Interest rates have been pushed up sharply recently. Even on long maturities, such as ten years. This does not bode well for highly leveraged real estate companies, where several already have acute financial problems.
— The real estate sector is not really set up for this. They have for a long time gotten used to low interest rates. And if these very high interest rates we have now continue, it will not work out, says Esbjörn Lundevall.
He describes it as the crisis the sector is going through has only just begun.
— We will see much more. We’ve gotten a bit into it all. But you haven’t had any major bankruptcies yet. And that should not be ruled out. There is more left than what we have been through.
“Financially very weak companies”
Lundevall notes that there are already a couple of foci of concern.
— Today we know that there are a number of financially very weak companies that must somehow be financially reconstructed or perhaps go bankrupt and be forced to sell their properties. Many are already trying to sell properties to stabilize their balance sheets, he says.
“The higher the interest rate we get and the longer it is high, the more real estate companies fall below the line in order to make ends meet,” he adds.
The financial problems are currently greatest among real estate companies with exposure to the housing sector – such as SBB, Heimstaden and John Mattson – where the yield from the start is lower than when it comes to offices and business premises, according to Lundevall.
— The lower the yield on the properties, the easier it is to have problems with high interest rates. And it’s housing that has the lowest return, and thus the companies get into trouble the most easily, he says.
However, what the real estate companies paid for their stock and how the loan looks like is at least as important, he points out.
— It is of course possible to have a very nice and well-maintained housing stock without problems. And it’s possible to have the highest yielding properties out there and still get into trouble if you’ve made very bad trades and bought a lot at the top.
There are warning signs
At the same time, the effects of the recession have not yet fully kicked in, he states after this week’s reports from, among others, Fabege and Wallenstam. The percentage of unrented homes and premises is still at relatively low levels and the property management itself generates profits.
But there are some worrying signs. The net rental – that is, how the flows of new tenants and tenants who cancel their contracts match each other – is starting to look a little weak in some places, according to Esbjörn Lundevall, equity strategist at SEB.
— For example, we thought the net rental at Fabege was a little weak. It was disappointing, he says.