Sweden’s property companies are in a difficult spot. Exposure to one of Europe’s frothiest real estate markets, funded through a smorgasbord of debt, is causing ructions. Commercial landlord SBB’s value is down 70 per cent in the past year, to €2.85bn. The group’s most recent asset sale — a minority stake in its schools portfolio to infrastructure fund Brookfield — highlights just how tight a spot it is in.
The sector’s polar vortex is partly down to falling property prices. After a stellar run during the pandemic, they have declined significantly this year. It is only a matter of time before this trend is reflected in the asset values of Swedish property companies.
Sweden is not alone in seeing falling real estate prices. But its property companies are more geared than most. SBB has good-quality assets, including schools, hospitals and the like, where rents are paid by the government and inflation linked. But it also has piles of debt — €7.81bn at the end of 2022, or almost 18 times forecast ebitda, according to Bloomberg.
SBB has been unloading assets to deleverage. But it cannot afford to let them go too cheaply. A big discount to book value would suggest that SSB’s assets might be headed for a haircut. Loan-to-value will fall to 42 per cent from 47 per cent after the deal.
The Brookfield transaction has a number of moving parts. It is paying €840mn for 49 per cent of a company that holds SBB’s educational property portfolio. This gives an implied equity value of €1.7bn — or an enterprise value of €3.6bn, factoring in the vehicle’s net borrowings. Compared with the book value at €4.1bn, the discount looks steep at about 10 per cent.
True, this does not include other sources of value creation for SBB, including management contracts, tax liabilities, intercompany loans and earn-outs on performance targets. But the educational portfolio is a choice asset. A sale at a steep discount to book value highlights the difficulties of Sweden’s property market and SBB itself.
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