The Swedish real estate sector is grappling with financial challenges due to the surge in inflation and interest rate hikes over the past two years, according to a report published by Nordic Credit Rating (NCR) today. The sector's interest coverage has weakened due to rising financing costs. However, it appears we have reached the peak of central bank rate hikes as inflationary pressures recede and the economic outlook remains gloomy, which are widely expected to result in interest rate cuts in 2024. Depending on the timeliness and extent of potential policy rate cuts over the next few years, some issuers' average interest rates may peak in 2024 and their interest coverage ratios look set to improve.
"The Swedish real estate sector has faced financial headwinds and rapidly deteriorating interest coverage ratios on the back of the sharpest interest rate hikes of the 2000's," said NCR credit analyst Gustav Nilsson. "However, lower long-term financing rates could result in some issuers seeing their average interest rates decline and their interest coverage ratios look set to improve."
Reported property values in Sweden have been remarkably resilient so far, with only moderate value declines despite higher yields. However, transaction activity has remained relatively low, delaying inevitable property value revisions as long-term financing costs remain prohibitive for a large proportion of potential buyers. We expect more transactions to be completed in 2024 as buyers and sellers' price expectations become increasingly aligned, assisted by lower long-term borrowing rates, which we believe will accelerate declines in reported property values and add pressure to loan-to-value ratios.NCR_-_Swedish_real_estate_sector_adapts_to_a_tougher_financing_climate.pdf (472.85 KB) Real estate ALL Real Estate Off