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Nordic Update

Stock market giants deliver in Q3

Publicerad: 16 november 2018, 18:03

Bild: Riksbanken

The listed Swedish property companies once again delivered stable interim statements in the third quarter, where most arrows are pointing in the right direction. Balder and Castellum offered positive surprises with notable write-ups of property value and in the Balder case, the property management income was far better than expected.

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Balder and Castellum wrote up the value of their properties with about 3 per cent respectively over the quarter, which is far more in the previous quarters. Normally, the bigger revaluations of the portfolios are made in connection with the year-end or half-year reports.

The value of Balder’s portfolio now amounts to 115 billion SEK and the corresponding amount for Castellum is 87 billion SEK.

Both companies caught the market with surprise by lowering the valuation yield, resulting in  a higher valuation of properties.

Among other things, the yield is affected by the general interest rates and the Riksbank has clearly indicated that it will hike policy rates in December or February, which all things equal should lead to higher yields.

“Lower yields sharply contradict the development you’d be worried about,” says David Flemmich, property analyst at Handelsbanken.

According to Flemmich there is however an effect of delay as surveyors are reluctant to alter their assumptions before being assured that the market has reached the general rate level. The lowered discount rate is thus probably mostly based on historical transactions.

At the same time, he thinks that the effect of a Riksbank rate hike on the market is overestimated as the yield gap is bigger than the historical average.

“I don’t think that the property market has fully discounted the low interest rates, there is a pillow in the valuations,” he says.

Balder lowered the valuation yield from 5.0 to 4.8 per cent in the third quarter. In addition, the company points to investments and improved net operating income from the existing portfolio as the reason for the higher valuation  of the company’s properties. In the case of Castellum, the yield was lowered from 5.4 per cent to 5.3 per cent.

The third largest listed company, Fabege, has previously stood out when it comes to large write-ups, and this time around Fabege adjusted the value of its portfolio by 2.5 per cent making a marginal adjustment of its valuation yield.

Strong property management income for Balder
Balder’s income from property management increased by 24 per cent in Q3, which was significantly better than expected by analysts. Common shareholders’ Income from property management, grew by 33 per cent as there no longer are any preferred shares outstanding, taking a share in the profit.

In his comments, Balder CEO Erik Selin writes that the property market as a whole is robust but adds that there are big differences between segments and submarkets.

Castellum’s income from property management grew by 13 per cent to a new record level and CEO Henrik Saxborn describes the market for commercial property, primarily office and logistics, as tremendously strong in Nordic growth regions.

Fabege’s income from property management increased by 22 per cent in the third quarter, supported by a strong office market in Stockholm.

As a result of the interim statement, Balder’s share developed strongly and in mid-November it was trading at historically high levels. Castellum has also been trading at higher levels, albeit a bit off the record levels reaches just before the global stock markets turmoil in October. Fabege, a share that has performed well for a long time, has however fallen since publishing the statement.

Rents are also rising, particularly in Stockholm. Fabege and Hufvudstaden state that the lease agreements renegotiated during 2018 have resulted in rents rising on average by 30 and 22 per cent respectively. At the same time, one should keep in mind that renegotiations usually occur with intervals of many years, making it difficult to know exactly how big a part of the increasing rents can be derived to the current year.

There is also quite a big discrepancy between different types of spaces. According to Hufvudstaden, office rents have increased by 38 per cent while retail and restaurant rents have increased by 4 per cent.

Net interest costs still falling
Net interest costs continued to trend downwards in Q3. Castellum’s average interest rates fell from 2.3 per cent at June 30th, to 2.1 per cent at the end of Q3 while Fabege’s average interest rates fell to 1.4 per cent from 1.7 per cent. Balder’s remained stable at 1.7 per cent.

One company that distinguished itself in this area was Wallenstam that managed to cut its average interest rate from 1.01 per cent to 0.98 per cent. Wallenstam bought back swaps before maturity during Q2 in order to cut its interest rate costs.

Wallenstam is one of the property companies affected most by the new tax rules, limiting the right to make tax deductions for interest expenses. The size of deductions is linked to EBITDA and unless Wallenstam takes measures to cut interest, the interest expenses-to profit ratio will become too high to allow full deductions.

Another company that has cut its interest expenses notably is SBB. The First North-listed company had a calculated average interest rate of 2.5 per cent at the end of September, after lowering its rate by 0.4 percentage points for two consecutive quarters.

SBB’s aim is to be assigned an investment grade rating in 2018, which might lead to the company lowering its interest expenses even further.

Oskar von Bahr

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