Trends in the Capital Structure and Risk Assessment of Swedish Real Estate Companies : A Study on the Impact of the 2022-2023 Shift in Interest Rates

Abstract: This study aims to analyse the changes in the capital structure of Swedish real estate companies over the past five years, with a particular focus on the period 2022-2023, characterised by the policy interest rate increasing from zero to 3.5 percent. The study further explores the potential risks these companies face concerning interest rate exposure and liquidity. The research process involves a comprehensive literature review, quantitative analysis of financial key figures, and qualitative interviews with banks and consultants in the real estate market. The findings suggest that the capital structure of real estate companies is highly influenced by the cost of capital and the companies’ credit ratings. While large companies with the highest credit ratings have coped with increased capital costs in the bond market and continue issuing bonds, remaining investment grade companies have turned to the bank sector as the prices in the bond market have increased. Increased competition in bank financing has made the banks more selective, prioritising existing customers and making it challenging for high-yield and non-existing bank customers to secure debt. The high demand for bank financing further opens up possibilities for alternative financing to increase market shares. As a consequence of escalated risk in the real estate sector, financiers are increasing credit margins and implementing stricter credit terms. A key factor for assessing the risk in today’s market is the capability of the cash flow to cover the rising cost of capital, exposing the low- yielding residential segment. To mitigate liquidity risk, the findings suggest an increased need for equity and expected share issuance and asset sales. However, a stress test conducted based on the Interest coverage ratio suggests that the real estate market is able to handle additional interest rate increases, not facing alarming distress until interest rates increase by an additional 3%. By examining theories such as the Pecking Order and Trade-off Theory, this research contributes to the existing literature, shedding light on the evolving capital structure of Swedish real estate companies and the impact of interest rate fluctuations on financing strategies and risk evaluation.