Even in Sweden hardly anyone knew anything about Castellum AB.

But the precipitous sale of 40 million shares in the real estate company earlier this month is now seen by some as a harbinger of the future of the European real estate market.

The seller, M2 Asset Management AB, justified its decision with declining market prices affecting its "ability to meet its financial obligations".

The withdrawal of a major shareholder is another episode in a turbulent year in which the stock market value of Swedish real estate companies has halved.

A relaxation is hardly to be expected.

According to data compiled by Bloomberg, the sector will have to repay debts equivalent to a good 10 billion euros in the coming year.

By the end of 2026, the division will have a refinancing requirement of around 42 billion euros.

Current liabilities and variable interest rates

The Swedish real estate companies' financing bottlenecks are due to their floating-rate bonds and short-term maturities in an environment of rising interest rates.

Although this makes the Scandinavian country's real estate market more vulnerable than others in the region, it is being closely watched as a possible litmus test for the rest of the sector in Europe.

Some real estate companies may have no choice but to fund themselves through the stock market.

“In a worst-case scenario, absent a thaw in credit markets, Sweden could be at the forefront of a string of bailed-out issues by listed real estate companies in Europe,” said Peter Papadakos, Managing Director at Green Street significant impact on the listed real estate sector in Europe.”

The Central Bank of Sweden and the Swedish Financial Supervisory Authority have repeatedly warned that the risks arising from commercial real estate financing pose a threat to the country's financial stability.

The biggest concern is the spillover effect for Swedish banks: housing loans accounted for about two-thirds of the total loan book in the Scandinavian country last year, compared with less than a third in many larger euro area economies.

High debt

Anders Kvist, a senior adviser to the director of Sweden's FSA, says the regulator has been warning about high levels of debt among commercial real estate companies for at least four years.

“Declining real estate values ​​could trigger a domino effect,” says Kvist: “If real estate values ​​fall, the collateral available for the loan decreases.

This can lead to more collateral being asked for, which in turn forces distress sales.”

Commercial lessors like Fastighets AB Balder, SBB and Castellum - the company reports its third-quarter results on Thursday - have pursued a growth strategy in Sweden over the past decade that relied on raising billions of dollars of cheap money from yield-hungry bond investors.

This strategy was adopted by all European markets, which benefited from extremely low interest rates and booming real estate prices.

Rising inflation and the resulting aggressive monetary tightening by central banks have turned the tide.

The impact on Sweden's leveraged real estate market, which has been among the world's most thriving over the past year, has been swift and brutal.

SBB shares fell by around 10 percent in 2022.

Bonds across the sector have plummeted.

Rating agency Moody's Investors Service downgraded Balder's investment grade rating to high yield on Wednesday.