Possibilities and risks

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 as well as political decisions. Long forward 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 value in the property holdings

Changes in the fair value of the properties as a result of 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.

Rent trend

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 retailing locations are more stable. The rent level for occupied premises with lease terms of three years or longer is linked to the consumer price index. Rent changes take place when the leases are renegotiated.

Property tax

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.

Rent losses on vacant premises

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 the Group’s retail premises. There should always be some vacant space in order to offer the tenants potential for expansion, to permit redevelopment to take place and to test the market’s willingness to accept higher rent levels.

Lease term

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 considerable adaptation costs for premises. These costs cannot always be compensated for by increased rents. Normally, Hufvudstaden seeks to sign leases with a long lease term.

Turnover-based rent

Turnover-based rent is mainly applied at the NK department stores. Hufvudstaden is striving to increase the proportion of lease agreements with turnover-based rent as they offer upward potential while at the same time the guaranteed minimum rent in turnover-based leases limits the risk of a fall in rents.

Operation and maintenance

Hufvudstaden is working actively to optimize the properties’ consumption and in doing so reduce the operating costs. The procurement of energy takes place regularly through forward agreements to reduce sensitivity to fluctuations in energy prices. There is an ongoing review if the conditions change.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.

Concentration on central Stockholm and central Gothenburg

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 attractive growth markets.

Financial risks

Apart from its own funds, the Company’s operations are also financed through loans from credit institutions. Consequently, the Group is exposed to financing, interest rate and credit risks. A presentation of the Company’s finance policy and how financial risks are handled, as well as the handling of credit risks attributable to accounts receivable and rent receivables, is to be found in Note 2, in the annual report.

Sensitivity analysis

The effects on pre-­tax profit on a full­ year basis, excluding changes in value, in conjunction with changes in a number of factors are reported below. The reported effects on profit in conjunction with changes in the rent level, level of vacant space, operating and maintenance costs, property tax and interest expense, refer to the effects that would have occurred during the 2016 financial year if the changes had occurred at the beginning of 2016. The reported effects on profit should only be seen as an indication and do not include any effect resulting from compensatory measures that couls be taken by the Executive Management.

Change in pre-tax profit, excluding changes in value

  Change +/-

Impact on profit, 
excl. changes in value before tax +/-

Rent level SEK 100/sq m SEK 39 million
Vacancy level1) 1 percentage point SEK 17 million
Operation and maintenance 10 per cent SEK 14 million
Property tax2) 1 percentage point SEK 15 million
Interest rate3) 1 percentage point SEK 67 million

 

1) Vacant floor space is estimated at SEK 4,400 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.

3) Without taking into account the fixing of interest through derivatives.