Russia is preparing for the consequences of the real estate market downturn

The owner of publicly owned real estate, SBB, has found itself at the center of controversy. If the ongoing slump in real estate prices causes a widespread crisis, the Swedish government is ready to step in to avert the consequences. It could be a portent of trouble across Europe.

High debt, rising interest rates and a weakening economy have created a toxic cocktail for commercial real estate in Sweden, several of which have been downgraded to junk ratings by rating agencies.

Housing prices have also fallen by about a fifth since their peak in March 2022, according to the Organization for Economic Cooperation and Development (OECD), reflecting rising costson mortgages.

The government's readiness for action

S Swedish Financial Markets Minister Niklas Wickman told Reuters the government has the financial capacity to prevent a real estate market collapse that could affect the country, which is one of Europe's richest, and its banks.

"We have the readiness to act," he said. "If more serious incidents occur, or if new risks or threats to the financial system are discovered, the most important thing in terms of stability is to have a broad toolkit that the state can use. "

Concerns about the real estate sector

Worries about the real estate sector are already weighing on the currency, and investors arewonder if Sweden is just the first domino starting to move in Europe.

Sweden and Germany are among the hardest hit by the widening real estate market downturn on the continent, according to Eurostat.

The OECD this week warned of "financial stability risks" in Sweden, pointing to banks' heavy lending to specific companies and homeowners, most of whom have floating-rate mortgages that change with rising interest rates.

The SBB

forced actions

One of Sweden's largest tenants is SBB, which finds itself at the center of the action. It is trying to salvage its finances after recently downgrading its credit rating totrash level.

The company was founded by former Social Democrat politician Elijah Batlian, who accumulated huge debts by buying public property, including housing, government offices, schools, hospitals, police stations and a military installation.

Rising interest rates have forced the company to cancel dividends and scrap its share offering, and now SBB is looking for a buyer for all or part of its business after Butlian's forced exit.

According to Reuters, SBB has SEK81 billion ($7.6 billion) in debt as of March 2022, of which about 15% is repayable within one year.

The company told Reuters it has taken steps to strengthen its financial position, including selling a stake in theconstruction firm.

The problems of SBB, which some analysts say are partly to blame for the fall in the Swedish currency, are causing alarm in Stockholm.

In combination with falling real estate prices and rising mortgage costs, the crisis also threatens voter outrage against a government already under pressure from a rising tide of gang violence.

The government's willingness to act

Financial Markets Minister Wickman says he has held talks with banks, real estate companies and investors regarding the entire commercial real estate market.

Later he stated before Parliament,that while he is willing to intervene to preserve financial stability, he will not "intervene" or "nationalize for the sake of nationalization," rejecting calls from some lawmakers to intervene in commercial real estate.

The banks' underestimation of the threat

This week, JP Morgan analysts said Sweden's big banks, which have real estate exposures of SEK1 trillion, are ill-prepared for losses.

The four major banks in Sweden are underestimating the threat. Swedbank told Reuters it was cautious about making loans. Finland's Nordea said its loans were strong and well diversified. SEB said it was "strong" and its credit quality was "resilient." Handelsbanken noted a recent presentation that said it wasits real estate lending is conservative and diversified.

"On the commercial real estate side, obviously there are contagion risks," Wickman said, without naming individual companies. "Maybe one or more companies sell assets. That causes other companies to revalue their assets, and that in turn could mean more companies have to make changes. "