Nordic Credit Rating (NCR) covers a wide range of real-estate companies in Sweden that focus on a variety of property types. Most of these companies are relatively small in the context of the wider Swedish property sector, with NCR-adjusted portfolio values ranging from around SEK 9bn to SEK 30bn.
Average remaining lease terms vary from a few months for managers focusing on the residential segment to as much as 10 years in the case of community service property manager Vacse. The occupancy rates among the property companies we rate vary between 90% and 100%. Managers of residential, retail and community service properties are generally at the higher end of this range, while office and industrial/logistics managers are usually at the lower end. So far, occupancy rates and operating margins are still strong, and we see limited impact on the companies' business risk profiles. However, a significant slowdown in the Swedish economy could lead to increased vacancies over the next couple of years. We regard residential and community service property managers as being better positioned to maintain high occupancy in an economic downturn.
The financial risk profiles of the companies we cover vary substantially. Net debt/EBITDA, a key credit metric, is generally comparatively weak among property managers with lower-yielding assets, such as residential properties. It is also often weak among companies that are growing rapidly, since net debt increases instantly, while any resulting EBITDA improvement comes over the subsequent 12 months. This metric has seen improvements throughout 2023 due to the moderation of growth ambitions among previously rapidly expanding property managers.
We expect the financial risk profiles of companies in the sector in general to continue to worsen for the remainder of 2023 and onwards, and this has driven a series of rating actions (see Recent Rating Actions below). We foresee continued headwinds in the sector, with the impact of higher interest rates on companies' key credit metrics increasing as swaps entered into at lower interest rates expire and spreads on capital market financing remain elevated, especially in the 'BBB' rated space, since year-end 2021.
In addition, we expect companies' net loan-to-value (LTV) ratios to come under pressure as property yields rise as returns on alternative asset classes become more attractive. We anticipate that valuations will be positively impacted by inflation-linked rental contracts, particularly for commercial property managers, but we expect higher yields to have a greater impact. We have seen a limited degree of valuation changes since H2 2022, but we expect property values in general to decrease over the remainder of 2023 and 2024. We believe that the transaction market, which has been sluggish throughout 2023, will pick up as uncertainty about interest rates recedes. The share price of most publicly listed companies is trading at discounts to book values. Although this might not, in our view, reflect the underlying fundamentals of property values, it prices in the dilutive effects and risks of potential new equity issues to strengthen the financial risk profile of companies.
In addition to a purely ratio-driven assessment, we also take into account a real-estate company's financial risk appetite when considering financial risk. Among other factors, we consider a company's average debt maturity and average fixed-interest period, as well as its average interest rate. As with the aforementioned key credit metrics, companies' approaches to financial risk vary significantly. We believe that the differences in individual companies' interest rate hedging and debt maturity profiles have a marked impact on the pace at and extent to which their interest coverage decreases over time. Rising interest rates are clearly reflected in companies' interim reports. The average reported interest rate increased to 3.8% as of 30 Sep. 2023, compared with 2.6% a year before. We expect this figure to increase further over the coming quarters, with a resulting negative impact on interest coverage, although inflation-linked rental contracts partially mitigate the overall impact. However, the recent decision by the Swedish central bank to leave the policy rate unchanged might indicate that market interest rates have peaked. Depending on the timeliness and extent of potential decreases in policy rates over the coming years, some issuers' average interest rates may be nearing their peak.
Our quarterly comparisons from Q2 2023 are available here.
Recent rating actions on real-estate companies
- Studentbostäder i Norden AB (publ) long-term issuer rating raised to 'CC' and withdrawn
- NP3 Fastigheter AB (publ) 'BB' long-term issuer rating affirmed; Outlook negative
- Stenhus Fastigheter i Norden AB (publ) 'BB' long-term issuer rating affirmed; Outlook negative
- Platzer Fastigheter Holding AB (publ) outlook revised to negative; 'BBB-' long-term issuer rating affirmed
- Bonnier Fastigheter AB long-term issuer rating lowered to 'BBB-'; Outlook stable
- Vacse AB (publ) 'A-' long-term issuer rating affirmed; Outlook stable
- Studentbostäder i Norden AB (publ) long-term issuer rating lowered to 'SD' due to distressed exchange on bond