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Nordic Update

Strong quarter for Swedish real estate equities

Publicerad: 26 september 2018, 11:01

The Swedish real estate companies keep running smoothly and there are as yet no signs of any slowdown. The profitability trend was good in the second quarter and the value of the companies’ housing stock was written up considerably driven by significant rent increases.

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Fabege FastigheterHandelsbankenKempenSagaxWallenstam Fastigheter

The Swedish real estate companies keep running smoothly and there are as yet no signs of any slowdown. The profitability trend was good in the second quarter and the value of the companies’ property stock was written up considerably driven by significant rent increases. At the same time, funding costs are decreasing.

The Swedish interim reports were warmly received by the stock market and the property price index of the Stockholm Stock Exchange rose by 9% in July. At the same time, the market had a more wait-and-see approach to real estate companies on the continent and in the UK.

Looking at Global Property Research’s property price index, comprising some of the most liquid shares on the Stockholm Stock Exchange, the rise was 11% in July. It was almost 10 percentage points better than the corresponding figure for Europe, which landed at just over 1%.

The difference is the largest for a single month in many years, according to Robert Woerdeman, Head of Research at the Dutch bank Kempen.

Robert Woerdeman. Foto: Kempen.

– I think it reflects the underlying development of the companies and also the sentiment in Sweden compared with Europe, he says.

According to Woerdeman, the general perception is that the strong market is expected to last in the coming years in Sweden, while there is greater uncertainty as to how long it will last in other parts of the world.

Fabege stands out
The biggest exclamation mark among Swedish real estate companies was Stockholm-focused Fabege. The management performance increased by 28% in the second quarter, supported by increasing rental income for existing buildings and completed projects. What particularly pleased the stock market, however, were the sharp upwards adjustments of the business objectives.

Fabege is now aiming at a 50% return on its development projects – more than doubling from the previous target of 20%. At the same time, the investment target is raised to at least SEK 2.5 billion a year from the previous SEK 1.5 billion.

Fabege has had an average return on invested capital of over 50% in the last five years and many projects are far more profitable than that.

– Although historically they have achieved a significantly better return on invested capital than the stipulated objective, I do not think the market has dared to count on the same rate of return moving forward. It is easier to be careful and consider the company’s objective, says David Flemmich, Property Analyst at Handelsbanken.

Fabege’s CEO Christian Hermelin looks to the future with confidence. “As Stockholm grows, our project opportunities will only get better and better,” he said in Fastighetsnytt’s IR pod after the report. However, he expresses reservations as to the fact that there may not be enough opportunities to start new projects in individual years.

– On the other hand, the margin of 50% is easier to reach, he added.

Christian Hermelin, CEO of Fabege. Photo: Fabege.

Another company that raised its prospects was Sagax, which announced that it now estimates that the management achievements of the year will amount to SEK 1,600 million. The previous estimate was SEK 1,530 million.

The company that stood out the most in terms of stock appreciation was D. Carnegie. The improvement was so great that the rental property company was obliged to send out a reverse profit warning a couple of days before the quarterly report was published.

The housing stock was written up by SEK 1.8 billion, resulting in a pre-tax profit of SEK 1.9 billion in the second quarter. In the corresponding period last year, a value increase of 457 million resulted in a pre-tax profit of 616 million.

In this context, it may be noted that Germany’s largest rental property company Vonovia’s bid for D. Carnegie’s sector colleague Victoria Park earlier this year resulted in a sharp appreciation of Victoria Park on the stock exchange.

A sign of strength for the sector as a whole was that the appreciation of the housing stock to a greater extent than in the past was driven by improved cash flows due to higher rental income rather than reduced required yield requirements among investors.

In recent years, reduced yield requirements, which are affected by external factors such as interest rate level, have pushed up the value of the stock. If you can borrow money cheaply, it can be profitable to buy a property even though the expected return is not that high.

The trend of reduced yield requirements has declined lately, but sometimes we still hear that there is further scope for reductions.

“The exception is logistic properties with long leases where we still see falling yield requirements and thus rising prices,” Stendörren’s CEO Fredrik Brodin wrote in the quarterly report.

The analysts also welcomed the fact that the companies’ funding costs are decreasing in many places. The focus on reducing these has increased lately, as new tax rules, which will come into force next year, will limit the ability of real estate companies to deduct interest expenses.

One example is Kungsleden, which through various measures has pushed down the average interest rate to 2.0% from 2.4% at the beginning of the year. The company also reduced the percentage of mortgaged properties significantly, which improves the possibility of raising the credit rating to the so-called Investment Grade. In turn, that may result in a further lowering of the funding rate.

– Once we reach Investment Grade, there will be another 30-40-point improvement, Biljana Pehrsson said to Fastighetsnytt in the context of the report.

Other companies that have reduced their funding costs include Fabege, Wallenstam and SBB.

Fabege has signed new interest rate derivatives to replace old expensive expired contracts. The average interest rate was thereby reduced to 1.83% from 2.27% in the previous quarter.

Wallenstam had almost halved its average interest rate to 1.01% on the closing date. Wallenstam is also one of the companies most affected by the interest deduction limitations and therefore has an extra incentive to drive down their interest expenses.

For the first time ever, SBB reported reduced financial costs based on rolling 12 months. Costs decreased to SEK 471 million from SEK 485 million at the end of the first quarter. Taking into consideration the simultaneous increase of loans, that is the equivalent of a saving of SEK 50 million, according to the company’s CEO Ilija Batljan. And further savings are expected:

– We will be able to significantly reduce our funding costs, he told Fastighetsnytt after the report.

Oskar von Bahr

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