Sweden’s real estate market poses growing risk for Nordic banks, says rating agency

Large commercial real estate exposures and rising credit risks of Swedish loans make the region’s biggest banks vulnerable as prices decline, DBRS MorningStar warns.

A debt-dependent commercial real estate sector is posing a rising risk to Nordic banks, as SKr35 billion (€3 billion) of unsecured real estate bonds – mostly from Swedish issuers, approach maturity, according to a credit rating agency note, issued today.

DBRS MorningStar said a weaker and more uncertain economic environment as a result of high inflation, declining real estate prices and interest rate hikes did “not bode well” for the commercial real estate sector and in turn for the banking system in the Nordics.

It added: “Most of the potential refinancing challenges for Nordic commercial real estate companies exist in Sweden, where borrowers have used the unsecured bond markets to finance themselves in a similar proportion to bank debt.”

Banks in the region have some of the highest exposures to commercial real estate loans in Europe, while the commercial real estate sector is “highly reliant” on debt and is sensitive to rapid rises in interest rates, the rating agency said.

Despite noting asset quality had remained robust by the end of the first quarter of 2023, DBRS added that “risks are rising” and Nordic banks’ large exposures make them more vulnerable if the sector deteriorates quickly.

Maria Parra, vice-president, global FIG at DBRS Morningstar, added: “We expect Nordic banks’ commercial real estate asset quality to somewhat deteriorate throughout the rest of 2023 and 2024.”

High exposure

Nordic banks’ exposure to commercial real estate as a percentage of gross total loan books is between 11 percent and 30 percent. In total, 39 percent of commercial real estate exposure on the books of the region’s largest banks – DNB, Dankse, Handelsbanken, Nordea, SEB and Swedbank – relates to Sweden.

Between the first and second quarter, Swedish bank Handelsbanken, Finnish lender Nordea and Stockholm-headquartered bank SEB all registered a double digit increase in loans being transferred into ‘stage two’ classification – an International Financial Reporting Standards term that indicates credit risk of a loan has significantly increased since initial issuance.

DBRS MorningStar attributed the increases at all three banks to the “challenging economic environment, especially in Sweden”.

Signs of stress have been emerging in Sweden in recent weeks. Stockholm-based landlord SBB was forced to postpone a dividend payment and cancel a planned rights issue designed to strengthen the company’s liquidity after S&P Global issued a ratings downgrade on the company to BB+ over fears it would not be able to deleverage.

SBB, which owns community and residential properties across the region, is one of many companies which funded growth through the Swedish unsecured bond markets, a cheap source of finance that became prevalent in the wake of the global financial crisis.

Companies have also been issuing bonds denominated in other currencies. In the case of Heimstaden Bostad, a Swedish residential landlord established in 2013, unsecured bond debt has enabled it to double the value of its portfolio. In October 2021, it issued €2.75 billion of unsecured bond debt to finance the purchase of 30,000 residential properties in Germany, Sweden and Denmark in a €9.1 billion deal.

Sweden struggles

Sweden’s economic outlook is forecast to be weaker than its Nordic neighbours due to weaker growth, higher inflation and a higher unemployment rate, according to the latest projections from the European Commission.

Sweden’s gross domestic product is estimated to contract by 0.5 percent in 2023 before recovering to 1.1 percent next year, materially lower than its pre-pandemic average of 2.5 percent in the 2010 to 2019 period. Finland and Denmark, meanwhile, are estimated to return to pre-pandemic average growth in 2024.