The value of Swedish residential and office properties is set to decline just as the real estate owners need to refinance large bond maturities in the coming years, according to a sector report by Nordic Credit Rating (NCR).

Rising interest rates, deteriorating financing conditions and a looming recession are putting pressure on Swedish owners of commercial real estate, and the ratings company expects that prime office properties could lose some 10 per cent in value through 2024, while residential property could see “a considerably larger decline”.

The commercial property sector has repeatedly been flagged by regulators as the main risk to financial stability in the largest Nordic economy, as a negative spiral of sales and dropping values could lead to loan losses at banks. NCR’s bigger peer Moody’s Investors Service last week warned of more “negative rating actions” in that sector.

Many companies in the sector – where US$9.7 billion of maturing bonds need refinancing next year – will have to strengthen balance sheets by cancelling dividends and divesting assets, NCR said.

“Our base case foresees this process as being orderly, but the longer capital markets remain wary of Swedish real estate, the higher the risk that many companies will want to dispose of properties at the same time, putting further pressure on property values,” NCR analysts Marcus Gustavsson and Yun Zhou said in the report. 

NCR rates 14 companies in the sector, and said most of them are “well equipped to deal with the more challenging market conditions”.

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However, more than a third of the real estate companies rated by NCR have negative rating outlooks, indicating an increased risk of downgrades as rising borrowing costs are yet to fully impact the sector, and the bulk of rent increases are expected to be lower than the rate of inflation. BLOOMBERG