A valuation of the property holdings is made by assessing each individual property’s fair value. The assessment is based on a valuation made according to a variant of the location price method, known as the net capitalization method. This method means that the market yield requirement are part in the net operating income of the properties. In the case of other project properties and undeveloped land, the valuation was based on a completed building with a deduction for construction costs, as well as financial costs and the cost of vacant space that arose during the construction period.
Sensitivity analysis, property valuation per December 31, 2018
|Change +/-||Impact on value before tax +/-|
|Rent revenue||SEK 100 per sq. m||SEK 1,030 m|
|Property costs||SEK 50 per sq. m||SEK 515 m|
|Rental vacancy level||1.0 procentage points||SEK 570 m|
|Yield requirement||0.25 procentage points||SEK 2,900 m|
The assessment of the yield requirements is based on information gathered on the market return on investment requirements for purchases and sales of comparable properties in similar locations. If few or no deals were concluded in the property’s sub-area, transactions in the adjoining area are analysed. Deals not concluded also provide guidance on the market yield requirements. Account has also been taken of the property type, technical standard and building construction.
The yield requirements used in the valuation vary between different regions and different sub-areas within the regions. Information is checked with independent valuation and advisory companies. Hufvudstaden's average yield requirement since December 31, 2013 has varied between 3.8 per cent and 4.7 per cent, and as at December 31, 2018 the figure was 3.8 per cent. For leasehold properties, the calculation is based on a yield requirement that is 0.20 percentage points higher.
The net operating income
The net operating income is based on market-adapted rental revenue. Rental revenue is adapted to the market by adjusting existing rents using newly signed and renegotiated leases and with account taken of the expected rent trend.
Revenue has been reduced to take into account an assessed long-term rental vacancy level. The vacancy level is based on the true outcome of the property holdings over a business cycle and the expected rental situation for the individual property. In the valuation, an average vacancy level of 4 per cent has been estimated. The actual average vacancy level during the period 2009 – 2018 varied between 3 and 6 per cent and as at December 31, 2018, the figure was 2.6 per cent.
A deduction has been made for standard costs for operation and maintenance, excluding costs that can be passed on, and part of the property administration. These are based on the actual outcome and are adjusted for non-permanent deviations. The average cost per square metre over the most recent five-year period has been in the range SEK 400 – 500 and the estimated cost in the valuation as of December 31, 2018 was on the same level. The following information has been used in the valuation.
|Range (weighted average)|
|Net operating income (SEK/sq m)||1,430 - 6,820 (4,480)|
|Vacancy level (%)||2 - 5 (4)|
|Yield requirement, Stockholm (%)||
3.3 - 3.8 (3.6)
|Yield requirement, Gothenburg (%)||4.1 - 4.8 (4.4)|
Yield requirement, total (%)
To assure the valuation, external valuations were obtained from three independent valuation companies: Forum Fastighetsekonomi, Cushman and Wakefield, and Newsec Advice AB. The external valuations cover 12 properties and are equivalent to 36 per cent of the internally assessed fair value, and the corresponding figure at the mid-year point was 38 per cent.
The basis for the selection of the properties was that they should represent variations in property category, town, location, technical standard and construction standard. The properties that underwent an external valuation were Grönlandet Södra 11, Hästhuvudet 13, Hästskon 10, Järnplåten 28, Kvasten 2, Kåkenhusen 40 (part of), Orgelpipan 7, Pumpstocken 10 (part of), Rännilen 8 and Rännilen 18 in Stockholm, and Inom Vallgraven 10:9 (NK Gothenburg) and Nordstaden 8:24 (part of) in Gothenburg.
The external valuation companies set a fair value of SEK 16.4 billion. Hufvudstaden's internal valuation of the same properties was SEK 15.9 billion. The internal valuations thus concur well with the external valuations.
In conjunction with an external property valuation, a range is often given to indicate the degree of uncertainty surrounding the fair value estimates. The value range is usually +/– 5 per cent but can vary depending, among other things, on the market situation, the technical standard of the property and investment requirements.
Hufvudstaden's property holdings are valued at SEK 44.1 billion with a degree of uncertainty of +/– 5 per cent, which means that the assessed fair value varies by +/– 2.2 billion.