Financial ratios in Sweden's real estate sector look set to benefit from ongoing interest rate cuts, according to a report published by Nordic Credit Rating (NCR) today. The agency said it expects rate cuts to continue through 2025 towards normalised floating levels of about 2%. It also believes that some issuers in the sector could have seen their average interest rates peak.
The report follows a period in which the debt-laden sector has been buffeted by surging inflation and subsequent increases in policy rates by the central bank. Real estate companies now face some respite: inflation has decreased from a peak in December 2022 and the central bank responded with rate cuts totalling 50bps in May and August.
"Capital market financing became increasingly accessible at longer tenors for property managers in the first half of the year," said NCR credit analyst Yun Zhou. "Substantial amounts of new issues have been carried out at more normalised levels relative to the elevated capital market spreads of 2022 and 2023. We take a positive view of the reopening of the capital markets for the sector and the subsequent easing of refinancing concerns for most issuers."
NCR believes that the transaction market, which was sluggish throughout 2023 and the first half of 2024, will pick up in the remainder of the year as uncertainty over interest rates recedes and financing becomes more accessible at attractive levels. The agency also believes that most of the likely value declines in the sector have already been seen because financing costs are justifying book values in higher yielding subsectors. However, lower yielding subsectors such as residential properties could see further corrections due to continued misalignment of sellers' and buyers' price expectations.
NCR said further corrections will be largely dependent on asset quality and current book yields. As the financing landscape normalises and transactions pick up, uncertainty about property values is likely to recede. The agency said it is cautiously optimistic about the implications of improved financing conditions for real estate managers. However, vacancies could increase in the sector as the economy weakens, with a negative impact on business risk profiles.
Contacts:
Yun Zhou, analyst, +46732324378, yun.zhou@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com