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 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.
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 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 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.
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 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.
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.
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.
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.
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.
Impact on profit,
|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.