(Bloomberg) -- Sweden’s real estate market has yet to fully digest a surge in interest rates over the last two years, spelling more pain for investment firms and banks that helped finance its expansion, according to the country’s financial regulator.

“We have still not seen the full effect from rate increases on real estate companies’ funding costs as all debt hasn’t been rolled over yet,” Henrik Braconier, who leads bank oversight at the watchdog known as FI, said in an interview.

Real estate prices around the globe have been roiled as higher interest rates weigh on valuations and commercial property developers contend with challenges from the shift to work-from-home and changing retail behavior. While many Swedish banks have so far faced lower-than-expected credit losses, the turmoil continues to hold the attention of the country’s financial industry. 

Earlier this month, Sweden’s largest pension fund, Alecta AB, delayed the announcement of its full-year results as it awaits a fresh valuation on its largest holding, indebted residential landlord Heimstaden Bostad AB. Last week, property firm Balder took a 4 billion kronor ($380 million) hit in fourth quarter earnings as it cut the value of its portfolio.

Braconier said the most significant risk to lenders’ balance sheets stems from the smaller, unlisted real estate companies, which aren’t scrutinized by analysts and tend to depend on banks for external funding.

“It is to those companies that banks have provided the largest loans and that’s where we see the highest risk for credit losses,” he said on Friday in Stockholm. “I wouldn’t be surprised if there is an increase from these levels, but we still see that big banks are very profitable and have large buffers, so there’s a resilience.”

Braconier faulted commercial real estate companies for a lack of transparency. Such firms have also been “slow” to write down property values “and there’s probably still some work left to be done there,” he said.  

Efforts of real estate firms to reduce their debt levels mean that circumstances “may become slightly worse” before they get better. Still, the situation has proved better than authorities had feared a few months ago, said Braconier. 

He cited the fact that property firms have issued bonds under “slightly better terms” and said he doesn’t see a “big threat to stability right now.”

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