Swedish property stocks end brutal 2022 with tough reset ahead

Bloomberg

In 2021, a Swedish property company was one of Europe’s top stocks. It’s ending 2022 at the very bottom of the leaderboard, with a 73% slump that underpins a sector-wide reset.
The reversal of fortunes for Samhallsbyggnadsbolaget i Norden AB — known as SBB — illustrates the woes of Swedish real estate stocks as they grapple with the fallout from aggressive interest rate hikes, as well as a funding squeeze amid high levels of debt. Peers
including Fastighets AB Balder and Castellum AB have plunged at least 50%.
“It’s been brutal,” said Johan Henriks, who manages insurance firm Lansforsakringar’s $1.7 billion Fastighetsfond. His fund — which invests in Swedish and Nordic real estate stocks — was one of Europe’s top performing last year, with a return of 58% in local currency terms, according to Bloomberg data. It has lost 45% in 2022.
Henriks said in an interview that firms specialising in apartment rentals and shares in homebuilders may take a couple of years to find a floor, though he is more positive on commercial and industrial real estate, which often have inflation-linked rents. He’s reduced his holding in SBB, which has a diverse portfolio of residential real estate and public buildings like schools and hospitals, and the fund’s biggest holding is now warehouse firm Sagax AB.
Analysts don’t see much upside for the sector. Average price targets for the biggest Swedish real estate firms range from flat returns for Sagax over the next 12 months to an around 30% rally for Balder. But even a 30% move would only leave the shares where they traded in mid-August.
“Risk/reward in the Swedish real estate sector is still poor,” with risks to refinancing and property values outweighing low valuations, Handelsbanken analysts Johan Edberg and Oscar Lindquist wrote in note last week. Buying these stocks now is “a risky bet on rates, funding and lenders’ willingness to support companies without firm commitments on additional capitalisation.”
The sector is being squeezed from all sides. While Sweden’s housing market is experiencing the worst slump among European Union countries, its real estate companies are also deeply indebted, with Moody’s Investors Service saying this month that more firms face the risk of downgrades spurred by their deteriorating debt profiles.
Underlining the negativity in the sector, SBB — which became a target for short-seller Fraser Perring’s Viceroy Research this year — is among the most shorted stocks in Europe. Shares out on loan, an indication of short interest, represent about 25% of company’s free float as of December 16, according to data from S&P Global Market Intelligence.