Swedish Real Estate Shares Finish Difficult 2022 With Challenging Reset Ahead

At the beginning of 2021, a Swedish property company was one of the top stocks in Europe. However, by the end of 2022, it had plummeted 73%, making it the worst performing stock in the sector. This decline has caused a major reset in the industry.

Samhallsbyggnadsbolaget i Norden AB (SBB) has seen a dramatic shift in its fortunes, reflecting the struggles of Swedish real estate stocks in the face of rising interest rates and a lack of available funding due to high levels of debt. Other companies in the same sector, such as Fastighets AB Balder and Castellum AB, have experienced drops of at least 50%.

Johan Henriks, the manager of Lansforsakringar's 17.2 billion Swedish kronor ($1.7 billion) Fastighetsfond, expressed his dismay at the fund's performance this year. Last year, the fund, which invests in Swedish and Nordic real estate stocks, was one of Europe's top performers with a return of 58% in local currency terms, according to Bloomberg data. Unfortunately, it has since lost 45% in 2022.

Henriks expressed in an interview that it may take a couple of years for companies that focus on apartment rentals and homebuilders to reach a stable point. He is more optimistic about commercial and industrial real estate, which often have rents that are linked to inflation. He has decreased his investment in SBB, which has a wide range of residential real estate and public buildings such as schools and hospitals, and the fund's largest investment is now in warehouse company Sagax AB.

Analysts are not expecting much growth for the sector. The average price targets for the largest Swedish real estate companies range from no change in value for Sagax over the next year to a potential 30% increase for Balder. However, even if Balder's stock does rise by 30%, it would still be at the same level it was in mid-August.

Analysts Johan Edberg and Oscar Lindquist from Handelsbanken recently noted that the risk/reward ratio in the Swedish real estate sector is still unfavorable. They pointed out that the risks associated with refinancing and property values are greater than the low valuations, making investing in these stocks a risky endeavor without any guarantees of additional capitalization.

Sweden's housing market is facing a major downturn, with Moody's Investors Service noting that real estate companies are heavily in debt and at risk of downgrades due to their worsening debt profiles. This is the worst slump among European Union countries.

The property market in Sweden has experienced a sharp decline, resulting in the worst slump in the European Union.

Moody's may downgrade Swedish property companies due to their high levels of debt. These firms are in a precarious financial situation and could face serious consequences if their debt is not managed properly.

Sweden's staggering $41 billion of property debt has become a cause for concern throughout Europe. This amount of debt is a major financial burden and has raised alarm bells across the continent.

SBB has become a target for short-seller Fraser Perring's Viceroy Research LLC this year, and is one of the most shorted stocks in Europe. According to S&P Global Market Intelligence, 25% of the company's free float is currently out on loan, which is an indication of short interest. Balder, Castellum, and Sagax all have an indicated short interest of more than 5%.

In response to the Viceroy allegations that were released in February, SBB refuted them and asked the Swedish Financial Supervisory Authority to look into the report.

Analysts at Kepler Cheuvreux have a more optimistic outlook, suggesting that investors purchase shares in SBB, Balder, and Castellum for the long-term demand for real estate. Albin Sandberg and Jan Ihrfelt have also praised the efforts of certain companies to reduce their debt or increase their financial flexibility in recent notes.

Last month, SBB made a deal to sell property valued at nearly $1 billion to infrastructure investor Brookfield in order to pay off debt. Additionally, SBB is in the process of separating a portion of its residential business. Balder, on the other hand, recently raised new equity to purchase a perpetual bond, which has helped to alleviate some worries about its debt.

In response to the sharp decline in SBB stock, CEO Ilija Batljan pointed to the Brookfield agreement as evidence that there is no correlation between the company's share price and the value of its assets. SBB's 12-month forward price-to-book ratio is 0.45 times, which is lower than the Stoxx 600 Real Estate subindex, which is trading at 0.67 times.

Neither Balder nor Castellum provided a response to the emailed inquiries.

It is likely that the market will remain unpredictable. According to Handelsbanken analysts, due to the current low stock prices and the lack of clarity regarding real estate values and financing terms, even minor shifts in the market can have a major effect on share prices.