Managers look to Sweden as liquidity pressures mount

The concentration of bond financing issued by the country’s REITs makes it a target for potential acquisitions in the coming months.

In anticipation of a wave of liquidity-driven sales, managers both local and global are looking to Sweden to acquire real estate at attractive prices.

During the summer, Sweden’s real estate market made global news owing to the huge volume of upcoming bond maturities for property companies. This prompted ratings agencies to downgrade the credit status of SBB, one of the largest Swedish property companies, to junk status. Real estate investment trusts in Sweden are also generally highly levered, creating expectations of an uptick in asset sales from listed owners.

Among the private real estate managers scanning Sweden for potential opportunities is London-based Tristan Capital Partners. According to Ali Otmar, senior partner and head of investments, the firm has invested €2 billion across the Nordics since inception, but has stayed away from Sweden for a number of years due to the combination of high prices and the use of unsecured bond financing in the market.

Otmar is currently seeing opportunities in a range of sectors across all Scandinavian markets, but most are in Sweden.

“Unlike bank debt, for unsecured bonds, it is not possible to negotiate a borrower/lender resolution, and as a result we expect to see elevated liquidity-led transaction volumes in Sweden,” he said.

According to a Q3 2023 report on the Nordic real estate market by manager Slättö, the bond market distress is highly concentrated to a small number of issuers, with SBB and Malmö-based residential manager Heimstaden constituting almost the entire amount currently in distress.

The report also found that around 40 percent of the outstanding bond amount in the Swedish real estate market, amounting to SKr313 billion ($28.8 billion; €26.8 billion) across both public and private companies, is due to mature by the end of 2025 – the majority by the end of next year.

“The bond market in Sweden is perceived to be an issue for many property owners, but true distress is isolated to only a few issuers. Most will be able to refinance their debts, albeit at lower LTVs, or receive equity injections,” said Jonas Andersson, deputy managing partner at Stockholm-based Slättö, adding that local banks remain “comfortable” with real estate in the Nordics.

“We see an opportunity to make attractive acquisitions from motivated sellers across the Nordics. In Sweden specifically, sellers in the form of listed companies are under pressure to divest due to refinancing needs.”

However, he noted, “book values remain on the high side.”

Otmar agrees: “We have not seen valuations bottoming out yet, but they are coming closer to a point where more transactions could start to happen. We have dry powder across both our equity and debt strategies and are ready to transact when we see the right opportunity.”

While managers say buyer and seller pricing expectations are still a way off meeting, in Sweden, the region’s largest market, the size of this gap is not as significant as in other major European markets. Data provider MSCI quantifies the gap for office assets in Sweden, for example, as -19.2 percent, which is smaller than in the Netherlands, the UK and Germany.

Randy Giraldo, senior managing director and head of real estate, Europe at manager Nuveen Real Estate, whose firm is also seeing interesting opportunities emerge in Sweden and across the Nordics, said he has seen “very limited” forced selling thus far, but expects more transaction evidence to emerge toward the end of the year as external valuations are processed. “As pricing and regulatory matters become more transparent we will become more active.”

In addition to sales of assets by REITs needing to reduce leverage, Giraldo also expects to see several institutional investors across the Nordics needing to reduce their direct real estate exposure as a result of the denominator effect.

Institutional investors in Sweden have the highest average current allocation to real estate of the region’s largest markets at 18.4 percent, according to PERE data. The European average is 13.9 percent.

Andersson, on the other hand, said the denominator effect is “wearing off” for investors in the Nordics, adding “they appear comfortable with their allocations at present.” He therefore does not expect to see a wave of asset sales from this channel.

‘Constructive’ refinancing

Private companies issued the majority of bonds due to mature in the Swedish real estate market in the next two years, Slättö’s report shows. As these firms look to manage their debt obligations in a higher interest rate environment, many will turn to banks in search of refinancing.

A €700 million loan issued by a consortium of bank lenders to Heimstaden Bostad provides an indication of Swedish banks’ current position on real estate. Speaking to affiliate title Real Estate Capital Europe last month, deputy chief executive officer Christian Fladeland said the firm’s refinancing strategy had been “very constructive” and that banks had been “very open to finance the company.”

According to Petri Valkama, head of strategic transactions at Copenhagen-based Nrep, the highest-ranked manager in the Nordic region in the 2023 PERE 100, “all the indications we have are that the banks are stepping in to support” the large amounts of bond financing under strain or approaching maturity. He therefore does not expect to see any system-level distress, only “an increased focus on cashflow, which is exactly what we’d expect to see in this situation, and more selectivity.”

Giraldo said there is still appetite among lenders for real estate, but that “processes are taking longer.”

As for whether the Nordics’ long-held reputation as a safe bet for real estate investing has been undermined by the current state of play in Sweden, managers PERE spoke to refute this.

“If we look at the combination of economic stability, economic growth and political stability, the underlying markets in the Nordics are still in a very good place – we have no expectation that this will suddenly change,” said Valkama.

“The Nordics are still a safe haven,” said Andersson, adding that “investor sentiment is now gradually improving in recognition of the strong vintages that 2023 and 2024 should prove to be.”