Rising interest rates remain a concern for Sweden's debt-laden real estate sector, as interest coverage ratios are likely to fall substantially over the next few quarters, Nordic Credit Rating (NCR) said today.
The current challenges are financial rather than operational, as business fundamentals such as rents and occupancy rates remain solid, the agency said in a report published today.
Positively, the agency expects most of its rated issuers to manage their credit metrics successfully thanks to their strong interest coverage before interest rates began to rise. Negatively, the extent and pace of adjustments in property yields and values in response to higher interest rates are more likely to have a pronounced effect. NCR said the brunt of the impact is unlikely to be fully felt until 2023.
"Although the overall trends are negative, we believe that most NCR-rated real estate issuers are well equipped to deal with more difficult market conditions," said NCR credit analyst Marcus Gustavsson. "Many have strong owners capable of injecting equity, if necessary, while others have adequate policy and rating headroom. In addition, issuers have other options to support their financial risk profiles, such as divesting properties or postponing investments. Interest rate hedges and inflation-linked rental contracts can also help to reduce the impact," he added.