MAY 2026, STO:CAST

Castellum AB: Macro-Micro Feedback Loop

#nordics #realestate #scenariodriven #riksbank

Castellum is not a broken company. It is something more difficult for equity holders: a company that looks repairable, but where the conditions required for a meaningful recovery are unlikely to align quickly enough. The market appears to be pricing a gradual normalization in occupancy, leasing momentum, and funding costs. The available data suggests a different path-one where these variables improve slowly, unevenly, and not necessarily in the combination required to drive an equity re-rating.

This makes Castellum, à notre humble avis, a compelling short expression. The thesis does not rely on distress, forced asset sales, or a balance-sheet accident. It rests on a simpler idea: that operating stabilization, in the current macro and sector context, is insufficient to generate upside for equity. In that environment, earnings may stabilize, but valuation multiples and asset marks remain under pressure, leading to a prolonged period of underperformance rather than a sharp correction.

Why Castellum, and Why Now

Castellum AB functions as one of the most liquid and transparent listed proxies for Swedish commercial real estate. With a property portfolio of approximately SEK 137 billion, 673 assets, and 5.3 million m² of lettable area, the company offers a direct transmission mechanism between macro conditions and listed equity performance. For investors seeking to express a view on Nordic office real estate without taking illiquidity risk, Castellum is a natural vehicle.

The portfolio composition reinforces this positioning. Offices account for roughly 61% of asset value, with a concentration in major Swedish growth regions such as Stockholm, Gothenburg, and Malmö, alongside smaller exposures to Copenhagen and Helsinki. These are not peripheral or structurally weak locations. They are, in theory, the markets that should recover first in a benign environment. The fact that leasing and occupancy remain under pressure in these core urban clusters raises a more structural question: if recovery is slow here, it is unlikely to be meaningfully stronger elsewhere.

A useful way to frame the thesis is that Castellum owns the type of portfolio that should validate the bull case. If it fails to do so, the problem is not idiosyncratic - it is systemic.

The Market Assumption: A Synchronized Recovery

The implicit market narrative appears to rely on a coordinated improvement across four variables: lower funding costs, stabilizing or rising occupancy, improving leasing spreads, and stable property valuations. If these move together, Castellum's earnings power and NAV could justify a re-rating. The issue is that these variables are not independent, and more importantly, they are not currently moving in sync. Rates may stabilize, but leasing remains weak. Occupancy may stop falling, but incentives increase. Valuations may stop declining due to cap rates, but continue adjusting due to cash-flow assumptions. The result is a scenario where stabilization does not translate into growth, and where equity performance remains constrained even in the absence of a negative shock.

Macro Flows into Micro: The Financing Constraint

The central macro variable is the Swedish rate environment, shaped by the policy stance of Riksbank. As of early 2026, the policy rate remains at 1.75%, with uncertainty driven by inflation dynamics and external factors such as energy price volatility. This creates a “higher for longer” backdrop, not necessarily in absolute terms, but in terms of duration.

For Castellum, the relevant issue is the policy rate AND the full financing stack, e.g. base rates, bank margins, credit spreads, and refinancing timing. At year-end 2025, the company reported an average interest cost of approximately 3.10%, an interest coverage ratio of 3.2x, and near-term maturities of SEK 10.6 billion in 2026 and SEK 5.7 billion in 2027. These figures are not alarming. But they are not conservative enough to absorb a prolonged period of elevated funding costs without affecting earnings. As debt rolls over into new pricing conditions, the reset is gradual but persistent. This creates a slow bleed dynamic rather than a discrete shock.

Leasing and Occupancy: The Missing Link in the Recovery

The most critical transmission channel between macro pressure and valuation risk is leasing performance. Castellum's economic occupancy declined to 89.8% in 2025, down from 91.5% the previous year, while net leasing for the full year was negative SEK 140 million. Management has indicated that weak leasing conditions in 2025 will continue to impact rental income into 2026, even if quarterly data shows partial improvement, which means this is not just a cyclical fluctiation. In practical terms, this means that reported stabilization may lag underlying operational weakness.

At the same time, broader market indicators reinforce this pressure. Stockholm office vacancies reached approximately 15.5% in early 2026, the highest level since the 1990s. This is not a marginal and it signals a structural imbalance between supply and demand in the most important office market in Sweden. Leasing weakness matters because it directly affects valuation inputs. Lower occupancy leads to weaker cash-flow assumptions, higher tenant incentives, and increased uncertainty around rent growth. Even in a stable rate environment, these factors can drive further downward revisions in property values.

Valuation Pressure: Not Just Financial !

In 2025, Castellum reported property value declines of approximately SEK 2.45 billion. Importantly, these were not driven solely by cap-rate expansion. A significant portion of the adjustment came from lower rental assumptions and higher vacancy levels. The distinction is important ! If valuation declines were purely rate-driven, stabilization in yields could anchor asset values. But when the driver is operational (e.g. leasing, occupancy, cash-flow visibility), valuation risk persists even if rates plateau.

In other words, the downside is no longer just a function of macro repricing. It is embedded in the asset-level performance.

Occupancy versus Nordic peers

Castellum is not uniquely distressed by Nordic standards. The company sits in the same general pressure zone as other Nordic office-exposed landlords rather than standing out as a one-off accident. That usually makes the short cleaner, because the thesis can be framed as sector stress expressed through a liquid name rather than as a heroic bet on idiosyncratic collapse.

The peer read-through in a bear market is straightforward. Office-heavy, leveraged, rate-sensitive Nordic landlords tend to underperform when yields rise, refinancing costs reset upward, and asset values drift lower. In that environment, companies with weaker leasing trends and larger refinancing walls usually de-rate more, while names with better asset mix or lower leverage fall less but rarely escape entirely.

Scenarios: Asymmetry Without Collapse

The bear case does not depend on a crisis scenario. Instead, it emerges from the base case. If rates remain moderately elevated, leasing improves only gradually, and valuations continue to adjust incrementally, Castellum's equity can remain trapped in a low-return regime. In this environment, earnings stabilization does not translate into multiple expansion. Instead, the equity reflects a combination of refinancing drag, weak organic growth, and uncertain valuation marks.

The bull case requires synchronization: lower funding costs, improving occupancy, stronger leasing, and stable valuations. Each of these is individually plausible. Their simultaneous realization is less so.

Buybacks: Supportive, but Not Transformational

The recently announced SEK 1.7 billion share buyback programme introduces a technical support for the stock. It signals management confidence and can provide a near-term floor, particularly when executed at perceived discounts to NAV.

However, buybacks do not alter the core mechanics of the thesis. They redistribute capital but do not improve leasing conditions, reduce structural vacancy, or materially change refinancing dynamics. If anything, they raise a capital allocation question: whether returning capital is optimal at a point in the cycle where balance-sheet flexibility may become more valuable.

Conclusion: A Short Built on Friction, Not Failure

Castellum represents a specific type of short: one built not on imminent distress, but on persistent friction. The company is large, transparent, and fundamentally viable. But it is also highly exposed to rates, leasing, occupancy, and valuations, that are unlikely to align quickly enough to justify a re-rating. In that sense, the risk is not that Castellum breaks. It is that it continues to function, but fails to deliver what the market is implicitly expecting.

And in public markets, that is often enough.