Thedéen: Property companies need to reduce debts
Many property companies have had problems since the Riksbank started raising the policy rate and now they need to reduce their debts, both to strengthen their balance sheets and to increase confidence among those who buy their shares and bonds. “The fact that the Riksbank recently decided to hold the policy rate unchanged at 4 per cent should not be interpreted as meaning that inflation risks have disappeared and that interest rates will fall rapidly.” This was what Governor Erik Thedéen said when he spoke on Friday about his views on developments in the commercial property sector at Moody's property conference at the Grand Hotel in Stockholm.
Date: 01/12/2023 09:55
Speaker: Governor Erik Thedéen
Place: Moody's property conference
Good times increased risk-taking among property companies
During the years of low interest rates and very good access to finance, many commercial property companies increased their borrowing substantially, expanded their property portfolios too quickly and took on major financial risks. When inflation then increased and the Riksbank began to raise the policy rate, many property companies came under pressure as their financing costs increased and property values began to fall.
Debt reduction is good for financial stability
Although the companies have different conditions for dealing with the challenges, the property sector’s sensitivity to interest rates and its close connection to the banking system can upset financial stability. The property companies therefore need to take more measures and more extensive ones to reduce their debts. Both new issues of shares and divestment of property are needed to a greater degree. “If this strengthens their balance sheets, the companies will have greater freedom to take a more offensive approach,” Mr Thedéen pointed out. It can also lead to a strengthening of confidence among investors who buy property companies' shares and bonds.
The tight monetary policy also justifies lower risk-taking
The fact that the Riksbank recently decided to hold the policy rate unchanged at 4 per cent should not be interpreted as meaning that inflation risks have disappeared and that interest rates will fall rapidly. “Monetary policy needs to remain contractionary and the Riksbank is prepared to raise the policy rate further if inflation prospects deteriorate,” explained Mr Thedéen.
Real estate companies therefore need to look at their risk-taking in a long-term perspective, fix the interest rates on their loans and borrow at longer maturities. This would also improve the conditions for the bond market to remain an important source of funding for both property and other companies. “There is also a need for long-term structural changes in the bond market with higher transparency, better risk awareness and a broader investor base than before,” concluded Erik Thedéen.