Highly leveraged landlords in Sweden will continue to face challenges as surprisingly little has been done to strengthen balance sheets, one of Sweden’s largest banks said in a report on the ailing sector. 

With 115 billion Swedish crown (S$14.6 billion) of bonds that need to be refinanced next year, commercial real estate owners have repeatedly been urged to take action to secure their financing, but movement has been slower than expected, according to analysis by Handelsbanken.

“Our assessment remains that not all real estate companies are equipped to handle interest rates at, or close to, the level we see in the market currently,” the bank’s economists said in the report. “We expect to see more capital raising and divestments to adjust debt levels to higher market rates, and that the strategy of staying put will be challenged.”

Handelsbanken said it had expected to see more property divestments, larger reductions of dividend payouts and investments, as well as more capital raised through share issues. 

For some companies, such as Samhallsbyggnadsbolaget i Norden – more commonly known as SBB – securing financing has become an issue of survival. The development has led to concern that in a worst-case scenario, a negative spiral of plunging valuations and loan losses at lenders could ultimately threaten financial stability.

Handelsbanken expects property values to decline by about 15 per cent from a peak in 2022. In a more adverse scenario where inflation speeds up again that drop could be as large as 25 per cent, the bank said. 

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The alternative scenario, where an escalation of the conflict between Israel and Hamas escalates to involve other countries in the region, could prompt additional rate increases that would put further pressure on landlords. 

If the Riksbank’s benchmark rate would rise to 5.5 per cent, from 4 per cent currently, that would push interest coverage ratios lower and could lead to more forced property sales, the bank’s economists said. However, they believe things would have to get even worse for the real estate turmoil to spiral out of control.

“When it comes to the risk of contagion effects beyond the sector, we don’t think the alternative scenario is serious enough to jeopardise financial stability,” it said. “Our assessment is that it will mainly be owners and bond holders that will be affected.” BLOOMBERG