Real Estate Market Entangled in Ownership and Debt

The real estate market in Sweden, known for its stretched dynamics, is grappling with a complex issue. Many top property tycoons have ownership stakes in rival companies, resulting in a domino effect where the struggles of one firm reverberate across others.

Sweden has become a prominent example of the strains that arise when interest rates rise. Approximately $8 billion in debt burdens SBB, a major commercial landlord, resulting in significant declines in the market value of its competitors.

Compounding concerns is the intricate web of shareholdings, with a few dozen industry leaders, wealthy families, and corporations holding significant stakes in multiple property companies. Many instances financed these holdings through debt.

Researchers at Colliers have identified thirteen chief executives and families with sizable stakes in at least 34 property companies. These companies, in turn, own stakes in at least 32 other real estate businesses. The interconnections highlighted by Colliers have attracted the attention of short sellers.

Henrik Braconier, chief economist at the Finansinspektionen, the financial supervisory agency in Sweden, emphasizes that this interconnectedness is a negative factor during turbulent times. While there are currently more substantial risks than interwoven ownership, it adds complexity and uncertainty for investors.

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Moody’s Investors Service had already cautioned in 2021 that “Swedish real estate companies are closely interlinked,” which could exacerbate risks during a downturn.

While cross-ownership between publicly traded companies has diminished in Sweden due to improved corporate governance, the real estate sector has taken a different path. Some cross-holdings evolved over time through company splits or mergers, while others were a strategic move by bosses to diversify their investments among companies they understand.

Low interest rates played a role in this trend by reducing borrowing costs and providing buyers with additional financial resources. Companies seeking high-yield investments directed funds towards competitors’ shares when suitable properties were scarce.

According to estimates by Finansinspektionen, Swedish property companies have approximately $41 billion in bond debt maturing between 2024 and 2027, much of it acquired at ultracheap rates well below current market offers from banks or the bond market.

A significant concern arises from the potential cascade effect caused by the concentrated ownership structure. The extensive use of debt, employed by both companies and CEOs to acquire competitors’ shares, amplifies any issues.

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For instance, a sell-off in one stock could trigger margin calls, compelling major investors to divest large stakes in other companies. These stocks could face additional pressure, especially if there is a lack of buyers due to similar troubles faced by numerous significant investors.

Other worries include potential conflicts of interest and the increased complexity that hinders analysts and investors from fully comprehending the companies involved.

The cooling of Sweden’s commercial property market has already resulted in reduced market values and the ousting of two high-profile chief executives. The shares of Balder, the country’s largest commercial property company, are currently valued at approximately one-third of their peak in 2021.

On June 2, SBB announced that founder Ilija Batljan would step down as CEO, acknowledging the need for new leadership. Prior to that, S&P Global Ratings had downgraded SBB to “junk” status, prompting the company to postpone dividend payments in an effort to preserve cash.

SBB experienced rapid growth during the period of low interest rates, expanding its holdings to over 60 million square feet of apartments and public-sector properties, along with stakes in at least eight other property companies.

Currently, SBB’s market capitalization has plummeted by over $15 billion since its peak in late 2021, with its stock declining by over 90%. The company