UBS Cites Commercial Real Estate Dip as Emerging Risk

March 29, 2024

UBS Highlights Commercial Real Estate Downturn as Key Risk

In a recent disclosure, UBS (UBSG.S) has identified the downturn in commercial real estate markets as a significant threat to its operations. The Swiss banking giant noted that the sector is reeling from the dual pressures of soaring borrowing costs and a decrease in demand for office spaces in the post-pandemic era.

The current state of commercial property markets in the United States and Europe is reminiscent of the 2008-9 financial crisis, with UBS citing “adverse effects on valuations from higher interest rates and structural decline in demand for office and retail space.” The bank’s 2023 annual report, released on Thursday, emphasized the potential for these issues to cause widespread consequences due to substantial lender investments in the sector.

UBS’s own exposure to commercial real estate has seen a significant increase, jumping from $47.1 billion in 2022 to $55.09 billion in 2023. This uptick is attributed largely to its acquisition of Credit Suisse, although it remains unclear how much of this is tied to the challenging US market.

Despite not being listed among the top risks in its previous annual report, commercial real estate now stands alongside inflation and geopolitical concerns as a major hazard that could impact UBS within a year. The bank’s acknowledgment of this risk comes amidst plummeting valuations in the US, which have strained developers and banks alike.

Analysts suggest that while a further downturn could affect major banks globally, the overall impact on their earnings should be manageable. Meanwhile, the International Monetary Fund has urged Swiss banks to maintain vigilance over real estate risks.

UBS also pointed out that increased exposure to Swiss commercial real estate has heightened climate-related transition risks, especially following Switzerland’s Climate and Innovation Act which will affect energy efficiency regulations. The bank is actively working towards reducing emissions linked to its property lending and has set ambitious targets for reducing emissions in its Swiss property portfolios by 2030.

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