Some of the biggest institutional owners of Swedish real estate are pushing back against what they view as overblown worries that the country’s floundering property market will unravel, causing wider financial instability.
As interest rates have risen, share prices of landlords listed in Stockholm have plunged by more than 50%. Samhallsbyggnadsbolaget i Norden AB in particular has become emblematic of the sector’s woes after a credit downgrade forced the company, commonly known as SBB, to pull a share issue and put itself up for sale.
The turmoil has also made its mark on the Swedish currency, which slumped to an all-time low against the euro last week amid anxiety that the real estate turbulence could pose risks to financial stability.
“I think that foreign investors have an exaggerated concern about that,” Tomas Floden, the chief investment officer of AMF, one of Sweden’s biggest pension funds, said in an interview last week at a gathering of Sweden’s political and business elite in Visby. His fund had about 22% of its 734 billion kronor ($67.8 billion) in assets under management invested in real estate at the end of last year.
“I’m not worried about Sweden’s financial stability, and I’m not worried about the Swedish financial sector,” Floden said.
Still, prospects for the real estate industry have deteriorated at a fast pace in the past year as rising interest rates eat away at profits for property firms that took on large amounts of debt, often by issuing bonds.
Commercial real estate companies are now facing some $17 billion in maturities over the next 18 months, and as they are turning to disposals to shore up balance sheets, regulators have warned that in a worst-case scenario, forced sales can create a negative spiral of plunging valuations and loan losses at lenders.
Floden said question marks surrounding a number of real estate companies must still be straightened out before international investors regain confidence in Sweden.
Kristin Magnusson Bernard, chief executive officer of the state-owned Forsta AP-Fonden, or AP1, also believes current turbulence can be contained without more severe repercussions for the financial system, as limited supply puts an implicit floor underneath property valuations.
“To really get that negative downward spiral, you need to have built too much in the wrong location, which we haven’t,” she said. “In addition, you need the banks to have been a lot more reckless in their lending, which they also haven’t been.”
AP1 has about 18% of its portfolio in real estate. It’s the owner of Willhem AB, a residential real estate company, and a co-owner of office and retail landlord Vasakronan AB, and Magnusson Bernard said those companies are looking for opportunities to buy properties, engaging in repeated rounds of discussions with potential sellers.
Right Valuations
“I think many — just like us — have been looking at portfolios for quite a long time and have a wish list of things they are interested in if valuations come down,” she said. “We always look for high quality stuff, but at the right valuations. We are not necessarily looking at buying stuff dirt cheap.”
One sizable deal came to fruition this week as Corem Property Group AB agreed, together with two partners, to sell a 51% stake in housing company Klovern AB to property investor Nordic Real Estate Partners A/S for about $230 million, freeing up liquidity to pay off bonds maturing next year. The transaction, which brings with it an accounting hit on Corem’s second-quarter profit of about 1 billion kronor, comes as the company is under pressure from higher financing costs and has seen the outlook on its BBB- rating revised to negative from stable by Scope Ratings GmbH.
The fund executives agree that it’s likely to take some time before the uncertainty around valuations clears, paving way for more buyers and sellers to find common ground. Magnusson Bernard said the transaction market may not spring into life until well into 2024.
“There are a number of current owners who play for time, and would like to exhaust all possibilities around strengthening the balance sheet by raising fresh capital, or maybe offloading very selectively,” the AP1 CEO said. “That obviously prolongs the period of uncertainty, but it’s also a good thing because it means that sellers are not really that forced yet.”