OAKS LANE
STONE IS CAPITAL

 |  Ramzi Chamat

Real estate funds are concerned about the merger between Credit Suisse and UBS.

For those who work in the field of securitized real estate, the merger of the two big banks is a source of concern for a market that has already been very cautious in recent months. However, for UBS, this is great news, as larger real estate funds will represent an additional competitive advantage which should also boost their results.

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The merger of Credit Suisse and UBS has caused major upheaval in the Swiss economy, both literally and figuratively, and is expected to have an impact on the securitized real estate market. There is no doubt that the new entity will have a dominant position that will not be without consequences for the rest of the industry.

 

According to Immoday media, "We interviewed a dozen professionals, including listed and unlisted fund managers, consultants and trade association representatives. They all expressed more or less the same view: in the long term, the new situation is not healthy. It gives too much power to UBS and increases investor anxiety in a market that was already quite uncertain in recent months.

 

I. UBS in an ultra-dominant position in the Swiss real estate market

 

UBS will occupy an ultra-dominant position in the Swiss real estate market once its merger with Credit Suisse is completed. The numbers speak for themselves: the new entity will manage fourteen real estate funds, of which the five largest listed funds account for 45% of the market. Combined with all its real estate vehicles, UBS will control 60% of the market.

 

According to data available at the end of March 2023, these funds will hold more than 60,000 rental units, with net assets of CHF 28.2 billion and a market capitalization of almost CHF 33 billion. Their average trading volume over the last twelve months is approximately CHF 317 million. In other words, UBS will become a veritable behemoth, surpassing even the biggest player in the sector to date, the insurer SwissLife.

 

II. Credit Suisse and UBS merger weakens an already precarious market

 

The merger comes at a delicate time for the real estate market, which was already weakened by a loss of investor confidence, increasing volatility and low activity. Indeed, several issuers have cancelled their capital increases, reflecting a situation that is not very reassuring. This mistrust is all the more justified if we look closely at the accounts of listed real estate investment trusts, which have taken out many short-term mortgages and will have to renew them at much higher rates, thus impacting their profitability and the dividends they pay out. In this context, the announcement of the merger between Credit Suisse and UBS is likely to reinforce investors' concerns and dissuade new investments in this type of asset.

 

III. Nightmare come true: the worst case scenario

 

In any case, it is clear that Credit Suisse funds are among the real estate vehicles in which investors no longer want to put their money, at least as long as they have no visibility into their future. This is problematic for other reasons as well. If investors are unable to sell their units on the market, they can demand that the fund management company redeem them at the net asset value at a certain deadline stipulated in the regulations. In this case, the fund could be forced to sell properties to obtain cash to pay back the investors. This problem is not merely theoretical, as it has already occurred in the past.

 

Our interviewees acknowledge that this is a worst-case scenario, but it is not impossible and may have already begun. Since there is absolutely no transparency, it is impossible to know what redemption requests are being made by investors in Credit Suisse funds. We will only know whether many Credit Suisse properties will come onto the market in a few months.

 

IV. There is an ideal solution for investors...

 

At the moment, it is all speculation because no one knows what UBS intends to do with the Credit Suisse funds. All options are probably being considered, from a global sale - which is very unlikely - to a merger of the Credit Suisse funds with those of UBS. The latter option would be the most reassuring for investors, as UBS funds are generally recognized for their strength and good management.

 

However, it is not an easy solution, because even if some funds apparently pursue the same strategy, there are still important technical, legal or tax differences that make a merger difficult. It should also be taken into account that such operations would require a modification of the fund's prospectus, and thus the approval of the Finma.

 

V...and the best option for UBS

 

The most advantageous strategy for UBS would be to adopt a selective approach by keeping the most promising Credit Suisse funds or real estate holdings and selling the rest on the market, even at a lower price if necessary.

 

This solution would allow the bank to get rid of unprofitable assets while strengthening its own funds. Indeed, the size of the real estate portfolio is a key advantage in the asset management business, as it allows for significant economies of scale in management costs and vendor negotiations.

 

In addition, a larger real estate portfolio can increase the fund's liquidity and improve its financial results. In addition, it could make it easier to organize building management and renovation work, by obtaining better terms from suppliers.

 

Ultimately, the size of the real estate portfolio is an important competitive advantage, and these arguments could be used to convince investors of the added value of this strategy for the fund. However, it remains to be seen how UBS will handle the technical, legal and tax differences that may arise when these funds are merged.

 

VI. A paradoxical situation: UBS and investors may come out ahead

 

This situation could have a paradoxical consequence: investors will have less choice, but the conditions offered will be more attractive. This would be beneficial for the new UBS, but less so for its competitors who will have to face increased competition. If this continues over time, it could create a worrying imbalance, with the risk of a split between UBS and other funds, and a high concentration in one fund issuer. In addition, the merger would exacerbate an already significant problem: the lack of diversity in the market. To be effective, it is necessary to have a plurality of players offering sufficient competition between investment products.

 

Source: Immoday



Demand continues to grow amid construction slump

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Shortage of nearly 50,000 housing units throughout Switzerland within the next three years.

Shortage of nearly 50,000 housing units throughout Switzerland within the next three years.