Hufvudstaden’s potential to inﬂuence proﬁts in current operations in the short term is limited. Revenue is governed by relatively long leases – normally three to ﬁve years –and operating costs are difﬁcult to change in the short term without sacriﬁcing service and quality. Hufvudstaden’s proﬁtability and operations are affected mainly by macroeconomic factors, such as the business climate, interest rates, regional development in Stockholm and Gothenburg and political decisions. Good planning and clear strategies are vital if a property company is to handle opportunities and risks successfully. The Company has identiﬁed material risks and uncertainty factors as described below.
Changes in the fair value of the properties due to ﬂuctuations in the economy and other factors represent both a risk and an opportunity. However, the risk is limited by the concentration of the properties in the most attractive commercial locations.
The rent trend involves both risks and opportunities. The risk, however, is limited by Hufvudstaden’s concentration on properties in the most attractive commercial locations. The rent levels for vacant ofﬁce premises are affected quickly in the event of a strengthening or weakening of the economy. Rents for central retail locations are more stable. The rent level for leased premises with lease terms of three years or more are linked to the consumer price index and many agreements also have a minimum indexation level. The majority of leases are not affected by a fall in the index. Rent changes take place when the leases are renegotiated.
Property tax increases constitute a risk although this risk is limited as a signiﬁcant proportion of the property tax is passed on to Hufvudstaden’s tenants.
In the event of a slowdown in the economy, the risk of an increase in vacant space is greater for Hufvudstaden’s ofﬁce premises than for retail premises. There should always be some vacant space in order to offer the customers potential for expansion, to permit redevelopment to take place, and to test the market’s willingness to accept higher rent levels.
A long average lease term is an advantage when market rents are falling and a disadvantage when they are rising. Excessively frequent relocation and vacation of premises give rise to adaptation costs. These costs cannot always be compensated for by increased rents. Normally, Hufvudstaden seeks to sign leases with a long lease term.
Turnover-based rent is mainly applied at the NK department stores but also in other retail properties. Hufvudstaden is striving to increase the proportion of lease agreements with turnover-based rent as they offer revenue potential while at the same time the guaranteed minimum rent in turnover-based leases limits the risk of a fall in rents.
Hufvudstaden is working actively to optimize the properties’ energy use and in doing so reduce the operating costs. Electricty procurement takes place regularly through forward agreements to reduce sensitivity to ﬂuctuations in energy prices. Hufvudstaden’s property holdings are well maintained. The Company is very focused in the way it works with follow-up and control of costs in each individual property, thus reducing the risk of unforeseen cost increases.
The concentration of a property portfolio in a geographical market area could involve a potential increase in risk because of reduced diversiﬁcation. In Hufvudstaden’s case, however, the risk is limited as the assessment is that in time Stockholm and Gothenburg will be the country’s strongest market areas and the most interesting growth markets.
Apart from its own funds, the Company’s operations are also ﬁnanced through loans. Consequently, the Group is exposed to ﬁnancing, interest rate and credit risks. A presentation of the Company’s Finance Policy and the manner in which ﬁnancial risks are handled, as well as credit risks attributable to accounts receivable and rent receivables, can be found in Note 2, in the annual report.
The effects on pre-tax proﬁt on a full year basis, excluding changes in value, in the event of changes in a number of factors are reported below. The reported impact on proﬁt in conjunction with changes in the rent level, vacancy level, operating and maintenance costs, property tax and interest expense, refer to the effects that had occured, calculated using current information at the end of the financial year. The reported effects on proﬁt should only be seen as an indication and do not include any effect resulting from compensatory measures that could be taken by the Executive Management.
Impact on profit,
|Rent level||SEK 100/sq m||+/- 38|
|Vacancy level1)||1 percentage point||-/+ 18|
|Operation and maintenance||10 per cent||-/+ 14|
|Property tax2)||1 percentage point||-/+ 17|
||1 percentage point||-7 +1|
1) Vacant ﬂoor space is estimated at SEK 4,700 per square metre.
2) Taking into account the fact that the costs are in part passed on to the tenants within the framework of the lease agreements.