Brunswick Pushes New Funding for Swedish Real Estate Market
By Hanna Hoikkala and Niklas Magnusson
(Bloomberg) — Sweden’s commercial real estate market is getting another leg of funding to stand on. After developers cut their reliance on bank loans and swept into the bond markets, the next big new source could be loans from pension funds and insurers, according to Brunswick Real Estate Capital, which has about 1.3 billion euros ($1.5 billion)in assets under management, including 400 million euros within credit financing.
The firm is looking to win business by pooling institutional capital and lending it to property companies in the form of senior secured debt. The structure could provide a quick way for institutional investors seeking to invest in the real estate market to secure returns amid ultra-low interest rates. In Sweden, this financing is still “marginal,” but it could take after the U.K. where non-bank lending to property companies (excluding capital markets) grew to 23 percent of the market last year from zero in 2011, according to Brunswick. “We’ll see an increased share of lending from the institutional capital in Sweden,” Louise Richnau, a partner at Brunswick Real Estate, said in an interview. “The change can take place quickly, as seen in the U.K., and it’s not unlikely that we’ll see something similar in Sweden or even a faster development.”
“Solvency II rules favor “the un-levered institutional capital, which makes senior secured lending an exceptionally stable and efficient investment,” she said.
It’s difficult for insurance and pension companies to set up lending in-house due to the complexities such as sourcing and origination, asset management and potential work-outs and restructuring as well as asset takeovers. Funds can provide more efficient market access, according to Brunswick. It’s also becoming a key priority for property companies to diversify their financing, partly because Swedish banks face stricter regulation and are overly exposed to the sector and may seek to reduce their lending to the industry. Swedish watchdog sees risks in commercial real estate The Catella Real Estate Debt Indicator, a market indicator for Swedish real-estate financing, shows market sentiment among Swedish banks has been negative for eight consecutive quarters. “The tightening, as an effect of stricter regulation, is really starting to become evident,” said Josefin Bergholtz, investment manager at Brunswick Real Estate. “Swedish banks will need to set aside more capital now that the Basel III rules gradually come into full effect — more capital than what the European banks need to set aside.” Since Swedish banks currently don’t meet the requirements for how much stable financing they need, it will be “very difficult” for the lenders to provide the required maturity in the future, she said.
Swedish housing prices are now also starting to decline, which is hurting property developers and could cause banks to further cut their exposure to real estate. The Financial Supervisory Authority also said on Wednesday that it considers the risks associated with the commercial property sector “to be significant” and that it will closely “follow and analyze any developments.”
Property companies have already diversified their funding by issuing bonds, which accounts for almost 40 percent of total debt at Sweden’s largest issuers. But Brunswick says the bond market can never fully replace bank loans, partly because it can be volatile and closed for periods of time and because it favors well-known borrowers with official credit ratings. A few years ago, many also sold preference shares to raise funds though that trend has weakened, according to Mikael Soderlundh, head of research at Pangea Property Partners. Like Brunswick, he foresees a further reduced reliance on bank loans. “Swedish real estate companies have mainly relied on banks for financing for a long time, but got a wake-up call during the global financial crisis, when some banks said no to new loans,” Soderlundh said.
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