Explainer: How Sweden's commercial real estate problems could spark financial meltdown
12/12/2023 14:53
STOCKHOLM, Dec 12 (Reuters) - Soaring interest rates and
too much debt are weighing down Sweden' commercial real estate
firms, making them the biggest threat to financial stability.
The full effect of recent rate hikes has yet to be felt and
authorities have told Sweden's banks to hold on to capital in
case the situation deteriorates and loans turn sour.
Worries about the sector have affected the crown currency
and foreign investors have reduced holdings in Swedish assets.
After a banking crash in the 1990s in Sweden - also caused
by the commercial real estate sector - the economy shrank three
years in a row and two banks were nationalised.
WHAT IS THE PROBLEM?
Many commercial real estate companies borrowed too much
when rates were low and are struggling with higher interest
costs and refinancing after eight rate hikes by the central bank
since spring 2022.
The economy is slowing, property values are falling and
vacancies are set to increase.
Authorities say problems are limited to a few firms but have
warned a fire-sale of assets by one could hit valuations across
the sector. Cross-ownership could make problems worse.
Credit agencies have already cut the ratings of several
firms, some to "junk", showing a high risk of default.
Loans to real estate firms make up about 16% of bank lending
on average. Handelsbanken has the biggest exposure to Swedish
commercial real estate, followed by Swedbank, SEB and Nordea,
according to figures from SEB.
Including mortgages to households - many of whom are also
struggling with higher payments - the property market represents
over 60% of banks' lending.
HOW MUCH HAVE REAL ESTATE FIRMS BORROWED?
Listed commercial real estate firms had outstanding debt of
around 1.8 trillion crowns ($175 billion), according to the
financial watchdog's latest Stability Report. Sweden's GDP was
around 6 trillion crowns in 2022.
Bank loans accounted for around two-thirds of borrowing.
The biggest holders of commercial real estate debt are foreign
investors, followed by Swedish funds, pensions funds and
insurance companies, according to the Riksbank.
WHEN DO FIRMS NEED TO REFINANCE THEIR LOANS?
According to the Riksbank roughly 105 billion crowns of debt
matures in 2024, 122 billion in 2025, 105 billion in 2026 and 63
billion in 2027.
The average maturity of debt for Swedish companies is around
3-4 years, shorter than in most of Europe. Interest rate costs
are likely to rise as debt is rolled over.
COULD A CRISIS IN THE COMMERCIAL REAL ESTATE SECTOR LEAD TO A
BANKING CRASH?
In stress tests, the financial watchdog (FI) said banks
could lose around 50 billion crowns if there were a crisis in
the commercial real estate sector.
Banks hold mandatory capital buffers of around 1.1 trillion
crowns and also additional capital above that.
However, the Riksbank said it was hard to predict whether a
crisis would affect confidence in the financial system as a
whole.
The collapse of regional banks such as Silicon Valley Bank
in the United States and Credit Suisse in Switzerland in 2023,
shows that investors and depositors can lose faith quickly and
pull their cash.
The Riksbank has said commercial real estate firms need to
restructure their balance sheets and banks should keep big loan
loss buffers in case things get worse.
"The main conclusion is that this does not represent a
systemic risk or a threat to financial stability," Financial
Markets Minister Niklas Wykman told Reuters in early December.
WHAT MEASURES HAVE REAL ESTATE FIRMS TAKEN AND IS IT ENOUGH?
Indebted real estate firms have started to buy back debt,
sell assets and raise equity but markets remain tough.
Authorities say more needs to be done and even companies
that are not facing immediate difficulties may need to
restructure as interest rates are likely to remain high for some
time. 0#RIBA=
WHAT COULD AUTHORITIES DO IF THERE WERE A CRISIS?
During the 2008-9 financial crisis, Sweden guaranteed bank
debts and offered subsidised loans to keep credit flowing.
During the pandemic the central bank bought government and
corporate debt and the government paid some employee wages, gave
companies temporary tax breaks and offered credit guarantees to
airlines.
The financial watchdog could ease banks' risk weight floors
for exposure to the commercial real estate sector, currently at
35%, or lower countercyclical buffers which now stand at 2% of
risk-weighted assets.
Sweden could also set up a 'bad bank' backed by the state,
which would take over underperforming commercial property loans
given by banks, a source with familiar with the matter said.
Wykman said the government had a "broad and deep toolbox"
was ready to "take action" if financial stability were
threatened.
($1 = 10.4151 Swedish crowns)
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Sweden-property-explainer Commercial real estate firms struggle
with high interest rates https://tmsnrt.rs/47ULu3g
Sweden-property-explainer Property companies’ interest rate
spreads and maturities https://tmsnrt.rs/3REEty4
Swedish banks have adequate capital buffers https://tmsnrt.rs/3NjhDJt
Sweden's commercial real estate firms and debt reduction https://tmsnrt.rs/3NnKqN6
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(Reporting by Simon Johnson, additional reporting by John
O'Donnell in Frankfurt, Editing by Louise Heavens)
((simon.c.johnson@thomsonreuters.com; +46 70 721 1045; Reuters
Messaging: simon.c.johnson.reuters.com@reuters.net))