Nordic Credit Rating (NCR) said today that increasing economic headwinds are weakening credit metrics across the Swedish real estate sector, where sharply higher inflation and interest rates, partly due to the war in Ukraine, have radically altered the landscape since the beginning of the year. Most companies in the sector reported market value gains in the first quarter, but rising interest rates are effectively reversing the benign market conditions of the past few years. Although interest-rate hedging can reduce the immediate impact of rising rates, the sector's high leverage means that even inflation-linked rental contracts will be unable to keep pace with increasing interest costs.
"Reduced interest coverage is not necessarily a materially negative factor for the overall real estate sector as most companies have satisfactory covenant and policy headroom," said NCR credit analyst Marcus Gustavsson. "However, a sharp fall in coverage could lead to rating revisions, especially for issuers which are more severely impacted or already have little headroom against rating triggers. Moreover, if higher interest rates translate into rising property yields and lower property values, companies could approach or breach their loan-to-value rating thresholds, putting additional pressure on ratings and outlooks," he added.
Contacts:
Marcus Gustavsson, analyst, +46700442775, marcus.gustavsson@nordiccreditrating.com
Yun Zhou, analyst, +46732324378, yun.zhou@nordiccreditrating.com