Rosalind Evans
Experts Point Out Sweden’s Vulnerability to Escalating Interest Rates
Swedish property market faces turbulence due to increased short positions by hedge funds this year © Bloomberg Swedish property market faces turbulence due to increased short positions by hedge funds this year on Twitter (opens in a new window) Swedish property market faces turbulence due to increased short positions by hedge funds this year on Facebook (opens in a new window) Swedish property market faces turbulence due to increased short positions by hedge funds this year on LinkedIn (opens in a new window) Save current progress 0% George Steer, Daria Mosolova, Joshua Oliver and Laurence Fletcher in London 14 HOURS AGO 42 Print this page Receive free Property sector updates We’ll send you a myFT Daily Digest email rounding up the latest Property sector news every morning. Investors are placing higher bets against the Swedish property market, foreseeing rising interest rates affecting domestic property prices and exposing the sector’s reliance on tight bank lending. Concerns spiked when S&P recently highlighted its concerns regarding SBB, one of the key market players, needing to refinance short-term debt maturing within the year. SBB’s credit rating was downgraded to junk status due to its high leverage and the drying up of market liquidity.
The fear among investors is that S&P’s warnings indicate problems for an industry dealing with increasing interest rates and declining property prices. “The more we examine Sweden, the more troubling the picture becomes,” stated James McMorrow, Europe commercial property economist at Capital Economics.
Over the past decade, worldwide commercial real estate firms leveraged increasing property values and low-interest rates to accumulate debt. However, many are now faced with refinancing their debt when interest rates are reaching their highest since the 2008 financial crisis. The industry’s dependence on short-term debt has made Sweden a particular focus for analysts and traders. According to data provider Breakout Point, hedge funds’ short positions in the Swedish real estate sector hit their highest in over a decade this year.
A sell-off in SBB affected domestic residential and commercial property competitors such as Fabege, Fastighets, and Corem, which have also been increasingly targeted by short sellers this year. Swedish real estate companies were five of the ten worst-performing stocks in Europe’s Stoxx 600 index.
Charles Boissier, head of European real estate at UBS research, remarked that the real estate sector had been aggressively leveraging up over the past 10-15 years, a trend seen not only in Sweden but also in Germany and other markets. Property yields are also projected to rise as interest rates and the cost of debt increase.
Around $40bn of combined bond debt of Swedish property groups is set to mature over the next five years, with $10bn due in 2023. About 70 percent of Swedish property bond issuance is floating rate, compared with only 2 percent in the eurozone. “These factors make Swedish property and Swedish property companies particularly susceptible to higher interest rates,” stated McMorrow of Capital Economics.
However, despite this situation, Charles Boissier of UBS downplayed the risks. He pointed out that just 16 percent of the debt across Europe’s major listed real estate companies is due before the end of next year, making a widespread liquidity crisis unlikely.
SBB, one of the central players in the Swedish property sector, has been the focal point of investor anxieties, especially after S&P’s downgrade of its credit rating. Its shares have plummeted 40 percent this week, reaching their lowest level in five years, and have fallen 90 percent since the beginning of last year.
In February 2022, Viceroy Research, led by Fraser Perring, announced it was shorting the stock, characterizing SBB as a “debt-driven accumulation of rent-controlled assets”. SBB refuted the short report, asserting it contained “multiple material errors, misleading assumptions, and baseless claims.”
Hedge funds have substantially increased their short positions against the company’s shares, rising from 18.3 percent of the outstanding shares at the start of the year to 24.1 percent, as per S&P Global Market Intelligence data. According to data from Breakout Point, Marshall Wace, Gladstone Capital, and Perbak Capital are among the funds that are betting against the company.
However, other domestic competitors of SBB are also anticipated to face similar pressures. With an average loan-to-value ratio of about 45 percent, Swedish listed real estate companies’ ratio is the third highest in Europe, following Norway and Italy, as per Oxford Economics’ Mark Unsworth. “What we might be witnessing is those stocks with the highest leverage beginning to confront refinancing challenges,” he said.
Investors are keen on the unfolding situation in Sweden’s real estate industry, partly due to the country’s sensitivity to higher interest rates. This means the impacts of stricter monetary policy are likely to manifest sooner than in other places. Over the past year, the Riksbank, Sweden’s central bank, has elevated rates from zero to 3.5 percent.
“Sweden could potentially serve as a warning for other European economies, and that’s why markets are paying attention,” said Simon Harvey, head of FX analysis at Monex Europe.
Despite the looming concerns, Charles Boissier from UBS remains optimistic, downplaying the potential risk. He noted that just 16 percent of the debt held by large listed real estate companies across Europe is due to mature by the end of next year, making a widespread liquidity crisis unlikely.
However, the fears among investors have been mainly focused on SBB, which had to cancel its dividend and a rights issue after S&P slashed its debt rating. Its shares have plummeted by 40 percent this week, hitting its lowest level in five years, and have dropped by 90 percent since the beginning of last year.
