(Bloomberg) -- After dominating Sweden’s credit market, real estate issuers in the Nordic country are now turning to the euro zone to find buyers with deeper pockets, including the European Central Bank.
Last week started with another Swedish real estate firm issuing in euros instead of kronor, and SBB is now one of a handful in the sector to have raised debt in Europe’s single currency in the past four weeks. What’s more, Swedish issuers are increasingly using their Finnish and Dutch units to be eligible for ECB bond purchases.
Sweden’s credit market made headlines last year as investors, the Riksbank and the financial watchdog warned of low transparency and dodgy liquidity. Critics also point to an over-representation of real estate debt, which now makes up more than 40% of the entire krona-bond issuance market.
Ilija Batljan, chief executive officer of SBB, says two things drew him to the euro market: liquidity and the prospect of longer maturities. But he also points to the need to protect his firm from risks in Sweden’s krona bond market. Batljan recalls the near-collapse Sweden’s credit market suffered last year, when dozens of bond funds struggled to prevent a mass investor exodus away from krona-denominated corporate debt.
It is now “very important to balance between different markets,” he said.
Other Swedish real estate firms that have issued in euros via a unit domiciled in the euro zone, and with an explicit target to gain access to the ECB’s asset purchase program, include Hemso Fastighets AB and Fastighets AB Balder. Heimstaden Bostad AB and Akelius Residential Property AB have made similar moves to raise euro debt via Dutch units.
The change in funding patterns appeals to investors such as Niklas Edman, a portfolio manager at Carnegie Fonder AB in Stockholm. “We can play in both markets and are able to get extra return in some cases,” he said, adding that the firm has “switched currencies in all of our largest holdings for SBB, Heimstaden and Akelius.”
While the Europe’s single currency offers access to deeper liquidity and prospects of cheaper debt, the Swedish market has seen a turnaround from the last year’s slump too. Jonas Rosengren, Hemso’s group treasurer, says conditions are now so favorable that, “if you look at primary issuance, I would say we are on lower levels right now in SEK market around 5-year space than we were before the crisis.”
Cold Feet
But some investors, such as Strand Kapitalforvaltning AB and Skandia Investment Management, have started to reposition for a correction in the market for Swedish real estate bonds. Analysts at Moody’s Investors Service also point to the pandemic fallout and “a wall of refinancing during the next two years” as key concerns for the sector.
Edman at Carnegie Fonder says real estate bonds make up about 15% of his firm’s corporate bond fund, “which is on the high side.” He says the debt “provided very attractive investment opportunities during the autumn, and we have slowly started to unwind some of the positions.”
“We are starting to sell off some real estate positions to get that share down,” he said. But Edman agrees with the issuers that moving into the euro market is a smart move. “The Nordic real estate segment is too large for only issuing bonds in the local market,” he said.
Karin Haraldsson, a portfolio manager at Lannebo Fonder AB, says her firm is also underweight real estate bonds compared to the wider market, and plans to reduce its share further. She points to an additional risk that investors need to keep in mind.
“Low interest rates are making many companies look good at present, but here you also have to take into account that interest rates may rise in the future. Some companies are also quite heavily indebted, especially if you include all types of debt instruments they have on their balance sheets.”
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