Positive development at Hufvudstaden
Throughout most of 2018 the global economy developed well, with sustained growth in many of the leading regions, including the USA, China and Europe. However, political upheaval on several fronts, with the impending Brexit, strained trade relations between the USA and China, and geopolitical instability, has led to uncertainty regarding the future economic climate. In Sweden, there was good growth although with a slight slow-down after the summer. Uncertainty on the housing market was balanced by a stable economy, strong export growth, rising employment, and increased consumption.
With inflation at around two per cent, the Swedish Central Bank raised what was a very low key rate for the first time in seven years. A conducive Swedish economy and Hufvudstaden’s well-defined business concept, with a focus on the most attractive marketplaces in Sweden in the office and retail sectors, have contributed to yet another year of improved earnings and rising property values.
Hufvudstaden reported stable growth in current operations. Property management revenues totalled SEK 1,302 million, a rise of just over 3 per cent and on a par with the figure for 2017. This can be attributed mainly to higher rents in conjunction with new and renegotiated leases, which were offset by a loss of income due to current projects. Earnings after tax increased by SEK 1,285 million to SEK 4,320 million, largely as a result of unrealized changes in value in the property holdings and recalculation of deferred tax following a reduction in corporation tax.
Higher property values
A transparent and liquid property market in Sweden has proved attractive to both Swedish and international investors. From an historical perspective, low interest rates, rent growth, a lack of good alternative investments, and good access to capital have helped make the 2018 property year one of the strongest ever with net revenue of around SEK 160 billion. Hufvudstaden’s property holdings were valued at the year-end at SEK 44.1 billion (39.7), a rise of approximately 11 per cent. The increase can be attributed to rising rents, slightly lower yield requirements and investments. The net asset value at the year-end was SEK 171 per share (152) and the share price SEK 136.90.
Historically strong office market
Stockholm and Gothenburg are two rapidly growing regions, both reporting good economic growth for several years, and with extensive infrastructure investments that are attracting attention from both private individuals and companies. The creation of new office space has been limited for a number of years, leading to a considerable shortfall between supply and demand and with rising market rents as a result. In Stockholm, market rents for offices in prime locations rose by around 5 per cent during 2018, and in Gothenburg by around 10 per cent. New all-time highs in excess of SEK 9,000 per square metre were noted in Stockholm and around SEK 4,000 per square metre in Gothenburg. These levels were unprecedented. Vacant space in the CBD continued to remain low at 2 – 3 per cent. Hufvudstaden’s rent renegotiations for office premises resulted in an increase of around 40 per cent, and for the renegotiation stock as a whole the increase was around 25 per cent.
Diversified retail trade
Consumption rose during the year by approximately 2.5 per cent, which is in line with 2017. However, growth stemmed mainly from the rapid expansion in online retailing, which currently accounts for around 10 per cent of the retail turnover in Sweden. Shifting purchasing patterns among consumers are exerting pressure on both property owners and retailers to review the nature and development of physical and digital marketplaces. There is a wide disparity between the different retail segments, with much of the mid-price segment, for the most part chain stores, finding it difficult to sustain profitability. Strong, unique brands in prime city locations, and with a clearly defined profile, have continued to report good earnings and the same applies to much of the low-price segment. Hufvudstaden’s properties are located in prime city centre locations and with excellent potential to develop into even more attractive meeting points in the future, offering consumers purchasing experiences that go beyond the norm.
The NK department store in Stockholm is undergoing an extensive upgrade of the physical environment, and at the same time we are examining ways in which we can enhance our digital presence. The possibility of offering NK customers the opportunity to purchase online is being examined. Bibliotekstan has developed well during the year and there is still considerable interest among international brands in establishing operations in Bibliotekstan and at NK Stockholm.
Project investment continues
Hufvudstaden has for several years made focused investments in business development and projects. Our project portfolio is made up of current and planned projects, and at present stands at SEK 3 – 4 billion. We estimate that over the next 5 – 10 years we can invest SEK 7 – 9 billion in projects or property acquisitions without jeopardizing our strong financial position or raising the risk level at the Company to any significant extent.
Foundation work and store projects continued during the year on the lower ground floor of the NK department store in Gothenburg, resulting in improved customer areas and a broader range of restaurant facilities. At NK Stockholm, a major project is in progress where the neighbouring Parkaden property has already been connected to the NK department store and another large entrance has been added. The floor space has been increased by around 20 per cent, which will facilitate the establishment of more exclusive brands and improve the level of service to our NK customers even further. A new market hall is due to be opened on the lower ground floor in spring 2019. The NK project is expected to continue through to 2020.
On the Skären block at Norrmalmstorg, a redevelopment and expansion project has commenced, and the majority of the floor space has already been leased to Advokatfirman Vinge. The property will be expanded with the addition of 2,600 square metres of attractive office space, and the entire building will undergo complete renovation. The project will continue through to 2020.
The Vildmannen 7 property in Bibliotekstan was ravaged by fire in November 2017 and much of the building was destroyed. Our assessment is that the external facades can be saved but everything behind will need to be demolished. Working closely with the City of Stockholm, we have commenced local planning work with the aim of creating an attractive building, both for our customers and other visitors to Bibliotekstan, as soon as possible.
Hufvudstaden’s sustainability work is ongoing and is vital to the Company’s revenue growth over time. Since 2010, the Company’s energy use has fallen by around 20 per cent and our climate impact by around 80 per cent, even though more people spend time in our properties. On the Kåkenhusen block in Stockholm we have commenced work on a geothermal heating project that will reduce energy use significantly.
We measure employee and customer satisfaction on a regular basis. In this year’s Customer Satisfaction Survey for office tenants, Hufvudstaden came top in the Large Company category and reported a significant improvement in Environmental Consideration. In this year’s Employee Satisfaction Survey we also received high scores although there is still potential for improvement in certain areas.
In the GRESB international sustainability survey for property companies, we came third among Swedish listed companies and Hufvudstaden’s shares have been approved for investment in the Swedbank Robur and Nordea sustainability funds.
Hufvudstaden has unique and very well-located commercial property holdings in two of the most rapidly growing regions in Europe. Our business concept has been tried and tested over many years and remains stable. With a strong financial position, we are very well placed to take advantage of the opportunities that arise and to meet the challenges that are emerging in a rapidly changing world.
Our tenants are among the most successful in their sectors and we have extremely knowledgeable and committed employees. Revenue flows from the retail and office sectors complement each other well across different business cycles, and we have identified physical and digital projects that will contribute to improving profitability, increasing the net asset value, and retaining good dividend growth over time. Property acquisitions are being sought that complement existing holdings.
During 2019, the focus will be mainly on developing NK operations and pursuing our projects and business development initiatives optimally, the underlying aim being to create added value in the property holdings.
I am firmly convinced that we have excellent prospects for improving Hufvudstaden’s results over the next few years. Finally, I would like to thank all Hufvudstaden employees for their invaluable work during the past year.
Stockholm, February 2019