Market and Transactions - Fabege

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Market and Transactions

Rental income and property expenses

With modern properties in attractive locations, the risk of increased
vacancies is low. Positive net lettings, completed projects and increased
rent levels for both new and renegotiated leases contributed
to income growth in 2018. In 2019, the company expects to see sustained
income growth resulting from completed project properties
and continued increases in rent during renegotiations.

Sensitivity analysis, cash flow and earnings Change Effect, SEKm
Rental income, total +- 1 % 26.1
Rent level, commercial income +- 1 % 21
Financial occupancy rate +- 1 percentage point 29.7
Property expenses +- 1 % 6.4

 

Risk – Rental income - customer bad debts

Suspension of customer payments. The customers’ ability to pay is affected by their stability and the general business climate.

Impact and management of risk, commentary 2018

The lease portfolio is spread among many industries and companies of different sizes. The 15 largest tenants are all stable companies and comprise
approximately 31 per cent of the total rental value. The tenants are highly solvent and rent losses are negligible. This is due in part to favourable credit ratings and in part to efficient procedures that quickly identify late payers. Over the past five years, total rent losses have not exceeded 0.1 per cent of the rent due.

Risk – Rental income - vacancy rate

Changes in vacancy rates in the property portfolio could impact rental income either positively or negatively. New production of office properties and demand for office premises affect rent levels and the vacancy rate.

Impact and management of risk, commentary 2018

The risk of increased vacancies in the investment property portfolio is deemed minor considering the portfolio’s central locations, modern premises and stable customers. The occupancy rate in the overall portfolio, including project properties, amounted to 94 per cent (94). In the investment property portfolio, the occupancy rate was 95 per cent (94). Rental growth in identical portfolios totalled around 10 per cent during the year.

Fabege’s portfolio generates stable cash flow from property management operations. The premises of development properties are kept vacant during
development, which negatively impacts cash flow during the period. This is done consciously to create greater value over the long term. Fabege’s
vacancies are in modern properties in attractive locations and no vacancies are structural; it is mainly a matter of time before the right customer is found for the right property.

Risk – Rental income - rent levels

Market rents prevail in the Stockholm office market. New production of office properties and demand for office premises affect rent levels and the vacancy rate.

Impact and management of risk, commentary 2018

Demand for office premises in Stockholm is growing, while the supply of new offices is limited, which is currently leading to increasing rents. Since leases generally have terms of 3–5 years, changes in market rents gradually impact on rental income. In 2018, Fabege renegotiated a volume of approximately SEK 213m, resulting in an average increase of 29 per cent. Fabege is of the opinion that renegotiations in the coming year will also contribute to an increased rental value.

Risk – Geographic concentration

Because the company’s property portfolio is concentrated to the Stockholm region, employment figures and developments in the Stockholm office market affect Fabege.

Impact and management of risk, commentary 2018

The strategy generates many benefits of scale and contributes to both an increase in net operating income and higher property values. With a focus on urban development in attractive locations, Fabege is able to influence the appeal and supply available in the districts. Stockholm is the growth engine
in the Swedish economy, with an expanding population fuelling demand for offices.

Risk – Property expenses

Property tax and ground rent, where the potential to affect the size of the cost is limited, account for a large part of these expenses. Other expenses, including running costs, maintenance and tariff-based expenses such as electricity and heating depend on price levels and consumption.

Expenses for the running and maintenance of properties are subject to seasonal variations. For example, cold and snowy winters give rise to higher costs
for heating and snow clearance, while hot summers result in higher cooling costs.

Lease maturity structure

Year om maturity No. of leases Annual rent, SEKm %
2019 716 535 19
2020 333 577 26
2021 242 335 15
2022 113 233 10
2023 94 198 9
2024 and beyond 84 759 34
Commercial 1,582 2,102 93
Housing contract 128 12 1
Garage and parking 748 135 6
Total 2,458 2,249 100

 

Project portfolio

The company believes that cost frameworks and schedules in the major projects will be met. Increased costs are largely related to adaptations
for individual tenants combined with higher rent or more challenging foundations conditions. Fabege does not envisage any significant risk of
increasing construction costs. With the company’s experience and the focus on letting the remaining non-leased project space, Fabege is of the
opinion that the risk of structural vacancy following completion is low.

Risk – Schedules and costs

Risks in the project portfolio are primarily related to schedules and cost levels when procuring construction services. Due to its large project portfolio and
annual investments of at least SEK 2.5bn, it is essential that Fabege manages these project risks optimally.

Impact and management of risk, commentary 2018

For many years, Fabege has pursued major new build and conversion projects. Each year, Fabege conducts project-procurement processes involving
significant amounts. Fabege’s project managers, who are highly experienced and skilled in project procurement, are responsible for these processes, and for running and following up large-scale and small projects. Procurement work is performed with the support of framework programmes, framework agreements and agreement templates. All investment decisions relating to projects exceeding SEK 25m are made by the Board of Directors.

The projects are expected to generate a yield on total capital invested of over 7 per cent. Fabege’s objective is for project investments to generate value growth of at least 50 per cent on invested capital, an aim that has been met over many years.

Risk – Unleased project space

In connection with large-scale new builds, there is a risk that newly produced space will not be let.

Impact and management of risk, commentary 2018

Currently the volume of ongoing new builds slightly exceeds 99,000 sqm, with the total investment amounting to some SEK 2,977m. The occupancy rate of the projects is 92 per cent, which entails a low risk of vacancy on completion. Requirements regarding the percentage of customers that have to sign leases prior to the start-up of a project are decided on a case-by-case basis.

Risk – Planning processes

Planning processes are time-consuming and depend on the resources available to municipalities. There is a risk of delays in opportunities to exploit development rights.

Impact and management of risk, commentary 2018

Lead times for the planning processes are lengthy. Fabege endeavours to maintain close cooperation with the municipalities concerned. Fabege works
with its own personnel, who are highly skilled and have considerable experience of working with planning issues.

The portfolio contains just over 698,000 sqm of wholly-owned development rights (offices and residential units), of which 44 per cent are legally binding.

Property values

As a result of low initial values for project properties and development rights, there is considerable potential for generating value
through project investments. Improved cash flows will contribute to higher property values going forward. At the same time, the market’s yield requirement is a factor that Fabege cannot influence. Fabege believes that property values in the company’s markets will
be stable in 2019.

Change in value, % Impact on after-tax profit, SEKm Equity/assets ratio, % Loan-to-value ratio, %
+- 1 528 51.1 38.5
0 0 50.8 38.8
+- 1 -528 50.5 39.2

 

Sensitivity analysis, change in value Assumption Impact on value, SEKbn
Rent level +- 10 % 5.7
Running cost +- SEK 50/sqm 1.2
Yield requirement +- 0.25 % 4.1
Long-term vacancy rate +- 2 % 1.3

Risk – Property values

Changes in rents, vacancies and yield requirements in the market affect the value of the properties. The market price is also impacted by access to and the terms of financing.

Impact and management of risk, commentary 2018

The value of the property portfolio is affected by Fabege’s leasing and customer structure, by the company’s development of the property portfolio and
by other external factors that determine demand. Fabege’s property portfolio, with stable customers and modern premises in prime locations, is made up of attractive investment objects even when the economy is not performing well. The persistent advancement of project and development properties will continue to generate value growth in the portfolio.

Properties are recognised at fair value and changes in value are recognised in the statement of comprehensive income. Property value is determined
according to generally accepted methods. About 25 per cent of Fabege’s portfolio has its value appraised externally at the end of each quarter. The value of the remaining properties is appraised internally based on the external valuations. Accordingly, the entire property portfolio is independently valued at least once a year.

The combined year-end market value was SEK 67.6bn (57.9), corresponding to about SEK 59,000 per sqm (52,000).

Changed 2 December 2019