Hedge funds have cranked up their bets against Sweden’s real estate sector as investors predict higher interest rates will weigh on domestic property prices and expose its vulnerability to tighter bank lending.
Traders’ worries have intensified after S&P on Monday flagged its concerns over the outlook for SBB, one of the market’s biggest players, which needs to refinance short-term debt that matures in the coming year.
The credit ratings agency cut the Swedish landlord’s rating to junk territory and drew attention to its high leverage and tightening market liquidity. But investors fear S&P’s doubts are a harbinger for an industry grappling with the impact of rising interest rates and cooling real estate prices.
“The closer we look at Sweden the worse things seem to appear,” said James McMorrow, Europe commercial property economist at Capital Economics.
For a decade global commercial real estate companies took advantage of rising property values and low interest rates to load up on debt. But many will need to refinance their borrowings just as interest rates touch their highest levels since before the 2008 financial crisis.
Analysts and traders have set their sights on the Scandinavian country because of the industry’s reliance on short-term debt. Hedge funds’ short positions in the Swedish real estate sector have soared this year, reaching their highest level in over a decade, according to data provider Breakout Point.
A sell-off in SBB spread to domestic residential and commercial property competitors, including Fabege, Fastighets and Corem, which have also increasingly been targeted by short sellers this year. On Tuesday, five of the 10 worst-performing stocks in Europe’s region-wide Stoxx 600 index were Swedish real estate firms.
Charles Boissier, head of European real estate at UBS research, pointed out that “as a sector [real estate] has been leveraging up quite aggressively in the last 10-15 years. That is not just Sweden, but Germany and other markets.”
Property yields — which move inversely to prices — are also forecast to push higher as rates and the cost of debt rise. Based on the current cost of debt available in the market, yields on “prime” Stockholm offices could yet rise this year to 4.7 per cent from 3.5 per cent, said Mark Unsworth, head of real estate economics at Oxford Economics, implying a 25 per cent drop in prices.
Swedish property groups also rely more on bank funding. Several US regional bank stocks have slumped since the collapse of Silicon Valley Bank in March, while April’s euro area bank lending survey showed the pace at which lenders were tightening their credit standards was at its highest level since the continent’s sovereign debt crisis in 2011.
Bloomberg data suggests that about $40bn of Swedish property groups’ combined bond debt will mature over the next five years, with $10bn due in 2023. About 70 per cent of Swedish property bond issuance is also floating rate, compared with just 2 per cent in the eurozone.
“These together make Swedish property and Swedish property companies particularly vulnerable to higher interest rates,” Capital Economics’ McMorrow said, even though the outlook for Sweden’s economy “does not look drastically worse than its neighbours in Scandinavia or the eurozone”.
Simon Harvey, head of FX analysis at Monex Europe, said investors were paying close attention to the trouble brewing in Sweden’s real estate industry, in part because the country’s sensitivity to higher interest rates means the effects of tighter monetary policy are likely to show up earlier than elsewhere. The Riksbank has raised rates from zero per cent to 3.5 per cent over the past year.
“Sweden is potentially a canary in the coal mine for [other European economies] and that’s why markets are taking heed,” he said.
However, UBS’s Boissier played down the risk. Across Europe’s big listed real estate companies as a whole, just 16 per cent of the debt matures before the end of next year, making a broad “liquidity crunch” unlikely, the bank found.
In Sweden investors’ fears have coalesced around SBB, which was forced to cancel its dividend and a rights issue after S&P cut its debt rating. Its shares are down 40 per cent this week, to its lowest level in five years, and 90 per cent since the start of last year. In February 2022, Fraser Perring’s Viceroy Research announced it was shorting the stock, describing SBB as a “debt-fuelled roll-up of rent-controlled assets”. SBB said the short report contained “numerous and material errors, misleading assumptions and [made] unsubstantiated claims”.
Hedge funds have upped their bets against the company’s shares from 18.3 per cent of the outstanding shares at the start of the year to 24.1 per cent, according to data group S&P Global Market Intelligence. Among funds betting against the company are Marshall Wace, Gladstone Capital and Perbak Capital, according to Breakout Point.
But SBB’s domestic rivals are expected to come under pressure too. At roughly 45 per cent, Swedish listed real estate companies’ average loan-to-value ratio is the third highest in Europe after Norway and Italy, said Oxford Economics’ Unsworth.
“[But] there will be a distribution around that average so perhaps what we are seeing is those stocks with the highest leverage starting to face refinancing challenges.”
