Will Sweden’s Woes Shake Europe’s Real Estate Markets?
Investors are taking fright at commercial real estate risks in Sweden. But we think the situation is less threatening than feared.
Sweden has become the poster child for European property-market volatility. The country’s residential property market has experienced one of Europe’s biggest booms and sharpest reversals in recent years. And Swedish commercial real estate (CRE) markets are facing oversupply, high vacancy rates and rising financing costs.
As a result, the bonds of leading Swedish real estate companies have faced successive credit rating downgrades, sparking fears that CRE troubles will extend to banks and property companies across Europe. We disagree. In our analysis, Sweden’s banks and property companies are mostly well-placed to ride out the property-market downturn, and we see fears of a domino effect as overly pessimistic.
Sweden’s Property Market Is Atypical
Investors should take care not to extrapolate Sweden’s property woes across Europe because Sweden’s financial stability is far more sensitive to CRE than the European average. For example, Sweden’s CRE is one of Europe’s smaller markets, accounting for about 2.8% of the total. But Sweden’s CRE market represents 47% of Swedish GDP, compared with a European average of about 11%.
Sweden’s CRE market is also closely entwined with the Swedish financial system: 47% of CRE bank lending originates from Swedish banks, and a similar proportion of CRE companies’ bonds are owned by Swedish financial institutions and investors. This makes Swedish banks highly sensitive to CRE market developments, given their above-average exposures to the property market (Display).
Rising interest rates are weighing heavily on the share prices of Sweden’s CRE companies, which have increased their leverage substantially over the last 10 years. Many face much higher debt-service costs (Display), damaging investor confidence.