Blueprint: Credit Suisse’s takeover and regulatory change stokes fears, ECB’s interest rate hike, MIPIM takeaways

Credit Suisse's rescue by UBS raises concerns for investment management businesses; US managers sense regulatory change; the ECB increases rates as the Federal Reserve's next meeting looms; takeaways from a busy week at MIPIM, the world's largest real estate conference; and more in today's briefing, exclusively for our valued subscribers.

They said it

“What’s happened in the last few days will make people hesitate, but for how long?”

Rob Wilkinson, Europe CEO of Boston-based AEW, describes to PERE at MIPIM the reaction of the real estate industry to the multiple bank failings

What’s new?

A week of change… and maybe more
The second and third largest bank failures in US history were never going to be the end of it. A third regional bank, First Republic, has now needed to be secured by $30 billion of deposits from 11 banks, including JPMorgan Chase, Citigroup and Bank of America. In Europe, meanwhile, Credit Suisse was rescued by fellow Swiss bank UBS in a buyout. What all this means for the real estate industry will be covered from multiple angles in PERE and affiliate titles Real Estate Capital USA and Real Estate Capital Europe in the coming days, weeks and months as more becomes clear.

One initial area of focus was regulation. Much has been made of Trump-presidency rollbacks of legislation allowing for Silicon Valley Bank to expand its balance sheet to a precarious size. In fact, one of the architects of global financial era legislation Dodd-Frank, Barney Frank, was on the board of Signature Bank and helped push through some of the legislative changes easing the flexibility of the regional banks. Expect a reversion of some of these changes in the wake of SVB’s and Signature’s failing. “There’s going to be a big-time proctology exam for every regional bank in America,” one chief executive of a debt-focused manager told PERE.

Swiss watch
Most onlookers at UBS’s $3.25 billion acquisition of its Zurich neighbor Credit Suisse are preoccupied with whether the rescue 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.

A deeper look at the areas of overlap, however, has folks 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 prioritizing 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 wreaked by Credit Suisse’s financial woes, the European Central Bank moved ahead with a 50 basis point rate increase on March 16. In opening its policy statement with “inflation is projected to remain too high for too long,” the ECB clearly was “prioritizing 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.


All of this turmoil played out while the world’s largest real estate conference, MIPIM, was hosted in France. Here are some of the key takeaways from PERE‘s presence on the floor of Palais des Festivals de Cannes.

Bank failures are not (yet) a major concern
The collapse of both SVB and Signature Bank hit the headlines just as delegates were packing their suitcases for Cannes. But the mood was calm on day one. “These things happen,” said one European manager. However, the tone shifted notably when Credit Suisse’s stock price plummeted on the morning of day two of the conference. “Real estate is an industry of eternal optimists, but we need to be more realistic,” said a US-based manager.

Interest rates are ruining the party
“It’s purely interest rates,” said one European logistics manager when asked what keeps him awake at night. At the world’s largest property conference, real estate investors were coming to terms with a new reality. With the cost of borrowing higher than it has been in 15 years, this challenge is new to many. “None of us have really worked for long in a higher rate environment,” said one North American investor about their team.

Mental adjustment needed on pricing
Managers are keen to get going on the business of doing deals, perceiving an opportunity to put their healthy capital reserves to work. But, with interest rates still a moving target, words such as “disciplined” and “patient” frequently cropped up in conversation, as buyers wait to get comfortable with the new prices and sellers wait for a reason to sell.

ESG is “an impending cliff edge”
The ongoing pricing reset will separate the wheat from the chaff when it comes to sustainability. Decarbonization capex “will be reflected in the valuations, in the debt and in everything else,” said a US-headquartered manager. There was no indication at MIPIM that ESG has taken a back seat during this period of high macroeconomic instability – “It’s the opposite, in fact.”

Debt is appetizing
Aside from the obvious opportunity for non-bank lenders to plug the financing gap, the market correction could push capital toward debt on a longer-term basis as investors rethink their allocations. “Debt is significantly better value than equity,” said one European manager preparing to launch its maiden debt vehicle to tap into this potential structural shift.

Trending topics

Office knells keeping sounding
Another week goes by and the sound of organizations 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 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 private real estate executives now wonder why episodes of defaults are starting to multiply.

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 PERE magazine’s April 2023 cover story, which examines how much further pricing needs to fall before transaction activity returns to normal levels.

Record sales
A muting of the market in H2 suggested 2022 was going to be a down year for real estate but one niche area did not get the message. Sale-leaseback transactions were more popular than ever, breaking records from both a volume and total transactions perspective, according to research from advisory firm SLB Advisors.

The $31.4 billion of deals across 874 transactions last year were driven by three things, according to SLB managing partner Scott Merkle: last year’s record merger & acquisition activity; a strong appetite to deploy capital from buyers; and sale-leaseback’s attractive cost of capital compared with other types of transactions. Rates on high-yield bonds and corporate debt, for example, climbed over 400bps, while increases in the cost of sale-leasebacks, measured by cap rates, only widened between 100 and 150bps. The popularity of sale leasebacks are likely to remain high as corporates look for liquidity during a market that is looking increasingly strained.

Data snapshot

Asia stands firm
Global Q4 returns, as measured by data provider MSCI, fell as most predicted. However, some key Asia markets stood firm on capital values while the rest of the world repriced significantly.

Investor watch

KIC eyes India for next potential expansion
Seoul-based Korea Investment Corporation is looking to join the wave of institutional investors expanding their presence in India as the firm is considering the opening of an office in Mumbai. Local press has reported that KIC has formed a team tasked with opening a representative office in Mumbai. This would be the investor’s fifth international office after New York, London, Singapore and San Francisco. Apart from KIC, other investors have expressed interest in investing in India as they see the country as benefiting from the US-China conflict. For example, Canada’s Ontario Teachers’ Pension Plan opened its Mumbai office last year.

This week’s investor meetings

Tuesday, March 21

Wednesday, March 22

Thursday, March 23

Friday, March 24

Today’s letter was prepared by Peter Benson with Jonathan Brasse, Evelyn Lee, Charlotte D’Souza and Christie Ou contributing