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Explainer-How Sweden’s commercial real estate problems could spark financial meltdown

STOCKHOLM (Reuters) – Soaring interest rates and too much debt are weighing down Sweden’ commercial real estate firms, making them the biggest threat to financial stability.

The full effect of recent rate hikes has yet to be felt and authorities have told Sweden’s banks to hold on to capital in case the situation deteriorates and loans turn sour.

Worries about the sector have affected the crown currency and foreign investors have reduced holdings in Swedish assets.

After a banking crash in the 1990s in Sweden – also caused by the commercial real estate sector – the economy shrank three years in a row and two banks were nationalised.


Many commercial real estate companies borrowed too much when rates were low and are struggling with higher interest costs and refinancing after eight rate hikes by the central bank since spring 2022.

The economy is slowing, property values are falling and vacancies are set to increase.

Authorities say problems are limited to a few firms but have warned a fire-sale of assets by one could hit valuations across the sector. Cross-ownership could make problems worse.

Credit agencies have already cut the ratings of several firms, some to “junk”, showing a high risk of default.

Loans to real estate firms make up about 16% of bank lending on average. Handelsbanken has the biggest exposure to Swedish commercial real estate, followed by Swedbank, SEB and Nordea, according to figures from SEB.

Including mortgages to households – many of whom are also struggling with higher payments – the property market represents over 60% of banks’ lending.


Listed commercial real estate firms had outstanding debt of around 1.8 trillion crowns ($175 billion), according to the financial watchdog’s latest Stability Report. Sweden’s GDP was around 6 trillion crowns in 2022.

Bank loans accounted for around two-thirds of borrowing.

The biggest holders of commercial real estate debt are foreign investors, followed by Swedish funds, pensions funds and insurance companies, according to the Riksbank.


According to the Riksbank roughly 105 billion crowns of debt matures in 2024, 122 billion in 2025, 105 billion in 2026 and 63 billion in 2027.

The average maturity of debt for Swedish companies is around 3-4 years, shorter than in most of Europe. Interest rate costs are likely to rise as debt is rolled over.


In stress tests, the financial watchdog (FI) said banks could lose around 50 billion crowns if there were a crisis in the commercial real estate sector.

Banks hold mandatory capital buffers of around 1.1 trillion crowns and also additional capital above that.

However, the Riksbank said it was hard to predict whether a crisis would affect confidence in the financial system as a whole.

The collapse of regional banks such as Silicon Valley Bank in the United States and Credit Suisse in Switzerland in 2023, shows that investors and depositors can lose faith quickly and pull their cash.

The Riksbank has said commercial real estate firms need to restructure their balance sheets and banks should keep big loan loss buffers in case things get worse.

“The main conclusion is that this does not represent a systemic risk or a threat to financial stability,” Financial Markets Minister Niklas Wykman told Reuters in early December.


Indebted real estate firms have started to buy back debt, sell assets and raise equity but markets remain tough.

Authorities say more needs to be done and even companies that are not facing immediate difficulties may need to restructure as interest rates are likely to remain high for some time.


During the 2008-9 financial crisis, Sweden guaranteed bank debts and offered subsidised loans to keep credit flowing. During the pandemic the central bank bought government and corporate debt and the government paid some employee wages, gave companies temporary tax breaks and offered credit guarantees to airlines.

The financial watchdog could ease banks’ risk weight floors for exposure to the commercial real estate sector, currently at 35%, or lower countercyclical buffers which now stand at 2% of risk-weighted assets.

Sweden could also set up a ‘bad bank’ backed by the state, which would take over underperforming commercial property loans given by banks, a source with familiar with the matter said.

Wykman said the government had a “broad and deep toolbox” was ready to “take action” if financial stability were threatened.

($1 = 10.4151 Swedish crowns)


(Reporting by Simon Johnson, additional reporting by John O’Donnell in Frankfurt, Editing by Louise Heavens)

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