In its response to covid-19, Sweden has stood out from the crowd. As most European nations enforced strict lockdowns in March, the Swedish government opted for a lighter touch approach, keeping schools, restaurants and borders open while urging people to work from home and practise social distancing in public.
This unconventional approach has divided opinion. Many believe the human cost has been too high. Sweden, with a population of 10.2 million, had recorded more than 6,340 coronavirus-related deaths by 20 November while neighbouring Norway, with a 5.8 million population, had only recorded 305.
Sweden’s authorities have consistently denied the response was designed to protect the economy. However, it does seem Sweden’s economy weathered the first wave of the pandemic better than some other European countries. Figures from Sweden’s national statistics office show GDP fell 8.6 percent in Q2, less than the 11.9 percent contraction across the European Union in the same period.
In September, the Swedish central bank forecast a 3.6 percent GDP drop this year, less than half the contraction predicted for the eurozone by the European Central Bank. Indeed, Swedish GDP increased 4.3 percent in Q3.
One company that is closely watching Sweden’s economic performance is Brunswick Real Estate. On 1 September, the Stockholm-based property investor and lender held a first close on SKr12 billion (€1.2 billion) for its third real estate debt fund. It is now tasked with deploying the capital in the country in sustainable real estate loans ranging from €40 million to €75 million.
Brunswick stands out as a non-bank lender in Sweden’s bank-dominated property lending market. The company broke new ground in 2013 when it launched the first debt fund focused solely on the country’s property sector. It said at the time that its aim was to provide borrowers with an alternative to the region’s banks and the unsecured bond market.
Pontus Sundin, chief executive of Brunswick’s debt division and himself a former property banker with German lender Helaba, says Sweden’s ‘light-touch’ covid response has helped its commercial real estate sector remain relatively resilient to the pandemic.
“We have seen that the impact on retail and hospitality was much harder in other countries where there were stricter measures than in Sweden,” he says. “Even some retail segments, like discount shopping, had an extremely strong second quarter.”
According to Savills, Swedish retail sales fell by only 2.8 percent year-on-year in April, compared with a drop of 19.6 percent across the eurozone. The consultancy recorded overall real estate investment volumes of €12.7 billion for the first three quarters of the year – down 22 percent from the same period in 2019, but 26 percent above the rolling 10-year average.
“We have seen a fast recovery rate,” says Sundin. He explains that conditions for real estate equity and debt investors have improved in the latter part of the year. “After a second quarter, during which the banks and the capital markets were very volatile, the market stabilised in the third quarter.”
Savills data show that real estate investment in Q3 amounted to €2.9 billion, only 7 percent lower than the 10-year average and driven by investment in multifamily properties. “The most interesting opportunities, sector-wise, are in residential, where the vacancy rate is zero percent and buildings have long queues of waiting tenants,” explains Sundin.
Another part of the market he expects to remain resilient is property occupied by government-backed tenants, including nursing homes, day care centres and elderly care facilities. Sweden, like its Nordic neighbours, has a large public sector. Sundin describes such properties as a “defensive option” for investors and their lenders. Savills data show investment in public sector-occupied property totalled €321 million in Q3, making it the third-most popular segment after residential and logistics.
Sweden’s offices, meanwhile, attracted just €262 million of investment in Q3. However, Sundin argues that entrenched working practices in Sweden could bolster the office market against the long-term impact of the pandemic.
“The office sector in Stockholm might be less impacted than in London or Paris because in this country there has been historically a wider acceptance from companies of the working-from-home trend.” This, he argues, means Swedish companies are less likely than other European occupiers to need to implement changes to their workplace dynamics.
“If I compare my own experience, having worked for German, American and Swedish companies, my take is that Swedish companies have a rather higher acceptance of people working from home. They will need to adapt their workspaces less than counterparts in other European countries.”
Looking forward, Sundin expects real estate investors to take a generally defensive approach due to the uncertainty in the market. This will create additional demand for assets with stable cashflows, such as multifamily properties, public sector-occupied buildings and logistics facilities with long leases.
The market recovery in Q3 forced Brunswick to reprice its loans to remain competitive. “In the second quarter, when banks and the bond market were very volatile, and investment activity was low, we felt we had a great financing opportunity,” Sundin says. “But by the end of summer, we saw a swift recovery and had to reprice loans because we were in danger of losing them.”
Although the market became less liquid in March, as the pandemic hit Europe, debt availability increased with the Q3 market rally. He adds that the lending market become more competitive in the third quarter, with loan-to-value ratios rising by 15 percent and margins decreasing by 30-50 basis points. “It varied on a case-by-case basis, and lending terms overall remained fairly conservative.”
One reason for this was that the country’s banks remained largely active, partly due to borrowers drawing down on credit facilities in order to cope with the crisis.
According to property consultancy JLL, the four biggest banks – Svenska Handelsbanken, Skandinaviska Enskilda Banken, Swedbank and Nordea – increased their aggregate outstanding loan amounts to real estate by 3 percent during the second quarter.
Data from Sweden’s national statistics office show that, in August, Swedish banks’ exposure to multifamily assets stood at €25.6 billion and that their exposure to other commercial real estate assets stood at €28.2 billion – up from €23 billion and €25 billion, respectively, a year earlier.
“The banks and the capital markets were very volatile in the second quarter but both markets stabilised in Q3,” Sundin says. “Banks probably concluded that market conditions were better entering into Q3, so they increased their lending activity.”
However, he adds that although banks continued to support their real estate customers during the first wave of the pandemic, they were more focused on refinancing loans than on writing new ones. “Based on the discussions I have with companies, to secure financing for new business and increases of limits is not easy.”
Taking a long-term view, Sundin expects the pandemic to reduce Swedish banks’ willingness and ability to lend to the commercial real estate sector. He argues that this will create opportunities for alternative lenders such as Brunswick.
“At the beginning of the 90s, the country suffered a tough real estate market crisis which prompted the regulator to limit Swedish banks’ commercial real estate exposure. As was the case in the aftermath of the global financial crisis, banks are likely to be cautious on the type of real estate exposure they want after the covid-19 crisis.”
He adds that the latest round of Basel Committee regulation, as well as domestic regulation on banks from the Swedish Financial Supervisory Authority, are set to increase the risk weighting for real estate financial exposure.
Sweden’s commercial real estate finance market stands at roughly €145 billion, he estimates, of which around €95 billion is financed by the banking system, and most of the remainder by capital markets. “The average loan tenure in Sweden is between three and five years, so the banking market needs to refinance €24 billion each year.”
Sundin explains that regulators are increasingly forcing banks to match their funding and their lending, which means they are reluctant to provide long-term finance. “If they have a five-year loan out, they need to have a five-year bond in, and the Swedish krona bond market is typically a three-to-five-year market. That means the banks tend to be competitive on shorter-term loans, but there is an opportunity for debt funds like us to offer attractive terms on tenures longer than five years.”
When announcing the launch of its third property debt fund in September, Sundin said the firm was aiming to take advantage of the shortage of liquidity in Sweden’s property finance market brought about by the pandemic. “Swedish banks’ inability to offer 10-year duration loans works in our favour,” he says.
Europe’s real estate lending market is gradually realigning, with alternative lenders taking market share from banks. However, Sweden’s non-bank lending industry remains small, for the time being at least. Being outside the eurozone, Sundin explains, means there is a currency barrier to foreign alternative lenders. However, as the country’s banks manage their exposure to the sector, he expects more opportunities for real estate debt fund strategies in Sweden.
Although Sweden and its Nordic neighbours are known for their relatively stable economies, Sundin has his eye on headwinds. Beyond the challenges of covid-19, he says global events such as a potential ‘no deal’ Brexit which was unresolved at the time of writing, will have an impact on his home country.
“Sweden is a small country, which is dependent on exports,” he says. “So if Europe sneezes, Sweden catches a cold.”
Brunswick’s third real estate debt fund, which reached a €1.2 billion first close in September, has a stated aim to focus on sustainable property investments.
The company previously offered ‘green’ loans through its second debt vehicle, but it has said that its successor will have a clearer focus on sustainable property investments. In a statement announcing the launch of BREC III, the company said: “In addition to green issues such as reduced carbon dioxide emissions and smarter energy consumption, we also want to ensure that our investments lead to an improvement in aspects of social sustainability.”
Sundin believes there is scope in the Swedish market to finance buildings that can be brought up to European sustainability standards. “There are around 300,000 assets in Sweden and less than 1,000 of them have an LED BREEAM certification,” he says. “So, we try to focus on assets where improvements can be applied. If the borrower meets certain criteria, we can provide a green loan.”
He adds that financing sustainable assets makes business sense. “Investors can achieve higher rents and lower yields if they have green-proof assets.”