The change in market sentiment has particularly been seen in the transaction market, where the listed Swedish real estate companies, which tend to have a higher reliance on capital financing, have decreased their share of the total acquisition volume so far this year.
Nevertheless, the transaction market has remained highly active in 2022, as international investors have increased their share of the buy-side. A shift has also been noted in terms of segment preference. Investors are shifting their preferences from core properties with lower yields toward more high-yielding value-add properties that can better sustain higher interest rates.
Increased international interest
Increased international interest
During a Round Table Discussion at Business Arena Stockholm on 22 September, our Head of Real Estate Investment Banking in Sweden, Carl-Johan Hugner, said that in addition to the domestic interest in the real estate sector, the interest has grown among international investors.
"International investors want to know more about the Nordics and understand the dynamics from both a debt and an equity point of view. In addition to international demand, there is also demand from domestic investors to shift focus as well. Publicly listed companies that have had a substantial part of the transaction market in the last years will most likely be more defensive. Instead, I think we will see more activity from local and regional private companies and Private Equity players."
Pareto Securities has a long and strong track record within real estate project finance and investment banking in the Nordics. Aside from raising equity and debt capital for many real estate companies and asset owners, we also source and place real estate transactions on behalf of investor syndicates.
Speaking for Pareto as an investor, we are always looking to buy.
“Speaking for Pareto as an investor, we are always looking to buy. The benefit of our setup is that we start fresh with every new investment and can adapt freely to where we see opportunities as long as our investors agree. In this climate, investors price the risk a bit differently. Right now, we believe there is good risk reward in some of the logistics segments and certain defensive retail categories, in particular now that we start to see some price adjustments”, said Hugner on stage.
Refinancing the bonds
Refinancing the bonds – will the market be there?
A significant share of the bonds issued by Swedish real estate companies is up for refinancing next year. Given the recent volatility in financial markets, there have been concerns about rising refinancing risk. The actors are questioning whether the bond market will be there. And if not, will the banks?
“It is important to remember that it is not one unified bond market; it is divided into Investment Grade and High Yield, where the former is an outright substitute to bank financing, whereas High Yield is a complement. I don’t believe that High Yield will be replaced to any significant extent by the banks, as it is unlikely that they will increase their LTV (loan-to-value) tolerance in the short term", Hugner said.
In Investment Grade, the outstanding debt is roughly 450 billion SEK, out of which the vast majority are BBB-rated bonds.
“One-third of outstanding BBB-rated bond volume matures in the next two years, providing a more challenging tradeoff. While senior lending banks could step in to provide loans to refinance some upcoming bond maturities, adding on too much senior secured bank debt could expose the companies to the risk of credit rating downgrades. I think a substantial part of the debt will be amortized rather than refinanced 1-1. We will see increased interest from international institutions to provide part of the debt through bilateral financing schemes”.
But Hugner is not worried about the volatile bond market.
“Financial markets tend to react quickly, and until we see a more stabilizing macro environment, there will be more risk priced in. What we see right now, it’s quite expensive capital in the bond market, but I believe it will stabilize in the coming year. The bond market is here to stay”, he said.