Private equity players are becoming more active in what remains a subdued investment market in Sweden, where listed domestic players – which own about one third of the number of investment properties – have gone awfully quiet as they struggle with high gearing and more expensive debt.
According to research by MSCI, Sweden has seen only €2.4 bn of investment into the real estate sector this year up until May, less than one third of the €8.5 bn tracked over the same period in 2022. The trend is not expected to change in the near future, according to Tom Leahy, MSCI Real Assets’ head of EMEA Research.
‘Investment volumes are down all over Europe and Sweden is leading the way. The market is very slow and we do not expect it to come anywhere near 2022 levels for the rest of the year,’ Leahy told PropertyEU. So far in 2023, Sweden’s listed property companies have divested $3.1 bn of European properties in an effort to deleverage and cope with their high debt to equity ratio.
Meanwhile, private equity players including Brookfield and Blackstone have entered the market to take advantage of the ongoing price correction in a move which, Leahy says, echoes the aftermath of the Global Financial Crisis, when value-add and opportunistic investors injected equity into distressed situations, notably in Ireland and Spain.
'We have seen several private equity firms with deep pockets already move into the market and there may be more to come if other opportunities arise.'
Capital market crisis
Sweden's current crisis has less to do with property market fundamentals, which in fact remain strong with rental growth accelerating in 2022. It is rather a capital market issue owing to the sharp rise in lending rates which has brought pressure on a number of listed property landlords that used debt to power a wave of industry consolidation, Leahy notes.
A set of domestic players spent tens of billions of krona in 2021 in a series of large portfolio deals and a spike in consolidation among the listed property companies. In the three largest corporate deals of the year, Corem Property Group acquired control of listed residential-property owner Klövern, Castellum bought Kungsleden and SBB bought Offentliga Hus.
These deals were financed by new bonds largely issued at floating rates and mostly indexed to the three-month Swedish interbank rate. Throughout most of 2020 and 2021, this benchmark rate hovered around zero; by the end of April 2023, however, it had risen to 3.49%, writes Leahy in a recently published blog. ‘This has caused significant challenges for the issuers of the debt, much of which was short-term.’
The issues faced by the indebted property companies have been reflected in their share prices. Between Jan. 2, 2022, and May 16, 2023, Castellum’s share price fell by 59%, Corem’s by 79% and SBB’s by 91%. By way of comparison, the MSCI Sweden Index fell by 14% over the same period.
Direct market
In the direct market, the gap between vendors’ and buyers’ expectations has widened and stands now at 25% for office properties, according to a modeled bid-ask spread calculated through the MSCI Real Capital Analytics database.
‘As long as we see the current level of uncertainty in the market, the gap will remain in place, at least for offices and retail,’ Leahy comments.
Industrial is faring better thanks to a strong structural story, he adds. ‘This is a part of the market which remains bullish for the right price.’ Big deals so far this year include Corum selling a 47-property portfolio of industrial assets to Blackstone in April and a 17-property industrial portfolio to a joint venture involving Swedish private-equity fund NREP in February.
