FI Analysis 45: High risks in small and mid-sized commercial real estate firms

Loans to CRE firms constitute almost half of banks' aggregate lending to non-financial corporations in Sweden. This is one of the reasons why real estate sector-related credit risks are one of the largest vulnerabilities in financial stability.

In a new report, FI has looked closer at which CRE firms constitute the greatest credit risk to banks, with a special focus on the differences between large and small firms. The data has been compiled from a stress test FI conducted in 2023 and applies a scenario where CRE firms experience an increase in interest expenses of 3.5 percentage points, a decrease in earnings from residential properties of 5 per cent, and a decrease in earnings from commercial properties of 15 per cent.

Banks' credit risks are large, even from smaller, unlisted commercial real estate firms

Even if the individual loans of small and mid-sized CRE firms is relatively small, together these loans represent around 40 per cent of the banks' lending to the commercial real estate sector.

The analysis shows that the share of firms that have a high LTV ratio and a low ICR, which are two important key ratios in FI's stress test, is largest among small and mid-sized CRE firms. Small and mid-sized CRE firms also represent more than half of the banks' estimated credit losses in a stressed scenario.

"There has been a lot of focus in recent years on the indebtedness of large listed CRE firms, but this analysis shows that they represent a smaller share of the banks' real estate sector-related risks. From a financial stability perspective, it is therefore important to also monitor smaller CRE firms since they typically have a weaker financial position and at the same time represent a significant share of banks' aggregate lending," says Ted Aranki, Advisor at FI.