Nordic Credit Rating (NCR) views the community service asset class as a supportive factor when assessing the creditworthiness of real estate companies. The definition of community service is, however, quite broad, and for this reason company property portfolios, financial strength and strategy require thorough analysis. In a recently published report "Stability in the Financial System" (published 28 May 2019), the Swedish Financial Supervisory Authority (FSA) highlights banks' lending to the commercial real estate sector and suggests that they need to hold more capital to cover losses in the event of an economic downturn. Under the stress scenarios conducted by the FSA, commercial real estate companies' net operating income is assumed to fall by 15%, while that of community service property providers, the focus of the report, it is assumed to fall by 5%.
"With long lease contracts under which rents are funded directly or indirectly by public institutions, we typically see community service properties as credit supportive. However, the community service definition is quite broad, thus every property portfolio must be analysed thoroughly", said Michael Andersson, Chief Rating Officer at Nordic Credit Rating.
Demand for community service properties is increasing rapidly. The Swedish population has increased over the past 10 years, the population growth rate is expected to remain higher than historical levels, and the youngest (below 20) and oldest (above 75) parts of the population are expected to grow at an even faster rate. Accordingly, the need for schools, healthcare facilities, care and nursing homes, police stations and other public buildings is expected to increase rapidly.
You can download the full research report on https://nordiccreditrating.com/ratings-research/research.
If you have any questions, please contact:
Michael Andersson, Chief Rating Officer, + 46 73 232 43 22, michael.andersson@nordiccreditrating.com
Mille O. Fjeldstad, Credit Analyst, +47 99 03 89 16, mille.fjeldstad@nordiccreditrating.com