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As all good short sellers know, identifying a bubble is one thing but finding the best way to bet against it profitably is a tougher challenge. The past month has seen renewed focus by investors on warnings signs that Sweden’s decade-long property boom may be coming to an end.
News that the residential property market from August to October suffered its quickest fall since 2008 sent chills through the value of the krona, which has lost 4.4 per cent against the euro since September on fears for the residential and commercial market.
These fears are understandable. Home prices in Sweden have roughly doubled since 2008, outpacing similarly overheated markets of Canada and Australia, according to Moody’s. Household debt is among the highest in the world at 180 per cent of disposable income. The yield on commercial property has fallen from more than 4 per cent in 2007 to less than 1 per cent, according to the Riksbank, while borrowing for listed property companies has trebled during the same period.
So what is the best way to short Swedish property? The currency markets are too blunt a tool. Swedish banks may have large exposure to property but they also have high capital buffers against future losses. A better way would be to look for Swedish listed commercial property companies whose shares appear priced for perfection.
Faberge is a commercial property company with 80 per cent of its assets in offices, and all of them in Stockholm. Its shares have risen 226 per cent since 2012 yet its annual funds from operations over this time have increased only 7 per cent during this period, from Skr752m to SKr805m. Today the company’s shares trade at 31 times next year’s adjusted earnings, according to estimates by Handelsbanken, more than double the 13 times at which they were valued in 2012 and a large premium to peers. Yet before divestments the company generates negative free cash flow while earnings before interest, tax, depreciation and amortisation only cover its interest payments twice, according to Swedbank analysis. More than one-third of its debt has to be refinanced within the next year. The slightest bump for Swedish commercial property would call dramatically into question the market’s rosy outlook for its shares.