(Bloomberg) -- Turmoil in the Swedish commercial real estate market could spill over into neighboring Denmark as heavily indebted landlords divest holdings, the central bank in Copenhagen said.

The largest Swedish firms have properties in Denmark worth 99 billion kroner ($14.5 billion) and debt to Danish credit institutions of about 43 billion kroner, Nationalbanken said in a financial stability report on Tuesday.

Swedish firms have already started to pare down their Danish real estate portfolios, with two property sales taking place in Copenhagen in recent weeks, Morten Hedegaard Rasmussen, head of policy and regulation at the Danish central bank, said at a news conference. 

Such deals could push down the prices of equivalent properties and affect the value of Danish commercial properties, Nationalbanken said. A 20% price drop in the Danish commercial real estate market is a “realistic” scenario given how much interest rates have risen, Hedegaard Rasmussen said.

“Due to the low level of transactions, a price correction related to divestment by the Swedish firms at this point in time would have a relatively great effect,” the central bank said. Still, those holdings are limited relative to the size of the Danish market.

Earlier this month, Swedish landlord Corem Property Group said it had agreed to sell two properties in the Danish capital worth 3.9 billion kronor ($370 million) in order to strengthen its balance sheet and free up capital.

For banks, a decline in commercial real estate prices may result in the collateral pledged for loans becoming insufficient to cover the full exposure, leading to losses if loans default, Nationalbanken warned.

Denmark’s Systemic Risk Council, an advisory unit of the central bank, in October warned that banks’ commercial real estate portfolios could spark losses that are significantly larger than historical models can measure, and suggested they hold more capital to protect their exposures.

Lending to the real estate industry has increased in recent years to about 38% of Danish credit institutions’ corporate exposures, it said. Medium-sized banks have expanded their lending to the industry by about 15% annually, while for the systemically important credit institutions, the number is almost 8%.

(Updates with further central bank comments from third paragraph)

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