SBB’s Teetering Empire Triggers Calls for Public Intervention

(Bloomberg) -- During the era of low interest rates, Swedish landlord SBB built itself into a $13 billion behemoth by taking on cheap debt to snap up schools and health-care centers that local governments were looking to offload. Now, the company at the center of the country’s real estate crisis is facing off against local councils that want their properties back.

SBB — as Samhallsbyggnadsbolaget i Norden AB is commonly known — has seen its share price go into free fall since it was downgraded to junk status on May 8. With hedge funds and rival landlords increasingly circling the troubled company’s holdings, it has prompted a moment of public-sector soul-searching. Lawmakers are questioning who should own the country’s stock of police stations, hospitals and nursing homes, and some municipalities have expressed interest in buying back assets they once sold to SBB.

“We don’t today know who will own our properties tomorrow,” Andreas Sjolander, a local councilor in the northern town of Harnosand, wrote via email. He said his municipality is already having “internal discussions” about which properties it might take control of.

Harnosand sold most of its schools and nursing homes to another Swedish property company, Kungsleden AB, in 2008 in a deal that has been called the starting point for viewing community properties as an asset class. Since then, the buildings have changed hands several times and are now owned by SBB — which rents them back to the local council.

While only a few Swedish municipalities have publicly announced plans to purchase SBB’s properties, the development poses an existential threat to the sale-and-lease-back approach to community assets in Sweden, which was championed and financed by the Stockholm-based company now wrestling with an $8 billion debt pile.

“Municipalities’ attitude towards selling this type of real estate to a private actor has probably changed,” Danske Bank credit analyst Marcus Gustavsson said by phone. “They might realize that it wasn’t such a good idea to have a private actor own this.”

Representatives for SBB did not respond to an emailed request for comment.

For Sweden’s local councils, taking control of in-use properties might come with a financial upside. A report published in 2021 by local government funding agency Kommuninvest I Sverige AB found that in most cases, it’s cheaper for municipalities to own rather than rent community properties.

“It’s difficult to see the logic in the sale-and-lease-back arrangement given the difference in loan costs the municipality has versus the private sector,” Erik Tornblom, acting Head of Research at Kommuninvest, said by phone. He said it is “puzzling” that some municipalities still choose to sell off their assets.

One complication is that it’s not clear whether local governments will be able to pick and choose which properties to buy back. Municipalities are legally prohibited from owning properties outside their own borders, and it’s likely that SBB would rather bundle its assets into portfolios rather than sell them off individually.

“It could be hard to get SBB to package the assets in one company per property,” Annika Wallenskog, Chief Economist at Swedish Association of Local Authorities and Regions, said in a phone interview.

‘End of the Road’

As lawmakers have balked at the prospect of key public infrastructure — including properties used by the Swedish military — passing into the hands of new owners, SBB’s decline has united opposition parties around a call for government action.

A Left Party proposal to grant the state first-refusal rights to buy community properties has garnered support from the Social Democrats, largest opposition party, and is being debated in parliament.

“In a situation where the company has economic difficulties, and a rather speculative business model that is built on low rates is reaching the end of the road, it is not reasonable from society’s point of view that these properties could end up under anyone’s ownership,” Ali Esbati, economic policy spokesperson for the Left Party, said in an interview.

“Something has to be done rapidly to have a chance to avoid that,” Esbati added.

The arguments from the left have done little to convince the ruling center-right bloc, whose government relies on support from the nationalist Sweden Democrats. Financial markets minister Niklas Wykman told Bloomberg News he has spoken with investors who might be willing to buy assets from commercial property landlords seeking to shore up their finances.

“There are potential buyers among institutional investors, and we have also seen non-institutional buyers enter the market, so there is demand for Swedish properties,” Wykman said in an interview at the finance department in Stockholm.

While the government minister dismissed the idea of a general scheme to nationalize properties, he’s asked Sweden’s Fortifications Agency to clarify what parts of the SBB portfolio may be of national security interest.

“We are ready to act to protect financial stability, to safeguard taxpayers’ money and to protect important values such as national security,” he said. “We will do that if it becomes necessary.”

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