Good morning, and welcome to this Skanska press conference. I'm Antonia Junelind, Senior Vice President, Investor Relations, and here with me on this call is President and CEO, Anders Danielsson, Group CFO, Magnus Persson, and Group EVP, Claes Larsson. This call is arranged following our announcement last night.
We continue to experience weak property markets, and as a consequence, property asset impairment charges will be recognized in commercial property development, residential development, and investment properties, impacting the fourth quarter results 2023. Please let me also inform you that after the publication last night, we have spotted an error in the English press release.
For clarification, the assessed average valuation yield for investment properties in Malmö is 4.8%. This has now been updated on all of our external platforms. So we will start this call by shortly summarizing the situation. Afterwards, you will be able to ask questions by using the audio link or the conference phone numbers.
Just follow the instruction provided by the operator. Please let me also remind everyone that we will only make comments in relation to the announcement, and we will therefore not comment anything else in relation to the fourth quarter performance or result. With that short introduction, I will hand over to you, Anders, for a brief summary.
Okay. So I will have a brief summary on the fourth quarter impairments of SEK 2 billion, which is divided in commercial property development, SEK 1.4 billion. And most of that is in the U.S. portfolio, which is our weakest market currently. Residential development has a charge of SEK 500 million, and the majority in our low-cost segment BoKlok, which has been impacted the most by reduced market activity following increased interest rate and inflation.
In investment property, we have a charge of SEK 200 million, and that is a change in property values. And these charges have no impact on the fourth quarter cash flow. We also have a change in surplus values in the commercial property development, and that is based on the review of estimated market values. The change is SEK 1.6 billion in the commercial development portfolio, and mostly all these are referred to the U.S. properties. With that, I hand over to Magnus.
Thank you, Anders. So the impairments and the changes in value that we communicated last night, of course, they relate to changes in sort of market circumstances that lie beyond our control. And all of them are taken also in the property operation. So nothing in the announcement last night relates in any way to the construction business. I think that's good to point out. And, of course, we need at every point in time to ensure that we have a balance sheet that represents the best possible assessment of the values that we, that we recognize.
As we have pointed out on several occasions during the fall, there are today very few comparable transactions out on the market to look at, which is the most used sort of method in order to gain reference points when you assess value for property assets. There are transactions made, but in many cases, those are sort of difficult... The pricing of those transactions are difficult to extrapolate into larger transaction volume, on the market there.
So through the fall, we have worked with this a lot, obviously, and due to the lack of comparable transactions, we have, piece by piece, essentially increased the scope of the supporting information that we've looked at in order to use as input in our valuation, looking at interest rates, buyer pool appetite, funding availability, funding costs for potential buyers, and so on and so forth.
And this goes very much in line also with the message that we've had, both in the third quarter and in the Capital Markets Day that we held not too long ago, that there is a large uncertainty around the value of properties today, because it is sort of difficult to find relevant, comparable transactions and thereby derive the value.
So the charges that we announced yesterday and the changes in the surplus value, this represents our current best assessment of the values for these properties, yeah. And if you look at the table that we released, we can see that we have then charges in Commercial Property Development on the accrued values of SEK 1.4 billion.
That will impact then our P&L in the fourth quarter. If we take into account the changes in the surplus value, we have to relate that to the total market value at completion of that portfolio. And the size of the charges on the accrued numbers are around 3.5%, and the size of the total changes in value at completion is around 5%.
If you look at Residential Development and do the similar analogy or comparison, the size of the charges in relation to the unsold accrued values is around 3%, and Investment Properties, it's around two- ... 5% then. And I want to emphasize again, we have very good assets, very good land in this operation. So the impact that we see here is purely driven by the market situation, essentially. I stop there and hand over to you, Antonia, for questions and answers.
Yes. Thank you for that, introduction. With no further ado, we will open up the Q&A. Operator, can you please introduce the first caller?
We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and one on their touchtone telephone. You will hear a tone to confirm that you're entered in the queue. If you wish to remove yourself from the question queue, you may press Star, followed by two. The first question comes from the line of Simen Mortensen with DNB. Please go ahead.
Yeah. Hi, guys. Thanks for the update. Just one question. I don't know if you want to answer it, but you have, in commercial development, also been doing asset sales in the quarter, both through directly to the investment property division, which has done also a write-down, but you also do write-downs in CD. Can you give us some flavoring about how these valuations you're now reporting is correlating with what is done in the transactions in Q4?
Hi, Simen, this is Magnus. Let me try and give you an answer to that. I understand your question. It's a bit tricky to answer, not because we're holding out on information here, but because it's difficult to compare one specific transaction to a broader portfolio, obviously. We can say that the transaction that we have done is the values of that are sort of reasonably in line with what we now communicate. But were you referring also to the investment we did externally in?
In L.A..
In L.A.? Okay.
Yeah.
I got it. I thought it was only on the investment property transactions. On that one, we don't give specific numbers and financials on the single deals, as you know, but we can say that given the very tough market circumstances in the U.S., we were very happy with the result of that one, and shows that quality matters. We were able to sell it to an owner-occupier, that sort of preferred the top quality of the asset.
Okay. Thank you. Those are my questions.
The next question comes from the line of Graham Hunt with Jefferies. Please go ahead.
Thanks very much for the presentation. Maybe two questions from me. First, I notice, I don't think you adjusted any valuations for completed properties in the Nordics, and I think I heard you say, Anders, that the reduction in surplus value is primarily focused on the U.S. So could you just talk about the... I think you have 10 projects there that are completed, 80% leasing ratio.
Seems to me that you still remain pretty confident on the valuation levels of those properties. You know, you see, you know, is that, is that related to where you're seeing buy interest at the moment? Because I think that's above your, your leasing threshold to go to buyers, and, you know, are you optimistic we could see some movement on that, specific portfolio anytime soon.
Then second question, maybe just on how we should think about the flow-through to dividends on this impairment. Does that just drop directly through to, to any kind of dividend that you would propose this year, the SEK 2 billion impairment? Just thinking about the impact there. Thanks.
Thanks, Graham. This is Magnus. I will take your first question, and Anders will briefly comment on your ask around the dividend. In terms of completed properties in the Nordic, the Nordic market is, we have a better sort of see-through and visibility in the Nordic market than we have in the U.S. market, which is most challenged, as we also state in the release and kind of communicated before.
So in terms of these valuations and why we're not making the changes, it's simply because we have reviewed, obviously, all the values and feel comfortable with where we stood at the end of the third quarter.
Regarding the dividend, we don't give any forecast on the dividend. We will come back on that on February 9, when we release the year-end report.
Thank you.
The next question comes from the line of Gregor Kuglitsch with UBS. Please go ahead.
Hi, good morning. Thank you for taking my question. Can I just sort of calculate back, the residual sort of surplus value? I think you had excluding the stuff that was already sold, I think SEK 6.1 billion as of Q3. You're now taking that down by SEK 1.6 billion, I think, so that leaves SEK 4.5 billion, and I guess that's to be compared to roughly SEK 55 billion of market value, right?
So basically, an 8% margin. Is that what you're basically saying, you think you have in the portfolio? And I appreciate there will be a mix. I guess, the U.S. will be lower than that or next to zero, and perhaps other bits a bit higher. I just want to understand if that's essentially what you're baking in. So that's question number one.
I guess the second question is, you know, you kind of alluded to it, it's quite hard to actually know where transactions are settling. So I guess, you know, what's the risk that, you know, you have to kinda come back and take another hit later on if things move? And I appreciate it's a bit of a difficult question, but any thoughts as to kind of how conservative you've been in this round? Thank you.
Hi, Greg, this is Magnus. I'll try to answer your questions here. In terms of the surplus value, I'm sure your math is correct. But when we come into the fourth quarter, we need to realize that we also have other gross impacts on the surplus values. So your absolute numbers become, will sort of not look like that, in the fourth quarter.
And in terms of your margin assessment, I really can't comment on that. But otherwise, your math seems sort of to add up. In terms of risk for future value revisions, I mean, we have gone very deep into the portfolio, assessed values with all the reference points we can find, and this is our best assessment of the current value.
This is in all means a guarantee for that nothing will happen in the future, but it is reflecting where we are standing today. This is sort of as far as I can go with commenting on the future, because no one really knows, right?
Thank you.
The next question comes from the line of Albin Sandberg with Kepler Cheuvreux. Please go ahead.
Yes. Hi, guys. So two questions from me. One was the, you did obviously some write-downs in Q3, as well. But at that point in time, you did not pre-announce it. Is it just lessons learned from that, or just the scope that it's more write-downs this time around that you sort of pre-announce them?
And, trying to also figure out from previous questions, what do you think... What is the key delta, change, that you're taking in the U.S. Q3 versus Q4? Again, you're referring to the uncertain situation also in Q3. But just to understand what is the key difference in your thinking between Q3 and Q4, maybe specifically on the U.S. Thanks.
Thank you, Albin. I'll try to answer your question. In terms of communication, we obviously follow the communication rules set up by the stock exchange. In this case, we think that the charges are known at this point in time, and also that they are of such a size that it warrants us to make this kind of pre-communication of these charges. In terms of the delta between Q3 and Q4, there's not one specific thing.
The market is moving. We are getting wiser and wiser. I think every company out there is today a bit challenged with understanding where we have the values. So, we have been sort of quarter by quarter, forming our view of what are the right values that we can stand behind, and that all the observations we have point towards.
So that's the sole reason. It's not a single specific delta between the quarters that have given this. It's an overall assessment that points towards that this is the sort of assessment we stand behind today.
Great. Thank you.
Thank you.
The next question comes from the line of Stefan Andersson with Danske Bank. Please go ahead.
Thank you. Yeah, maybe two questions from me as well. First, on commercial development, looking at the value adjustments you make here in the U.S. and in relations to the assets that you have there, it's a fairly big move. So I'm a little bit and I'm sure apparently we see that you do transactions with profit, so seems like you have some assets that were terribly wrong.
So I'm a little bit curious on if you can elaborate first, number one, you know, what kind of assets is it that are impacting this much? And then, secondly, will this... You know, how would this... I imagine it should impact your operation there. So my question is, you know, how are you thinking about starting new projects? Do you have the right land bank? You know, staffing-wise and so on, what impact has this had on the operation?
Yeah, I can take that. I mean, we operate in five cities in the U.S. It's Los Angeles, Seattle, Houston, Washington, D.C., and Boston. I will not go into specific market characteristics, but you could say it's the office segment that is mostly hit. You can divide it into two market reasons underlying.
One is a tough leasing market because of post-pandemic effects. Back to office rates are very low in the U.S., so big hesitation among tenants to expand or sign up for new space. We're lagging behind in the leasing compared to what we assumed when we started a lot of the projects. Secondly, you have, of course, the high interest rate environment in the U.S. that hits the financing of property purchases.
Of course, then you have lack of visibility for comparable transactions in the market. So very uncertain yield levels and also lagging behind in leasing. That, that is what hits our portfolio, and I will not go into pointing out any specific submarkets or segment, but office is definitely more hit than, for instance, multifamily and life science.
Of course, we are extremely cautious on starting new projects at this point of time, because it's hard to pencil the business cases. So probably in, in, in the near future, we will be very, very cautious and, and has postponed further growth of the business in the U.S.
Great. Thank you. And then on the residential side, I know Eastern Europe you seem to be relatively content with, so we're talking about the U.S. and the Nordics here. Your comment there, that it's a very weak market, could you possibly give a little bit more flavor on that? You mentioned in BoKlok, is it only that segment, or are you seeing a very weak market all overall? And would that mean that you haven't seen any improvement here recently either?
Yeah, on the share, I can take this. What we have said is that the market downturn that we have seen the last few quarters has been mostly hitting the low-cost segment, which in our case is BoKlok. And that goes in pretty much all the market where we have those operations, and that is the predominant part is in Sweden, but we also have some low-cost BoKlok operations in the U.K.
So, otherwise, I will not comment on the market outlook or the market development in the fourth quarter. I will come back to that in February, but you have our outlook from the Q3, and we will not comment anything else.
Thank you. All for me. The next question comes from the line of Erik Granström with Carnegie. Please go ahead.
Thank you. Good morning. I had one question, a little bit related to the one that Stefan asked on, on BoKlok. You mentioned in the press release that a, a majority of the impairments are done, within this unit, and in the table, it seems that it's outside of Sweden, in the Nordics, where this is taking place. And I was just wondering if you could comment on, the relation in, in BoKlok, in the Nordics, outside of Sweden, which seems to be the, the largest impact, in this quarter?
Yeah, yeah. As I said, we have taken some action in the turnaround plan, and we've decided to leave certain geographies. And of course, when we do that, we have to look into the asset we have, and that is mainly landbank, but also some unsold units that are completed. So, and we are taking firm stand where what do we see the value of those, and then we have taken the consequences of that and the charges in the fourth quarter.
But it's right to assume that the majority of the impairment related to RD is, in fact, within BoKlok, in areas where you previously have decided to leave those operations?
Yes, that is correct.
Okay. Thank you. That was my question.
Okay.
There are no further questions at this time.
Thank you. That means that we're now wrapping up this conference call. Thank you for joining us this morning. We will be back with the presentation of our full year-end report on February nine. Thank you.