Property bond spreads are back at 2021 levels, despite weaker credit metrics and rising borrowing costs

Property companies accounted for a large share of new issuance in the Swedish credit market in August. Fund inflows and coupon payments left credit investors with cash to deploy, driving spreads in the sector tighter still. Five-year bonds were priced at three-month Stibor plus 100–105 basis points, close to 2021 levels, when the tightest spreads on BBB-rated issues reached Stibor plus 95 basis points. Back then, however, Stibor was negative, vacancy rates were lower and credit metrics were generally stronger.

Credit spreads are back near 2021 levels

Swedish senior property bonds, ASW (bps)

SEK BBB−SEK high yield

0200400600800253110715

20222023202420252026

Beneath the surface, we see vulnerabilities that current credit spreads do not reflect. The adjusted interest coverage ratio for investment grade property companies stands at 3.09 times, down from 5.35 times in early 2022 and at its lowest level since at least 2017.

Interest coverage is at a ten-year low

Adjusted interest coverage of IG property companies, equal-weighted average of 20 companies

3.0x3.5x4.0x4.5x5.0x5.5x3.09x5.35x

20182020202220242026

At the same time, the average period for which interest rates are fixed has fallen to 2.84 years, also the lowest in the series.

Interest rate fixing periods are at a ten-year low

Rate fixing and debt maturity of IG property companies, years; equal-weighted average of 20 companies

Rate fixing periodDebt maturityGap, now 0.94 years

2.53.03.54.04.53.78 yrs2.84 yrs

20182020202220242026

One explanation is the steep swap curve: fixing the base rate for five years costs around 92 basis points more than using shorter maturities. This is a significant cost for companies whose interest coverage is already close to credit rating thresholds. We cannot know what drives each company’s decision, but the consequence is clear: the sector is more sensitive to interest rates than current spreads suggest.

Average borrowing costs have risen from 1.41 to 2.89 %. Higher market rates have yet to feed through in full because some debt is still covered by interest rate hedges entered into in 2020–2022. As these hedges expire, borrowing costs will progressively reset at higher rates.

Funding costs have doubled

Average borrowing cost of IG property companies, 3M Stibor and five-year SEK swap rate, per cent

Average borrowing cost, IG5-year SEK swap3M Stibor

0 %1 %2 %3 %4 %2.95 %2.89 %2.03 %1.41 %

20182020202220242026

For these reasons, we have seen limited value in the sector for some time. Mercurius Credit Fund’s exposure is approximately 4 %, compared with a peak of 35 % at the end of 2023, following a gradual reduction since early 2025. This low exposure has been a modest drag on returns. Even so, we have been able to deliver in line with the fund’s target return without taking on that risk.

The fund’s exposure to the sector

Property bonds as a share of the Mercurius Credit Fund portfolio, per cent

0 %10 %20 %30 %40 %4 %35 % (Dec 2023)

Jan 2024Jan 2025Jan 2026

Our cautious view of the property sector is not permanent. When pricing becomes attractive and we see greater value, we will increase the fund’s exposure again.

For now, we see value among issuers without an external credit rating whose credit quality we assess as equivalent to BBB or BBB−, and among BB+ rated companies with the potential to be upgraded to investment grade.

August provided a clear example: the fund’s largest holding, Norwegian company Nortura, was upgraded to investment grade and its bond spread tightened by around 40 basis points. The position, which we had built over the previous year, was the largest positive contributor to the month’s return. The fund returned +0.35 % in August, taking its year-to-date return to +2.96 % and its trailing twelve-month return to +4.11 %.

If you have a different view of the sector, would like to receive the full monthly report in Swedish or wish to discuss our analysis, please contact Christian Hjalmarsson or Andreas Olsson.