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As all good short sellers know, identifying a bubble is one thing, but finding the best way to profitably bet against it is a tougher challenge. The last month has seen renewed focus by investors on warning signs that Sweden's decade long property boom may be coming to an end. News of the country's residential property market from August to October suffered its quickest fall since 2008 sent chills through the value of the krona, which has lost 0.4% against the euro since September on fears about the country's residential and commercial markets.
These fears are understandable. Swedish home prices have roughly doubled since 2008, outpacing similarly overheated markets in Canada and Australia, according to Moody's. Household debt is among the highest in the world at 180% of disposable income. The yield on commercial property has fallen from over 4% in 2007 to less than one today according to the Riksbank, whilst borrowing for listed property companies has trebled over the same period.
So what is the best way to short Swedish property? The currency markets are too blunt a tool and 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 at Swedish listed commercial property companies whose shares today appear priced for perfection.
Fabege is a commercial property company with 80% of its assets in offices and all of them based in Stockholm. Its shares have risen by 226% since 2012, yet its annual funds from operations over this time have increased by only 7%. Today, the company's shares trade at 31 times next year's adjusted earnings, according to estimates by Handlesbanken, more than double the 13 times they were valued at in 2012 and a large premium to Nordic peers.
Yet before divestments, the company generates negative free cash flow while earnings before interest, tax, depreciation and amortisation only covers 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 dramatically call into question the market's rosy outlook for its shares.
