Financial Arrangements for Large Property Transactions

Abstract: The transaction volumes on the Swedish real estate market have during the last few years been soaring. The correlation between the financing climate in Sweden and the transaction volumes have been eminent. In an industry where external capital is of vital essence, it is extremely important to create a financing arrangement that sustains both booms and recessions. To generate a broader view of the real estate market, the purpose of the thesis has been to survey the financing arrangements in large property transactions during an economic cycle, the last decade. Through the information the thesis has aimed for creating a view of determining factors behind the choice of financing arrangement, provide a prospective view and to explore suitable arrangements given the economy. The thesis has mainly used a qualitative approach combined with a quantitative collection of data. Thus, it is based on a survey of financing arrangements from the 4 largest transactions each year from the last decade and on information gathered through interviews with key figures from both real estate owners and real estate consultants. The gathered material indicated that the numerous companies’ different financial arrangements was defined by their purpose of ownership. The real estate owners have historically used a high degree of external financing in transactions, primarily bank debt. The banks’ willingness of lending have however varied over time which inevitably affect the companies. The more recent period of the survey shows that financing through capital markets have become an important source. Despite varying loanto- value ratios during the period, the high levels from before have not been found. The reason behind the lower degree of leverage in general is due to the fact that the real estate owners have learnt a lesson from previous crisis. Our thesis displays that financing arrangements differs depending on buyer and that it is company specific. The various arrangements depending on buyer and company have evidentially made it problematic to find direct connections between choice of financing and economy or to find basis in earlier theories. However, when it comes to the real estate owners, we were able to see resemblance of the Trade-off theory. The consistent coherence amongst the real estate owners – which also endorses the Trade-off theory – is to find a sustainable combination of internal- and external capital to, from without a defined risk profile, maximise returns.