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(Bloomberg) — Even in Sweden, few people knew about Castellum AB. However, the precipitous sale of 40 million shares in the real estate company earlier this month is now seen by some as a harbinger of things to come in the European real estate market.
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The seller, M2 Asset Management AB, cited falling market costs that affected its “ability to meet its monetary commitments” to make the decision. Corporations have noticed that their market place has been cut in half.
There is little hope of respite. The sector faces debt payments of $10 billion next year, with refinancing requests of about $41 billion through the end of 2026, according to data compiled by Bloomberg.
The investment crisis facing Swedish real estate corporations stems from their variable-rate bonds and short maturities in an emerging interest rate environment. While this makes the Nordic country’s asset market more vulnerable than others in the region, it is being widely watched as an imaginable litmus test for the rest of the sector in Europe.
Some real estate corporations still don’t have the option to dive into the stock market to raise funds.
“In a bad situation of thawing credit markets, Sweden could be at the forefront of a series of bailout rights problems for indexed real estate corporations in Europe,” said Peter Papadakos, lead executive at Green Street. reaching implications for the indexed European real estate sector”.
The Swedish central bank and the Financial Supervisory Authority have warned that dangers similar to housing debt advertising pose a risk to the country’s monetary stability. The main fear is the domino effect for Swedish banks: Last year, mortgage lending accounted for about two-thirds of the Nordic nation’s total loan inventory, compared with less than a third in many of the eurozone’s major economies.
Anders Kvist, senior adviser to the head of the Swedish FSA, said the watchdog had been alert to higher levels of debt through advertising of real estate companies for at least four years.
“Falling asset values can cause a domino effect,” Kvist said. “If the values of the assets are transferred, the collateral that will be held on the loan will also be reduced. discount.
Commercial homeowners such as Fastighets AB Balder, SBB and Castellum, which report on third-quarter effects on Thursday, have spent the past decade pursuing an expansion strategy in Sweden that relied on raising billions of dollars in reasonable cash from yield-hungry bond investors. It’s a playbook that has been followed in European markets, backed by incredibly low interest rates and sky-high asset valuations.
Breakneck inflation and the consequent competitive tightening of financial policy through central banks have reversed the situation. The effect on Sweden’s leveraged property market, one of the brightest in the world last year, has been swift and brutal. SBB shares fell 81% in 2022. Bonds across the industry fell to poverty levels. On Wednesday, Balder saw his investment-grade credit ratings downgraded to maximum yield through Moody’s Investors Service.
It has become “a dark mix for many corporations in a market where simple cash rewarded those with a competitive expansion agenda,” said Martin Edemalm, portfolio manager of steady revenue sources at SEB Investment Management in Stockholm. “But now the market has fundamentally changed. “
Swedish real estate corporations want to refinance more than $40. 8 billion of debt in bonds maturing over the next five years, a quarter of which mature in 2023. You can see how they handle those refunds in the European industry in general.
“European real estate corporations tend to have lower leverage and longer debt profiles than their Swedish counterparts,” said Edemalm, whose company manages about 300 billion kroner ($26. 5 billion) in bonds. “But rising interest rates are obviously negative for the asset class, so it’s moderate to assume that yield requirements will build up for European real estate, putting pressure on valuations. “
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With bond yields, and therefore loan prices, trading at unaffordable levels, much of the direction of debt financing is too expensive for some companies. This crisis is forcing issuers to struggle to obtain bank loans as their balance sheets creak under the weight of maximum leverage and falling asset valuations.
Jens Andersson, Castellum’s chief financial officer, said the company is exploring other investment markets besides the classic mortgages of Nordic banks. He cited the example of U. S. personal placements. due to its long life and competitive prices. But even this sector has obstacles to succeed. finished after the recent turbulence in the UK gold market.
One option to mitigate the investment crisis has been to sell assets. SBB sold homes totalling NOK 6. 7 billion in the current quarter and, more recently, announced new sales of at least SEK 10. 5 billion. In July, Standard
These sales have drawn attention to investor concern: the unusually high levels of cross-ownership in Sweden, which have already prompted warnings from rating agencies about the dangers of governance and potential conflicts of interest. M2 Asset Management sold its stake in Castellum to the owner, Akelius Residential Property AB.
Real estate mogul Rutger Arnhult raised his eyebrows when he named Castellum’s chief executive after being elected chairman for the first time. Arnhult also controls M2 and is the largest owner of Corem Property Group, which last year joined its other stakes, Klovern AB, in a $1. 7 billion merger. Castellum, in turn, owns a third of the Norwegian lessor Entra ASA, of which Balder is also a shareholder.
In a report on the country’s monetary formula in May, the FSA said emerging market debt in the asset sector means it remains “a significant vulnerability to monetary stability. “They have “often played a role in currency crises. “
Maria Gillholm, a real estate analyst at Moody’s, says complex ownership networks among Swedish real estate corporations “further restrict their access to capital, as corporations focus on protecting their own liquidity in the event of a recession. “
“Entra, where Castellum and Balder jointly hold a majority stake, is a good example,” he said. an injection of justice. “
The silver lining for fund managers like Edemalm is that the sale has been so serious that there are now some smart deals to take advantage of once you dig deeper into sub-segments of the sector, such as higher-performing homes in offices, commercial buildings or logistics spaces.
The portfolio manager cites as examples the hybrid euro debt sold through Balder, Castellum and Heimstaden Bostad AB.
These segments are “less sensitive to emerging interest prices and will gain advantages from CPI-linked contracts,” the portfolio manager said. “But the most at the moment are strong balance sheets and strong, supportive owners. “
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