(Bloomberg) -- Risks are piling on for Sweden’s commercial real estate sector as rising interest rates erode profitability and raise debt refinancing problems, the country’s financial supervisory authority said. 

As the Swedish central bank has responded to soaring inflation by rapidly raising interest rates, commercial property companies are facing rising costs and challenges in refinancing maturing debt. Shares of real-estate owners listed in Stockholm have lost more than 40% of their value this year, and the watchdog, Finansinspektionen, said “the already high risks in the sector have continued to increase.”

“The rising interest rates lower commercial real estate firms’ profitability and will probably also entail downward adjustments to real estate valuations, which will lead to higher loan-to-value ratios,” Finansinspektionen said in a bi-annual report on financial stability. “Several highly indebted commercial real estate firms are now striving to reduce their debt. Such an adjustment is necessary, but it is occurring at a time when the sector is already under pressure.”

Property companies’ funding situation is being watched with concern by authorities, including the Riksbank, which urged lenders to be cautious about paying out cash to shareholders earlier this month. The central bank warned that falling property values could set off a spiral that would cause loan losses at banks, and lead to problems that would reverberate throughout the financial system.  

Finansinspektionen also said the stability risks associated with household debt have increased as “rising interest expenses, high inflation and high energy prices will result primarily in households reducing their consumption.” 

Swedish home prices have fallen more in the last nine months than in any other period since the early 1990s.  

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