New Fund Created to Bet Against Swedish Real Estate

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In the middle of a takeover battle between two Swedish property titans, an asset manager in the country has just set up a credit fund to bet against the sector.

Strand Corporate Bond Fund will hold an “underweight” position on Sweden’s real-estate industry, according to its co-managers Mari Fors Rhenman and Carl Johan Lagercrantz of Strand Kapitalforvaltning AB.

Issuance in Sweden’s corporate bond market has been increasingly dominated by real estate firms, which have used the debt to pay for their rapid growth. At the same time, the secondary market for trading bonds has been widely criticized for its lack of liquidity and price transparency. Earlier this year, 35 Swedish bond funds slammed shut amid an investor panic triggered by the pandemic.

Lagercrantz and Fors Rhenman say a quarter of their new fund will target frequently traded bonds to balance the holdings of higher yield debt, given the market looks “too homogeneous” because it “largely consists of real estate companies, and these are also dominating most large funds.”

The timing is noteworthy, as it coincides with a bidding war between Castellum AB and Samhallsbyggnadsbolaget i Norden AB (SBB) for Norwegian office provider Entra ASA. The two Swedish suitors want to buy Entra in a deal valuing it somewhere between $3.4 billion and $3.8 billion, through a combination of cash and shares. Both have arranged liquidity facilities with banks.

Entra said on Wednesday it will respond “in due course” after getting advisers to update the value of its $5.9 billion portfolio. Meanwhile, rating agencies say both bidders actually stand to benefit from a deal, pointing to the added cash flow and geographic diversification.

‘Wall of Refinancing’

But the sector overall has ratings analysts worried. Moody’s Investors Service says that creditors in Swedish real estate face a “wall of refinancing during the next two years” and that its “key credit concern for real estate companies is liquidity.

Fors Rhenman and Lagercrantz say they won’t let the fund’s assets grow beyond 3 billion kronor ($350 million), as part of a strategy they say will help keep it afloat if liquidity suddenly evaporates.

“There is a clear advantage in not being too large in a market that from time to time is so illiquid,” they said in emailed comments.

The overall size of Sweden’s credit funds reached a peak of 180 billion kronor ($21 billion) in February, one month before the Covid-19 pandemic rattled markets and dragged risk assets to record lows. But that correction was short-lived, and prices in Sweden’s credit market have since mostly recovered. Real estate issuers continue to dominate the supply of new bonds.

To avoid the concentration of risk, Strand Corporate Bond Fund will offset illiquid investments with liquid ones. The portfolio of junk bonds will be balanced with a similar-sized portfolio of notes that are of high quality, they said.

Sweden’s credit market is “still a relatively immature market and we think you can benefit greatly by managing liquidity risk if the situation deteriorates again,” the managers said.

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