank debt, vestiges of the European debt crisis.

Just as this latest move is not unknown for UBS since the acquisition of Credit Suisse, similar risk-reducing actions continue elsewhere in the CRE investment environment. Concerned investors look for redemptions to avoid further losses. Funds must sell off better properties at low prices to raise capital to enable the redemptions. Some, like Blackstone’s BREIT, can face redemption waves because of popular concerns over competitors like Starwood’s SREIT.

Back in May 2024, investors in the AAA tranche of the $308 million debt backed by 1740 Broadway in midtown Manhattan only got 74% of their investment back after the loan sold at a steep discount. Creditors in the five lower groups were wiped out.

It is “a really bad sign as to how deep the hole goes,” Bloomberg wrote at the time. When everyone gets wiped out, including those holding the most highly-rated slice of debt, it’s like a wall full of red flags, languidly stirred by an economic sirocco. Reportedly this was the first such event in the post-pandemic era, according to Barclays Plc. This raises the question of whether it’s once again time for CRE loan rating skepticism since the last round during the Great Financial Crisis. Even the presumably most stable investments by the largest sophisticated investors aren’t safe, and concentrations in worrisome product types can accelerate the process.