Off The Wire
Bank rescue real estate turns from dowry to downer
LONDON, March 30 (Reuters Breakingviews) - Credit Suisse’s (CSGN.S) rescue contains a property booby prize. Unlike many banks which got into trouble back in 2008, the Swiss lender has flogged much of its prime real estate. That leaves prospective new owner UBS (UBSG.S) with an expensive and long-lasting rental bill.
In the last financial crisis prime real estate played a big part of bank rescues. When Barclays (BARC.L) bought Lehman Brothers’ U.S. capital markets business in September 2008 the deal included the bankrupt investment bank’s headquarters. The new building on New York’s Seventh Avenue accounted for $1.5 billion of the $1.75 billion deal’s value. Similarly, when JPMorgan (JPM.N) rescued Bear Stearns six months earlier it also took the target’s Manhattan headquarters. At the time JPMorgan boss Jamie Dimon said the deal meant he would save $3 billion because he no longer needed to build a new headquarters. Property also helped prop up government bailouts. Royal Bank of Scotland had 17 billion pounds' worth of property and similar assets when the UK government bailed it out in 2008.
Today there is less real estate underpinning bank values. Credit Suisse sold its main Cabot Square office in London’s Canary Wharf over a decade ago; it now occupies the building under a lease which ends in 2034. Prospective owner UBS rents its new Broadgate campus in London; Deutsche Bank (DBKGn.DE) does the same with its Frankfurt headquarters following a 2011 sale and leaseback deal.
These leases are a hefty liability for any new owner. Credit Suisse’s One Cabot Square building is 550,000 square feet and includes a sprawling trading floor. However, it’s far from clear that the enlarged UBS will need that space following what are expected to be hefty job cuts in Credit Suisse’s investment bank. The boom in hybrid working further reduces the need for extra offices.
Banks like UBS will also find it harder to sub-let excess space. Canary Wharf is already grappling with 15% vacancy rates as demand dwindles, according to Green Street estimates. For buyers preparing to rescue embattled banks, real estate has turned from a dowry to a downer.
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UBS said on March 19 it had agreed to buy rival Swiss bank Credit Suisse in a shotgun merger arranged by Swiss authorities.
As part of the deal, UBS will take on Credit Suisse’s leases on buildings like One Cabot Square, the bank’s office in London’s Canary Wharf.