Financial challenges for the Swedish real-estate sector are likely to remain in 2023 as higher interest rates feed into companies' financial statements, negatively impacting interest coverage and property values and driving up loan-to-value ratios in the sector, according to a report published today by Nordic Credit Rating (NCR). In addition, NCR expects the high volume of sector-wide bond maturities to increase uncertainty as companies take action to strengthen their financial risk profiles, for example, by divesting properties. The rating agency's base case expects this process to be orderly, but the longer capital markets remain wary of Swedish real estate, the higher the risk that many companies will attempt to dispose of properties at the same time, putting further pressure on property values.
"Our base case assumes property value declines of around 10% for prime office properties through 2024," said NCR credit analyst Marcus Gustavsson. "Property types such as residential, where rent increases are moderate, could see a considerably larger decline as property yields rise from very low levels. The lack of transactions could delay the timing and extent of revaluations in companies' balance sheets. However, following a 250bps increase in market rates since February, we believe yields will inevitably increase across all property types," he added.