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Will the year end on a positive note?

Publicerad: 21 december 2018, 15:19

When summarising the stock exchange year so far, real estate shares have had a relatively good return despite a shaky stock market in October. Fastighetsnytt’s community property index had risen 7% during the year in mid-November, while the stock market as a whole had dropped 3%.

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When summarising the stock exchange year so far, real estate shares have had a relatively good return despite a shaky stock market in October. Fastighetsnytt’s community property index had risen 7% during the year in mid-November, while the stock market as a whole had dropped 3%.

The picture is about the same as in 2017. Then as now, the real estate companies are doing quite well, but are not rushing at the same rate as in previous years. However, the construction companies continue last year’s downward trend, including parts of the housing sector. Here however, there is a breakdown in which those focussing on tenant-owner apartments generally are up against a headwind while several rental housing companies are progressing well.

The biggest exclamation mark of the year is Samhällsbyggnadsbolaget i Norden, SBB. The share, which is listed on First North, has rallied nearly 80% this year. Among the higher-profile companies, the two largest real estate companies – Balder and Castellum – stand out in particular, with gains of about 20% each, as well as number three Fabege, which rallied up to 30%. In addition to a good performance, the trio has also written up the real estate values with large amounts.

Shifting fortunes of housing companies
Several housing companies accounted for spectacular falls during the year, as it still is difficult to sell tenant-owner apartments, in particular in the more expensive price ranges. At the same time, the temperature has been raised in other parts of the housing market, partly as a consequence of the fact that foreign players are increasingly interested in Swedish rental housing. Something that was manifested during the year by a bidding war for Victoria Park.

Among the shares worst affected during the year are, as in 2017, Tobin and Oscar Properties. Both have lost almost half the market capitalisation during the year. This autumn, a number of dissatisfied customers have started taking legal action against Oscar Properties to try to cancel their purchases.

In the case of Tobin, the market situation has lowered the full-year profit forecast on three occasions during the year. The originally indicated operating profit amounted to SEK 250 million, but now the indicated range is SEK 25-50 million.

At the beginning of the year, Klövern made a mandatory bid for Tobin after a directed reissue made Klövern the main shareholder of the company. The bid allowed Klövern to become the majority shareholder, and more recently, the ownership share has increased to more than 80% of capital and votes. It is reasonable to assume that Klövern eventually will exceed 90% and require compulsory purchase of remaining shares.

In October, Klövern also made a cash bid for A Group of Retail Assets, Agora, which resulted in compulsory purchase of all shares just over one month later. Klövern also stood out during the year by entering new markets in Copenhagen and New York.

Other housing companies that have performed poorly during the year are SSM and Prime Living. During the year, SSM has been sued in a couple of rounds by a number of homeowners claiming their money back due to delayed projects. The share has dropped more than 60% during the year.

Prime Living has struggled with liquidity problems. In mid-November, the company announced that there is a risk that the money runs out in December. The share has dropped 90% during the year.

There is a risk that next year will be tough for the housing developers. The Riksbank is in the process of raising interest rates, and according to some analysts, it may be some time before supply starts to decline.

– We still expect very high volumes of completion all the way into 2019. We believe in continued headwinds for the housing developers. We expect the completion peak to occur sometime in the second half of 2019, says David Flemmich, Property Analyst at Handelsbanken.

A continued weak housing market may also hit Sweden’s economy as a whole in the future, partly as a result of reduced construction and falling household consumption.

Scramble for Victoria Park
On the other hand, many companies focusing on owner-occupied apartments to varying degrees have had an excellent stock market year, partly as a result of an increased foreign interest in the Swedish rental housing. It was manifested in a bidding war for Victoria Park between US private equity company Starwood and German housing giant Vonovia.

The Germans proved victorious and now control over 80% of the capital and votes in the company. In addition, Vonovia has an option to purchase additional shares, which will result in an ownership share of over 90% next year. There is thus a very high probability that all the shares are called in.

Rental housing is popular at the moment since the market is considered to be more or less insatiable. At the same time, the rent control allows for rental properties to be bought cheaply and for rents to be raised through renovations. This is something that, for example, Victoria Park and Hembla, former D. Carnegie & Co., have embraced. Most of the profits from these cash cows now end up in foreign pockets in Germany and the US. Hembla is majority owned by US Blackstone after a previous bid.

The bidding war also contributed significantly to the fact that Hembla wrote up the value of its building stock by a total of SEK 1.8 billion in the second quarter, equivalent to about 7% of the previous stock value.

Shaky construction projects
The construction companies had some tough luck during the year with a lot of profit warnings and write-downs. Both Skanska and NCC changed CEOs at the beginning of the year. These started with thorough due diligence activities related to their respective operations, which in both cases led to write-downs and various billion one-off costs.

In Skanska’s case, one might have thought that it would calm down in the third quarter after giant write-downs in the first two. But when least expected, they announced further write-downs in the US of 1.3 billion.

As a consequence, Skanska decided, among other things, to stop bidding for so-called mega-design-build OPS projects as these are considered too cumbersome. It echoes Peab’s decision a few years ago to focus on smaller and more manageable projects after the company bit off more than it could chew by taking on several large arena projects.

In the third quarter, Serneke also issued profit warnings for less profit as a result of write-downs in two construction projects. Skanska and NCC have dropped over 20% this year while Serneke plummeted 45%.

Credit rating chase
Another factor that has been the object of focus during the year has been credit rating. Many companies on the stock exchange have aimed to achieve the BBB credit rating, which corresponds to a so-called Investment Grade rating at S&P. An Investment Grade rating can, for example, result in reduced interest expenses. It can also open up for investments from foreign institutions that only invest in companies with a good credit rating.

Fabege, Sagax and Castellum all received the investment grade credit rating by Moody’s during the year. Sagax, together with Fabege, has been the best performer of the major real estate companies this year, with an increase of about 30%.

Samhällsbyggnadsbolaget i Norden, SBB is so far this year’s best real estate company. SBB has, among other things, exposure to rental housing and has during the year tapped into the trend of renovations. SBB has also managed to make a bid for the one-man property Karlbergsvägen 77.

There have also been many insider purchases in the company during the year, indicating that management is looking to the future with confidence. In addition, Victoria Park’s founder Greg Dingizian has bought shares for about SEK100 million. Money that he freed up at the sale to Vonovia.

While many real estate companies disappear from the stock market as a result of acquisitions, one has been added through Hemfosa’s spin-off Nyfosa.

Oskar von Bahr

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