Real estate trading in Sweden: is a new bubble looming?

Iliya Batlian - Founder of SBB

company

Ilija Batlian is the founder of a company whose name is hard to pronounce: Samhallsbyggnadsbolaget I Norden AB, which translates from Swedish to English as Social Building Company, but is best known by its acronym SBB. Batljan was born in Montenegro and emigrated to Sweden in the 1990s during the Balkan wars.

There in the Scandinavian country, he earned a degree in economics and a doctorate in demography and elderly care planning. He then embarked on a successful political career under the auspices of the Swedish Social Democratic Party. After becoming mayor of a small town in the province of Stockholm, he left it all behind in 2011 to work for a company in''real estate.

.

The company fired him, but Batlian had already realized his future was in this sector, and in 2016 he founded SBB with a big, risky goal: to invest in real estate related to healthcare, nursing homes, public schools and even police stations, and then lease those properties to local governments. And his risk paid off. In less than a decade, brick by brick, he built a $13 billion portfolio of businesses.

The Swedish real estate market is under threat.

The majority of the company's investments are in social housing and council properties in the Nordic countries, which have been sourced through a wave of cheap loans. By the end of 2021, SBB had about 60 million square meters''real estate, which is equivalent to 20 Empire State Buildings. Today, however, SBB has come to symbolize an industry that is in some trouble due to soaring mortgage costs (caused by rising interest rates, which have also depressed the value of the currency), as well as high levels of household debt and runaway inflation (which peaked last December at 12.3% and was the highest in 30 years).

After reaching an all-time high in the second quarter of 2022, real estate prices began to decline. "They have fallen by about 12% since then, which means that, adjusted for inflation, the decline has been more than 20%," says Andrew Kenningham, chief economist at London-based research firm Capital Economics. "There has been a significant''course correction,' notes Daniel Kral, senior economist at Oxford Economics. But the situation, analysts argue, does not mean a burst bubble. "While we may see further declines in the next few months, prices will eventually return to levels as they were in 2020," explains Jens Magnusson, chief economist at SEB (Skandinaviska Enskilda Banken AB, a Nordic financial group).

The situation is still a concern, however, because of the high level of household debt. In Sweden (with a population of 10.8 million), owning real estate has always been easier than renting, and mortgage debt accounts for 83% of all household debt, according to the country's comptroller. Swedes find themselves twice as indebted as the Germans or Italians. And real estate is''object of collateral for 18% of bank loans, triple that of Spain, according to the Organization for Economic Cooperation and Development (OECD).

Housing prices and debt levels have been rising in response to the latest financial crisis due to falling interest rates. For nearly five years - from February 2015 to the end of 2019 - interest rates were negative.

Today, they are 4%, which encourages people to purchase real estate during the economic recovery. From 2008 to 2021, Sweden's average annual GDP growth was 1.7% (twice the EU average for the EU as a whole). "A structural imbalance has emerged," says Kral. 'On the demand side, population growth and ultra-low interest rates have not been adequately offset''affordability of real estate. Prices then began to rise, exacerbated by the high profits made on real estate sales.

The picture becomes even more unclear when we look at household financial liabilities. On average, household debt is around 195% of disposable income (after taxes). This figure is worrying, especially when interest rates on these debts are rising. And it comes at a time when the majority of mortgages (60% to 70%) are on variable interest rates. "The combination of high household debt and variable loans has made Swedish households and the economy more sensitive to monetary policy," SEB's chief economist emphasizes with persistence. He says: "So''as I'm not particularly worried about households not being able to repay their loans, but it could significantly reduce other spending, which in turn would cause the economy to slow down.' Sweden is predicted to be the only European economy to fall into recession by the end of this year.

The impact on the construction sector and the economy.

The weak housing market is already affecting the construction sector and, along with increased uncertainty and rising costs, is dampening investment. "In a good year we see around 75,000 new housing starts. This year we will be lucky to see 25,000," says Magnusson.

Sweden, a country with a controlled rental housing market since the late 1940s, where, on average, you have to wait for about''9.2 years to get a home under the program knows what a housing crisis looks like. In the early 1990s, after mortgage restrictions were lifted, the market collapsed, causing a major crisis that led to the nationalization of two banks, the bailout of a third (with losses amounting to 12% of GDP) and the devaluation of the krone. It took the country almost four years to recover from the shock.

At the time, Elijah Batlian, the founder of SBB, had just landed on Scandinavian soil and had no idea what awaited him thirty years later. He probably would never have thought of becoming what he is today, nor did he envision the size of the billion-dollar business he had managed to build, whose credit rating had now been downgraded to 'worst quality' status, forcing him to step down''CEO. But the fate of what is Caesar's: Batlian still owns 8.3% of the company's stock and nearly 32% of the board's voting power.