Term Sheet: Questions posed by UBS/Credit Suisse deal, AllianceBernstein’s second vehicle, WeWork’s deal with bondholders

UBS's purchase of Credit Suisse poses plenty of questions for the real estate sector; US manager AllianceBernstein targets its second European lending vehicle; WeWork sorts its finances in an agreement with bondholders; and more in today’s briefing, exclusively for our valued subscribers.

They said it

“It does seem inevitable that some banks will now need to pull back on lending to shore up their balance sheets, and we’re likely to see stricter capital standards for banks”

Blackrock chief executive Larry Fink reflects on the impact of the failure of Silicon Valley Bank in his annual letter to investors.

What’s happening?

Crisis averted, questions raised
UBS’s $3.25 billion purchase of Credit Suisse removes an immediate cause of instability in the European banking sector, calming nerves in the real estate lending space. However, the deal raises plenty of questions. For one, increased uncertainty in the banking sector may lead to higher funding costs. In a report on the US, forecasting firm Oxford Economics said the recent turmoil will feed into tighter lending standards for commercial real estate, further dampening the outlook for capital values. In addition, the banking crisis makes central bankers’ interest rates decisions harder to predict. Further forward, there may also be a regulatory impact.

What’s more, the deal poses questions about the combined role of UBS and Credit Suisse in the property lending market. On the face of it, it creates a big beast. UBS’s 2022 results show around $25 billion of commercial real estate loans, predominantly in its personal and corporate banking division. Credit Suisse reported SFr25.46 billion (€25.6 billion) of real estate loans, mainly in its Swiss bank and wealth management divisions. Sources say its European activity in recent years has been more focused on warehouse lines and back leverage than direct lending, with a focus on private clients. Real Estate Capital Europe will be tracking what happens next.

Swiss watch
Most onlookers are preoccupied with whether the UBS rescue of Credit Suisse, blessed by the Swiss government, will avert another banking crisis. Those in the private real estate world are also wondering what it means for their respective real estate investment management operations. Within the combined entity, which would see the formation of a $1.5 trillion asset management goliath, would be a real estate business with more than $160 billion of assets under management combined, ostensibly at least.

However, a deeper look at the areas of overlap (see affiliate PERE‘s coverage here) has some of those involved wondering whether anything gives. Within the two asset bases are meaningful Swiss direct holdings, as well as direct core and higher risk-and-return international strategies in both open and closed-end funds. There are also indirect multi-manager and listed equities businesses. All these are run by a 500-plus person real estate and private markets business at UBS Asset Management and a 170-staff real estate contingent within Credit Suisse Asset Management. For them, the revelation of an integration plan cannot come soon enough.

ECB stays the course on inflation reduction
The rising interest rate environment has been cited as a major factor behind the woes of failed US regional lenders like Silicon Valley Bank and Signature Bank, as well as Credit Suisse. Although many have questioned whether central banks should continue prioritising inflation reduction over ensuring the stability of the global financial system, the banking crisis of the past week did not have any immediate repercussions for monetary policies.

Despite the market havoc wrought by Credit Suisse’s financial woes, the European Central Bank moved ahead with a 50-basis-point rate increase on 16 March. In opening its policy statement with “inflation is projected to remain too high for too long”, the ECB clearly was “prioritising inflation above all else”, Oliver Salmon, capital markets research director at Savills, noted in the firm’s global capital markets weekly review. Now all eyes will be on the Federal Reserve as the US central bank meets this week to make its next interest rate decision.

AllianceBernstein goes again
Nashville-headquartered investment firm AllianceBernstein has launched its second European real estate debt vehicle, nearly three years after entering the European property lending space. The US firm filed the vehicle – AB European Commercial Real Estate Debt Secured Income Fund II – in Luxembourg in January. It is understood it will focus its second vehicle on mid-market lending opportunities with loans ranging from €50 to 100 million on average and aim for target net return of 5 to 8 percent.

AllianceBernstein, which entered the market in 2020 and wields €1.2 billion of capital, this week provided a £135 million (€156 million) whole loan to Goldman Sachs-backed developer Riverstone for its Fulham Residence, a retirement living property, in London.

WeWork it out
Flexible workspace provider WeWork has agreed a deal with bondholders and its largest shareholder, Japanese investment manager SoftBank, allowing it to shrink its total debt pile from $3.6 billion to “less than” $2.4 billion. The company said that $1.5 billion of debt had been cancelled or turned into equity. In addition, the firm said more than $1 billion of funds have been raised via new and rolled capital commitments.

“The post-transaction balance sheet will allow the company to pursue value-additive growth opportunities, providing further upside potential,” the firm said in a statement.

Chief executive Sandeep Mathrani has been vying to make the company profitable since he joined in 2020. In its fourth quarter results for 2022, the company said revenues had increased 18 percent year-on-year, but it made a net loss of $527 million versus a net loss of $803 million in the same period in 2021.

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Where the repricing opportunities are
The real estate transaction slowdown during H2 2022 led to double-digit declines in pricing across major markets globally, according to Schroders Capital’s H1 2023 real estate investment outlook. Although further corrections are anticipated this year, “the repricing has already created attractively rebased investment opportunities and we anticipate a broader buying opportunity emerging as the year progresses”, Kieran Farrelly, global head of real estate solutions wrote in an introduction to the report.

The UK market more broadly and European logistics have undergone significant price adjustments, and consequently “are showing attractive relative value” as UK self-storage, European hotels and US residential, the report stated. The office sector, meanwhile, shows the least attractive risk-adjusted returns, particularly in Asia-Pacific and Continental Europe. Be sure to look out for affiliate title PERE magazine’s April 2023 cover story, which examines how much further pricing needs to fall before transaction activity returns to normal levels.

Office knells keep sounding
Another week goes by and the sound of organisations bemoaning the oncoming obsolescence of today’s offices grows louder. On Wednesday, broker Cushman & Wakefield published a white paper warning how 76 percent of “office stock across Europe risks falling below an acceptable condition”. The firm said incoming sustainability standards were making existing assets less likely to be investible without meaningful upgrades.

On Friday, a report by the Urban Land Institute and digital workplace firm Instant Group, revealed the results of a survey they conducted, including how only 14 percent of occupiers believe their existing workspace portfolios align completely with their business objectives and how 62 percent of office landlords expect a decrease in capital values under current valuation models. Most alarming was how less than 2 percent felt they had the “required capex to respond to occupier and ESG legislation-related requirements”. Indeed, fewer real estate executives are nowadays wondering why episodes of defaults are starting to multiply.

Hopes for more stability
Savills’ chief executive Mark Ridley had an upbeat message for the market following the real estate adviser’s financial results for 2022, in which it reported a 16 percent decrease in profits before tax. He told the Financial Times [pay wall]: “Investors are starting to understand where [interest rates] might peak and what that’s going to do to debt rates”, adding there was “plenty of dry powder” ready to go back into the market.

Ridley is not alone in his belief that volatility is settling. In January, Dale Lattanzio, DRC Savills Investment Management’s managing partner, told Real Estate Capital Europe: “The point at which interest rates will peak is less important to me than the fact we’re further into the process than we were,” adding that it was possible to “more accurately predict” a range of outcomes.

Data snapshot

Europe repricing
Global Q4 returns, as measured by data provider MSCI, fell as most predicted. European markets experienced a significant correction in capital values.

Loan in focus

Supermarket sweep
German bank BayernLB has provided an £86.9 million (€98.7 million) loan to UK grocery property owner Supermarket Income REIT to refinance its existing debt. The secured, interest-only loan replaces three existing tranches the REIT had with the same bank. The new facility matures in March 2026 and is priced at a margin of 1.65 percent above SONIA.

The facility is fully hedged for using an interest rate swap to a fixed rate of 4.29 percent, including margin. The borrower said the cost of the hedging instrument for the new facility was £2.8 million – covered by the £3.3 million of proceeds from the termination of its previous hedging instrument.

Today’s Term Sheet was prepared by Daniel Cunningham, with Lucy Scott, Mark Mwaungulu, Evelyn Lee, Jonathan Brasse and Peter Benson contributing