Can a troubled US commercial property fund damage Canada’s housing market?

A former RBC financial advisor is speculating on potential cross-border damage

Can a troubled US commercial property fund damage Canada’s housing market?

The coronavirus is not the only concern that is creating jitters in the financial markets. Reports that investors are reportedly waiting to withdraw roughly US$7 billion from UBS Group’s US$20 billion Trumbull Property Fund has permeated the financial news, and one observer is speculating the situation could spill over into Canada’s housing market.

The Trumbull Property Fund began in 1978 and is among the oldest and largest real-estate funds. It focuses on properties that carry a lower risk level and is more interested in generating lower but steadier returns.

Trumbull was among core funds performed well in the years following the 2008 financial crisis, when investors rushed into safer vehicles that offered predictable stability. Today, however, the situation is somewhat different. One problem involves the fund’s mall properties – many of them were acquired during a stronger retail scene, but are now struggling against the rise of online retailing.

Divestment requests in the fund started to flicker in 2017 and picked up through 2019. A Feb. 11 article in the Wall Street Journal that cited an unnamed “person familiar with the matter” claimed investors were ready to pull US$7 million out of the fund due to its ongoing level of underperformance. UBS sought to calm investors by offering to reduce fees and to wave management fees for new investments, along with replacing some in the fund’s leadership team, including Matthew Lynch, the head of U.S. real estate.

Nonetheless, UBS might find itself in a dilemma if it is tight for funds to accommodate a large wave of redemption requests. The Swiss bank did not publicly comment on the Wall Street Journal’s coverage.

So, what is the connection between Trumbull and Canadian housing? Christopher Liew, a former financial advisor at Royal Bank of Canada, used his column in The Motley Fool to speculate how a cross-border crash could be possible if the weakening of Trumbull sets off a chain reaction into real estate funds that seeps into the residential side of the market.

“Despite the ups and downs, the housing market in Canada was able to post higher prices and sales in 2019,” Liew wrote. “The housing market in general displayed resiliency and earned a passing mark following the slowdown that began in 2018. Now, dark clouds are hovering. If the $20 billion time bomb explodes across the border, it could erase the gains last year and trigger a tailspin this year. The situation is a bit alarming, because the Canada and U.S. markets, at some times, are moving in a similar direction.”

Liew observed that the major Canadian banks “reported lower profits and higher loan-loss provisions” by the end of 2019, adding, “Is it the new normal, or are the banks preparing for an eventuality like a housing market crash? Investors are starting to monitor the amounts the banks are setting aside for bad loans.”

Whether the convulsions from within a single troubled commercial property can bring down the housing market of another country remains to be seen. However, Trumbull’s tumult does not appear to have made any impact in its own country.

Last month, the National Association of Realtors, a US trade group, noted that its Pending Home Sales Index for January was up by 5.2% from the previous month and up by 5.7% from one year earlier. Furthermore, data from the US Census Bureau and US Department of Housing and Urban Development determined that new US single-family house sales during January were at a seasonally-adjusted annual rate of 764,000, the highest level of sales since July 2007, while US home building construction surged to a near 13- year high in January.