Sweden’s US$41b property debt is alarming Europe
EVEN in Sweden, few people knew much about Castellum AB. Yet the hurried sale of 40 million shares in the property company earlier this month is now seen by some as a harbinger of things to come in the European property market.
The seller, M2 Asset Management AB, cited falling market prices that affected its “ability to fulfill its financial commitments” for the decision. The dumping of the stake by a major shareholder, is just the latest episode in a tumultuous year in which Sweden’s property companies have seen their stock market values halve.
There is little expectation of any respite. The sector is facing US$10 billion in debt repayments next year, with refinancing demands of about US$41 billion by the end of 2026, according to data compiled by Bloomberg.
The funding squeeze faced by Sweden’s property companies stems from their floating-rate bonds and near-term maturities in an environment with rising interest rates. Although that makes the Nordic country’s real estate market more vulnerable than others in the region, it is being watched closely as a possible litmus test for the rest of the sector in Europe.
Some property companies could be left with no alternative but to tap the stock market to raise funds.
“Under a bad-case scenario of no thawing in credit markets, Sweden could be first in line in a series of rescue rights issues from listed property companies in Europe,” Peter Papadakos, managing director at Green Street, said. “That would have sizable implications for Europe’s listed property sector.”
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The Swedish central bank and Financial Supervisory Authority have warned repeatedly that the risks stemming from commercial property debt pose a threat to the country’s financial stability. The major concern is the spillover effect for Swedish banks: property lending last year amounted to about two-thirds of total loan stock in the Nordic nation, compared with less than one third in many larger euro-area economies.
Anders Kvist, a senior adviser to the director of the Swedish FSA, said the watchdog has been warning about the high levels of debt in commercial real estate companies for at least four years.
“Falling property values could trigger a domino effect,” Kvist said. “If property values fall, the available security on the loan decreases. This can lead to demands for more collateral and in turn force distressed selling.”
Commercial landlords such as Fastighets AB Balder, SBB and Castellum – which reports third-quarter results on Thursday – have spent the past decade pursuing a growth strategy in Sweden that relied on raising billions of dollars of cheap money from bond investors hungry for yield. It’s a play book that was adopted across European markets buoyed by razor-thin interest rates and booming property valuations.
Surging inflation, and the resultant aggressive tightening of monetary policy by central banks, have reversed their fortunes. The impact on Sweden’s leveraged property market, among the world’s frothiest last year, has been swift and brutal.
SBB shares are down 81% in 2022. Bonds the length and breadth of the sector have tumbled to distressed levels. Balder on Wednesday had its investment-grade credit ratings placed on review for downgrade to high yield by Moody’s Investors Service.
It has become “a grim combination for many companies in a market where easy money has rewarded those with an aggressive growth agenda,” said Martin Edemalm, a bond portfolio manager at SEB Investment Management in Stockholm. “But now the market has fundamentally changed.”
Swedish property companies must roll over US$40.8 billion of maturing bond debt over the next five years, a quarter of which falls due in 2023. How they navigate those repayments is seen as critical for the wider European sector. BLOOMBERG
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