Welcome, everyone. This is André Löfgren, Senior Vice President, Investor Relations speaking. The welcome is to our nine-month report presentation, which will be held by our CEO, Anders Danielsson, and also our CFO, Magnus Persson. After this presentation, you will be able to ask questions. With that, I hand it over to you, Anders.
Thank you, André, and welcome, everybody. I want you to look at the first picture here. It's our Powerhouse, Brattørkaia in Trondheim in Norway. Powerhouse, the name is because the building produces more than double the amount of electricity it consumes daily. We go into the nine months report and the overview here. Overall solid performance. This is a strong report. The Construction stream steadily improving quarter- by- quarter, the same with this quarter and the Residential Development. Strong profitability. We also increase our sold and started units on the first nine months. Commercial Property Development, we have started a lot of projects during the first nine months, and also sizable starts. The gain on the divestment, they are on attractive levels.
Operating margin in construction, 3.6% in the first nine months, same in the third quarter. Return on capital employed in project development well above our target of 10%. 12% ROCE. Return on equity, 26% on a rolling 12 months basis. We continue to have a very strong financial position. It's also very encouraging to see our carbon reduction that has reduced with 47% since the baseline in 2015. You also saw that we increased our targets for carbon emission to 70% reduction in our own operation until 2030. With that, we can go into these different streams, starting with construction. Revenue decreased to SEK 95 billion. That's about 6% reduction in local currency for the comparable periods.
The order bookings, SEK 111 billion, for the quarter compared to last year, SEK 110 billion. We should also remember that last year we had the high-speed rail of close to SEK 14 billion in the second quarter. This is an increase by 6% in local currency. We have a book-to-bill of 117% on a rolling 12-month basis, and the order backlog just shy of SEK 200 billion. Operating income increased with 48% in local currencies to close to SEK 3.5 billion for the period. The operating margin, again, 3.6% compared to 2.3% last year. The Q2 divestment of infrastructure services operation in the U.K. impacted positively in the second quarter with SEK 370 million.
Encouraging here as well to see that the profitability improves in all business units for the first nine months. Going into Residential Development, the revenue increased to SEK 10.7 billion. We also sold more homes, and we started more homes compared to the last year. Operating income SEK 1.5 billion close to SEK 1.6 billion, and the operating margin well above our target here as well, 14.5%. And the return on capital employed on a rolling 12 months basis close to 15%. High activity and strong profitability all over. The focus for us when it comes to Residential Development is to focus on zoning and bring new projects to the market. We have today a very high sales rate in our ongoing project, so the biggest priority is to start new projects here.
Longer term, if you look at our business, some uncertainties of course about where the economy is going, the unemployment levels and so on. The foundation for this business is strong. Structural shortage of homes is definitely a mitigator for that one. Going to Commercial Property Development. The operating income SEK 1.5 billion. We have a gain on sale in first nine months of SEK 1.8 billion. Even though it's lower than last year, we have the divestment has been on a very attractive level. The return on capital employed above our target 10.8% on a rolling 12 months basis. We have today 32 ongoing projects, which corresponds to almost SEK 24 billion in total investment upon completion.
We have also historically a lower occupancy rate and completion rate, and that's because we have started new projects. We have all-time high when it comes to start of new projects. We have started 16 projects the first nine months, which corresponds to total investment of SEK 14 billion, highest ever. We can continue to see a slow leasing market, but clearly the activity is picking up in the third quarter. We have leased 125,000 sq m during the period. That's slightly lower than last year. We continue to see a solid property investor appetite, and they are definitely going for flight to quality here. Again, divestments, they are at very attractive levels. We go back to the Construction stream here and look at the order bookings.
Here you can follow it over time, year- by- year. You can see the order backlog, the development of the order bookings, a rolling 12, and compared to the revenue, and also order bookings per quarter. What you can see here is that we have had higher order bookings on rolling 12 compared to the revenue. I expect this to, you can see it, the flattening out. I expect it to increase going forward. Again, this healthy backlog of shy of SEK 200 billion. If I look into the different geographies when it comes to order bookings, overall strong backlog, strong book-to-build, well above 100% in all markets, except for Sweden, but I'm not concerned over that figure.
We are in a very, very strong pipeline, and we have a lot of projects that they are in the first stage, that the client pushed them over the new year or into the fourth quarter. I think we're overall very strong. 117% book-to-build, which equals to 18 months of production. That is a good position. With that, I leave it to Magnus.
Thank you, Anders. If we then look at the income statement for the Construction stream, revenue's down 11%, 6% in local currencies, which is sort of the volume indicator here. Currencies does make the numbers look a bit more sort of that the revenue decline is bigger than what the volume is. Still, what Anders just went through with 117% book-to-build in a rolling 12-month basis and 18 months of production in the backlog, we're not too concerned about this. Expected to sort of come back here. S&A, always very important for us. As you can see, it's falling nominally. We are coming in at SEK 4.1 billion in S&A costs. If you look on the S&A margin, then -4.4%, it's a bit higher than, but that's driven by volume obviously.
Given the backlog that we have and the book-to-build, we think this is a good level to be at for the moment. Gross margin 7.9% year- to- date. You need to adjust this for the U.K. divestment to see the trend here, if you will. If you take that out, you end up with 7.5%. Q3 isolated is 7.6%, so as Anders said, we continue to piece by piece improve the underlying performance of the construction portfolio, which is exactly what we have been working with. Takes us down then to the EBIT margin, 3.6% or 3.2% year- to- date if you take out the U.K. divestment. I think the development here is really sort of a testament to this stabilization of the construction portfolio that continues successfully improving the performance.
If we look at the different geographies, the margin, as said, improves in all geographies year- to- date. In the third quarter, it was stronger in Europe, and in the U.S., slightly lower in the Nordics. I'd say overall, all geographies continue to improve their performance. The margin in individual quarters can of course go a bit up and down, but overall a very solid performance. In the third quarter, no one-off effects that sort of disturbs the comparability here. If we go to Residential Development, we have had a very strong performance, revenues of SEK 10.7 billion. Of course that's a lot. You compare it to SEK 9.6 billion last year. If you look at the third quarter isolated, sales fell, it looks like quite a bit.
There's a couple of explanations to this that are important to be aware of. First, I think the third quarter last year is a very, very tough comparison for two reasons. One is that there was a significant amount of pent-up demand in the housing market after Q1 and Q2 had been, to a large part, at a standstill due to the pandemic. The other one is that we divested a package of rental properties in the third quarter 2020, for SEK 1.5 billion. Of course right now, due to or thanks to the strong sales we've had, we have fewer units to sell. Our inventory is a bit low. I'll come back to that.
Performance-wise, with an EBIT year- to- date of 14.5% and a whopping 15.5% in the isolated quarter, the performance in Residential Development is of course on a very, very high level now. There are no significant one-off effects in the quarter here that you need to be aware of when you compare it. If we look at the different geographies, we improved margins both year to date and in the isolated quarter in all different geographies. I'd say the market is perhaps strongest in the European geography currently with a very, very strong demand and a very positive price development. It's a positive market in all our geographies.
I should also add, of course, that the strong price development here has really sort of made it possible for us to increase prices when we sell these units, and also that we have been sort of not needed to use sales reserves that we sort of always have with you when you start a project. All of this in the market contributes to very strong result. If we look at homes started and sold, you can see that the lines in the chart there dips a bit in the third quarter of solds and started. Year- to- date, we have sold more. We've sold 3,054 units, and last year, same period, 2,879 units.
Sales a bit up, and we have started the same amount as last year, which is roughly 2,500. We have a bit of a start deficit, if you will, in this. In Q3 then the sales, as already commented, we sold actually considerably lower amount of apartments than last year, but a big part of that is explained by the divestment of the rental portfolio in the third quarter in 2020. With the sales pace as strong as it is, it has been challenging to backfill with new projects. A chief reason here is that it is sort of slow and resource demanding with the permitting process to drive this process through the administrative authorities.
That takes time, and that is the limiting factor for starting more projects, which we are working hard on, of course. If we look at homes in production, we have roughly 7,400 units in production at the moment, which is a good step up from the 6,600 that we had a year back. Of this, we have sold now roughly 80%, which is a number that from a commercial perspective, you can say is too high. We would be more comfortable with 60%-70%, so we're working to start more units then. No issue with unsold completed homes. As you can see, 94 units. That is very small amount in comparison to the total amount of units in production here. We go to Commercial Property Development.
We had a very low volume quarter, you can say, in the third quarter. The result that you see, the revenue of SEK 4.4 billion and the gross income is basically generated, the largest part of that in the first quarter, where we sold a fairly large office building in Copenhagen. In Q3, isolated some smaller transaction, and we also divested the remaining ownership we have had in one of the U.S. projects that we previously sold to 90%. The activity in the quarter has mainly been in creating new opportunities for commercial development that we will capitalize on in the future then. Five new projects were started in the isolated quarter. If we then look at the realized and unrealized gains, you can see these bars in the chart on the slide is increasing.
In totality, we now have unrealized gains in the portfolio, SEK 10.5 billion, up from SEK 8.5 billion in the second quarter. In total year- to- date, we have started then 60 new projects with SEK 14 billion in total investment at completion, which is then actually the highest investment value of new starts in a single year in Skanska's history, already now in the third quarter. We're really doing now what we have said we would do for quite some time and putting this good pipeline we have into play. Of course, it's happy to see then, as it should be, that unrealized gains are increasing. If we look on the completion profile of the portfolio, this profile is now a bit bifurcated, if you will.
We have increased the amount of properties that are completed and unsold. The investment value of those goes up from SEK 8.1 billion in the second quarter to SEK 10.7 billion. That's the orange bar in the chart there. At the same time, the occupancy rate of these properties goes up to 67% from 59%. That's a good development. As you can see, we do not expect to complete anything in the fourth quarter and just very little in the first quarter next year. The new starts that we are now doing, they will of course complete in quite some time ahead. It's a young portfolio that we have here. The leasing exposure, if you will, is quite sort of further out in time ahead of us.
If we look at leasing, the two lines that track occupancy rate and completion rate, they go down. That's of course partly a consequence of the challenges with leasing that have been characterizing the market for some time. Also the fact that we are now starting a lot of new projects. When you start a project, you obviously have no leasing and you have no percent of completion in it. That sort of forces both of these lines down, these two indicators that we have. Year- to- date, we have leased 125,000 sq m. There are a lot of leasing negotiations ongoing. We started to comment on this in the first quarter that the market was, you know, waking up a little bit, which was reinforced.
In the second quarter, we still see this good activity in the negotiations. I think it's important to be aware here that it takes sort of, say, six to nine months between contact to contract in the commercial development business. What we saw, the discussions we saw starting perhaps in the beginning of the second quarter now, they are maturing now in a good way. If we look at the group, operating income from different business streams amounted to SEK 6.5 billion. Central costs down to -SEK 226 million, so more than SEK 100 million lower than last year. That is related to improvements in the legacy portfolio that we have, the old businesses in Skanska. Central costs or headquarters costs are basically stable.
Takes us down to the total operating income of SEK 6.2 billion, and the net financial items that are slightly lower than last year here. Of course, rates are lower. They have been low for a long time, but it is challenging to find yield on financial assets as we stand now. As we grow the development portfolio and start new projects, we are also increasing the capitalization of financial costs in the group here. Taxes at 16%, year- to- date. If we look at cash flow, we've had a tremendously strong cash flow development in the group. If you look at operating cash flow here, and you compare it to the same period last year, the main difference is the investment divestment.
This year we had net investments of SEK 300 million, but last year we had net divestments here of SEK 4 billion. That's a significant difference. Also the fact that we have mainly in the second quarter this year paid a large amount of taxes, which is in a way positive because those taxes relate to the significant profits that were booked on the sale of 2NY and ERC, among other projects in 2020. This explains the main differences in cash flow here. Free working capital essentially continues to be very strong. We are at a level of 20% of revenue, which is a very strong level. We do not see any firm indications that this is about to change.
If we look at capital employed, you can say that this, we started the year with SEK 44.5 billion. We are now at SEK 46.1 billion. With the amount of new starts we have in commercial development and the ambitions we have in residential development, that is very likely to increase here, which would also lead us to enter into more of a net investment cycle. We have been in a net divestment cycle for quite some time here. We'd expect the green line in the chart, if you will, to sort of continue down a bit here going forward.
If we look at the financial assets we have access to, we have SEK 17.5 billion in the cash and equivalents and the committed undrawn credit facilities at our disposal, and SEK 13 billion of that is available on very short notice. We are well-stacked with sort of funds to realize our investment ambitions. Financial position for the group, we remain with a very, very stable financial position. The adjusted net cash in the company is SEK 15 billion flat at the end of the third quarter with an equity-to-asset ratio of around 32%. Again, remaining a very, very solid financial base, so to speak, to work from commercially speaking. With that, Anders, I hand over to you.
Yes, I will address the market outlook stream by stream. If I look from overview, it's pretty much unchanged since the last quarter. We can see in the construction stream that the pandemic is still present. But we also can see that the activity is increasing in our markets. We can see it on the non-residential sector that companies, private companies are starting projects, which is encouraging. We can also see during this year price increases on certain materials and also bottlenecks in the supply chain. We have been able to mitigate those by very careful bidding process and to secure prices before we bid for projects as long as possible, as much as possible, and also to avoid those bottlenecks by accelerating procurement, for example.
Public infrastructure investment to stimulate the economies is there. We can all see it in a different market, but the funding is still uncertain in different markets as well. Ambitious investment plans under development in many of our countries that we're in our footprint, but the lead time are expected to be long before we can see it materialize out in the pipeline. For Residential Development, shortage of homes in the housing market is still there. We also can see activity is increasing overall that more and more homes come out into the market. Longer term, it's a balance between, of course, the rise in unemployment levels and some economic uncertainties what will happen after the pandemic. That mitigates with the continued low-interest rate policies. Commercial Property Development, investor appetite solid.
We have low interest rates and stable credit markets, which is positive. As I talked about earlier, tenants, they are still hesitant, but the activity is definitely picking up. We can see that clearly in the third quarter here that we have more and more visits on our project. They are very interested. We can see that more oil companies getting their people back to the offices. Clear trend, especially in the U.S. market and U.K. market, and we can see it happening with a slight delay here in the Nordic and Europe as well. To summarize this presentation, solid quarter, strong first nine months, and the Construction stream quarter- by- quarter continue to improve the profitability. Residential Development, strong performance, and we have started sizable projects in the Commercial Property Development. We are well-positioned.
We have a strong financial position, strong organization, and our strength is very, very aligned with the future customer needs. I want to remind you that you're all welcome to the Capital Market Day on December 7th later this year. With that, I'll leave it to André to open up for questions.
Great. Thank you very much, guys. Yeah, and as Anders said, it's time for Q&A, and please follow the instructions from the operator.
The first question comes from Pam Liu, Morgan Stanley. Please go ahead. Your line is now open.
Thank you very much. I have three questions, please. The first question is on Construction. If I look at Q3 only, which does not include the divestment gain in Q2 in Europe, I would say that the margin is fairly strong in Europe and continue to improve in the U.S. Could you please comment on, you know, the sustainability of margin at this level in these geographies, and if there is any scope for further improvement, and where would the driver come from? The second question is related to Residential Development. You know, you are talking about not starting homes fast enough. But if I were to look at your pipeline in the Residential Development, would you be able to comment on how each stage of the pipeline looks like? How mature is the pipeline?
For example, do you have significantly more of the pipeline that's still stuck in the planning stage, or are there more actually, you know, it's towards the end of the planning stage and therefore more ready to start? It's just to get a sense of how quickly you can ramp up the home start number again while the demand is still good. The final question is anything you can share on the cement supply situation in Sweden, because we have been seeing news articles saying that they may have to start rationing supplies from December. Any color would be great. Thank you.
Okay. Thank you. I will start to address the first and the third question, and then Magnus can comment on the second one. When it comes to the construction margin, we have seen continuous improvement for the last three years. As you recall, we took some strategic decisions, strategic action three and a half years ago, and those are paying off now. Quarter- by- quarter, we're steadily improving. I can see that overall in all markets that we improve. We can see that in the first nine months as well. As you know, we have a target of more than 3.5% or equal to 3.5%.
We are getting close to that target, and that's really encouraging. We're determined to continue with our strategy. It's profit before volume, and we are keeping up to that strategy for the construction, definitely. I don't see any differences in the markets. U.S. market is picking up, so as you can see as well, the margins. On the cement supply, of course, I addressed it in the second quarter as well. If we will see some issues or stop in the cement supply, partly in Sweden, this is a Swedish issue, as you know, it will be disruptive for the industry, definitely. What we have been doing even since this summer is to prepare ourselves for different scenarios. We are continuing to doing that.
I think I'm confident that we have good plans in place for different scenarios, but without going into any detail here. On the RD question, Magnus.
Yeah. Your question was about what stage is our pipeline in Residential Development. Of course, it varies across different geographies because so does also the
The permitting process, it doesn't look exactly the same all over the place. You can say we have a good land bank where we have sort of a very large amount of potential projects, so to speak. That is in the zoning process. That can take. It can be quick sometimes, but it can also take very long. It's sort of hard to describe exactly where in that process it is. It is not primarily, I would say, a land bank that is holding us back. It is the zoning processes. I would say that's the answer you are looking for here. In totality, we have around 26,000 building rights.
We also have a subject to certain conditions, at least another sort of 13,000 building rights that could be available through options for us. We have a lot of control of a lot of building rights here. It's all about processing this through the zoning process. Of course, up until getting building permit, but that is normally a smaller thing compared to get the zoning plan in place.
Can I just quickly ask a follow-up question? Just to clarify the definition, so it's zoning and then building permit, and then building rights. And then if you have the building right, how quickly can you start building? Thank you.
I mean, when we acquire land, we sort of say we acquire building rights. It can be raw land or it can be, you can have sort of the general plan. Then you need to have the right zoning, so you know what you're allowed to build in a certain place. Once you have that, you can sort of design the building. Then when you have done it, then you apply for building permit. The zoning process is what takes time.
Okay, thank you.
Our next question comes from Gregor Kuglitsch, UBS. Please go ahead. Your line is now open.
Hi. Good morning. Can you hear me?
Yes.
Yes.
Yes. Excellent. Thank you. I've got a few questions. The first one is on Construction margin. So just to understand you correctly, you're basically saying you've achieved the 3.5%, give or take, and you don't see any reason that kind of goes backwards. Obviously, there's all sorts of concerns around cost inflation. So just to understand, is your message essentially that you think you can hold that margin or maybe even improve it? The second question is on Residential. Sorry, maybe, it was commented on earlier. Was there anything specific in the quarter? There was obviously a relatively steep drop in the top line. Is there anything we can read across from that for the future? Is it just quarterly volatility? Then finally on Commercial.
I mean, obviously what we're seeing is your leasing rates are quite low, right? I mean, they haven't really improved. At the same time, you're telling us the unrealized gain is kind of going up materially. The question, I guess, is at what stage does this sort of the strategy change? Because as far as I can tell, you're kind of holding on to things you don't want to sell at a low price. The balance sheet's kind of increasing in value, right, in terms of the unrealized gains. At what point do you feel it necessary to perhaps try to move these on, or are you just gonna sit there and wait? Thank you.
All right. Thank you for your questions. I can start for the first one, and then Magnus can address the other ones. With the construction margin, to be clear, we have 3.6% year- to- date here. But if you exclude the one-offs, i.e., the infrastructure services divestment, we are at 3.2% in the first nine months. We're not at our target yet. We will continue to work hard to reach that. On the RD. I can see.
Question about whether or not there is sort of any one-off effects in the top line of the RD numbers.
There's no one-off effect in that, but there are one-off effects in the comparison quarter, the third quarter of 2020 that I mentioned some time back here, where we sold SEK 1.5 billion worth of portfolio of rental properties to the external market. So the comparison number is a bit distorted by that, but not on the top line this quarter. Then you had a question on commercial development. The leasing is low, the unrealized gains go up, and what is our strategy with this? I think a couple of things is worth explaining here. If you read the fine print in our report, you will also see that when we report unrealized values in the portfolio, that is, assuming that these properties are leased, of course.
To be very clear on this, we do not book anything of the unrealized gains. This is only a matter of reporting how we view our portfolio. I think that's a very important, sort of piece of information. This does not lie in our balance sheet. All the commercial development projects is booked at acquisition cost in our balance sheet. Of course, our strategy with this is we are confident that this is a solid business in the long term. We do not want to sort of sell off properties before we have leased them out properly, because that would mean that we are leaving upside, we're leaving gain on the table. That is one of the reasons to why we carry such a strong balance sheet as the group has.
That is to have the staying power as the market cycles up and down a bit. Now we are in that cycle in the commercial development business where we can use the staying power to make sure that we actually fully capitalize on the potential of these properties and don't have to divest them too early.
Okay. What you're saying is essentially, I mean, you kind of hinted that investors are taking more of a look. I think that if I'm not mistaken, there's more visits. But essentially, you don't wanna sell stuff which isn't effectively fully leased, so you'd rather wait because otherwise you don't capture the full value. Is that right?
That's absolutely correct. We get a fairly large amount of requests to sell properties from investors that are not leased to the level we would like to have them leased. But again, we sort of resist that and we think that there is still value to be created by improving the leasing, and we will make sure that we extract all the value from these projects as we think we can before we divest them.
Okay. Thank you.
The next question comes from Marcin Wojtal, Bank of America. Please go ahead. Your line is now open.
Yes. Good morning. Thank you for taking my question. I just wanted to follow up on commercial development, if possible. I have the impression that you are more positive about the outlook. At the same time, looking at your qualitative guidance on page four, where you have these arrows, you still have arrows pointing down for commercial development. Can you help us understand a little bit? Are you expecting 2020 - 2022 to be still a little bit of a transition year and perhaps the activity to improve in 2022- 2023 and 2024? How are we supposed to square the circle, please?
Yes. Thank you for the question. It's what we can see in the market now is definitely more activity. What we haven't seen so far is that we have signed the contract. Hopefully, we will see that in the near future. As Magnus pointed out, it's normally take six to nine months before we sign any contract. We are encouraged by the increased activity, but we do think it's too soon to celebrate and to increase the market outlook. That's basically the reason why we still have the arrows pointing slightly down.
Okay, very good. If I could have some follow-ups on the numbers for commercial development. You have got unrealized gains above SEK 10 billion now, up from SEK 8 billion. Is it just due to new projects started in Q3, or you have actually revalued some of the existing assets during the quarter? And maybe one more. What is typically the occupancy rate of CD assets when you divest them? Thank you.
I will answer that. The increase in the unrealized gains is by new start. Very seldom do we revalue properties during their lifespan until maybe precisely before they are mature enough to be sold. But we are very cautious with that. Then your second question concerned. Can you repeat that, please?
Yes. Yes. Typically, when you sell assets in commercial development, what is typically the occupancy ratio, of-
Okay. Yeah.
of those assets?
Okay. Yeah. Ideally, of course, it's 100%. We can consider selling when it's slightly less than that. You know, not a lot. I say we seldom really sell properties that is below 90%, even if it can happen from time to time. Then it is a very sort of careful commercial consideration because we are very good in leasing, and we do not want to leave money on the table.
Okay. Thank you.
Our next question comes from Stefan Andersson, SEB. Please go ahead. Your line is now open.
Oh, thank you. Just two questions from me then. Small one, maybe I misunderstood. When I look at, on the central cost, you have the OPS gain there of SEK 85 million. Could you maybe remind me? You said it already, maybe I missed it. Could you maybe just remind me what that is?
Yeah. Hi, Stefan. This is Magnus. You're correct. That's an adjustment to previous reserves that we have done in the legacy portfolio as a consequence of that developing better and better. That's the reason to it. Not the whole reason. The other reason is that we have a sort of better underlying profit in some of those assets.
Okay, good. What is the net reserve? Is that something you want to comment on? That could be, you know, the net reserve in total.
No, we don't comment on that level of detail.
Yeah.
We keep the reserved amount. Yeah. We have, of course, reservations for well-known risks in that portfolio. It's a run-off portfolio, and we do not want to take any risk on that. It should be very uneventful, and we should focus on our ongoing operations when we look at this company going out into the future. That's what we want.
Yeah. Good. Going over to CD, a little bit curious. I mean, your balance sheet to me at least looks extremely strong, and in historic perspective as well. The board is not there, so I can't ask about dividends, of course. You know, what I'm thinking about starts here. If I look at your leasing, if I look at the real estate companies I cover here in Sweden, you see vacancies is going up. I fully understand if you see more interest. I mean, there is a very hot end market more than you are constructing new offices. My question here is in that kind of environment, you have a very strong balance sheet.
You have buyers standing online wanting to buy the assets, and some questions about occupancy. How eager are you to start without having tenants in place? Going back 10 years, you wouldn't even start without having a tenant. What is your view now? How do you balance that? I know this is a very open question, but I hope you understand what I'm reaching for.
Yeah. You can be the judge if you get the right answer then. I mean you have to go back a couple of years to understand the situation. Already in 2019, we were hit a bit by the cost escalations in the Construction arm, so to speak, which made us start fewer projects in commercial development than we wanted. In 2020, we had this very good pipeline. We had ambitions to grow, which we have been communicated for quite some time. Along came the pandemic. We have, over this time, built up a super strong balance sheet, and our ambition is to continue to invest this. Of course, as you point out, leasing needs to follow this.
Now, we have a type of financial position that allows us to take a certain amount of sort of speculative risks in this way. That's the business model we have. Of course, we would like to lease more. There's no question about that. Our overall ambition here is to continue to grow the property operations in Skanska and use these funds that we have available for that.
May I ask the conclusion then. You're willing to start projects without tenants, really? I mean, you do it in some markets as well, but that's really what I can understand from your answer.
Yeah. You can say almost all projects we start in commercial development is without tenants. Yes.
Okay. Good. Let's see if you answer this one, but I'll try anyhow. Expectations on CD. If I look at consensus expectations from the market, there's quite a lot of expectations on you divesting from the CD portfolio in the fourth quarter. It's all built up, of course, from your comparisons from earlier years and so on. Just to try to get a little bit more out of you on that, those opportunities, because it's a black box. We don't really know. Do you have any larger projects that are, you know, close to 100% leased, without saying that how negotiations are going? I don't know if you can indicate something or you can just say you don't give a prognosis, but I try it at least.
In the stock of SEK 10.7 billion of unsold completed commercial development projects, you have everything from those that are leased to a low degree to those that are leased to a very high degree. Obviously, you know, our ambition is not to have them like that. We will sell them. Q4 is normally a very strong sales quarter. The investor market is very strong, but we don't forecast. We don't give forecast to that.
Yeah. Thank you.
As a reminder, if you would like to ask a question, please press zero one on your telephone keypad. We have received one more question from Pam Liu, Morgan Stanley. Please go ahead. Your line is now open.
Thank you very much. Just, one follow-up question, please. Coming back to Residential Development, please, and it's a more general question. I suppose just trying to understand a bit more about the dynamics of supply and demand in housing. We know that in Sweden there has been a structural housing need, given the demographic growth. We also know that financing has been and continue to be cheap. Yet it seems that developers don't seem to build sufficiently, fast to fulfill the demand. That has actually been the case for quite a while, I would say. Not just the 2021, sort of scenario. Now, I totally agree that part of it could be related to the long kind of zoning planning process. Is there something else here at play? You know, what can you say about the housing affordability?
Could that be something that doesn't necessarily translate the need into demand? Or, you know, is it a typical practice of developers to sort of under build to the demand in order to maintain this sort of supply demand tension? Yeah, anything on that would be great. Thank you.
Yeah, I can answer that. Our first priority, as I said in the presentation, is to start new projects where I think we are too high on the sales rate in the ongoing projects. Having said that, we have increased our portfolio with ongoing projects significantly the last year. Our intention is definitely to start new projects, but it's the bottleneck here is definitely zoning to get permits to start new projects. In my view, it takes too long time to go through the zoning process. It can take years here in Stockholm area, for example. That is a bottleneck. Also, addressing the affordability. We do have. We're not only in the building.
Residentials for high-end, we try to avoid that. We also have a significant part of our operation in the more affordable housing. We have, for example, BoKlok, the cooperation we have with IKEA that has grown a lot during the last few years, and that is really successful. We have also launched that concept into the U.K. market, and it's really encouraging as it has been well-received. We have quite a good diversification of our offering to the market, both affordability and more closer to the high-end. We're in a good position there. We're also in a good position when it comes to RD since we are diversified when it comes to geographies as well. That's good.
Thank you very much.
We haven't received further questions at this point. I will hand back to the moderator.
All right. Thank you very much. I actually have one question, or actually two questions on the chat, and I will read them to you guys, and you can arm-wrestle who will answer this one. The first one was actually from Simen Mortensen at DNB, but that was already covered. It was about these PPP gains in the third quarter. Then we have from Albin Sandberg at Kepler Cheuvreux. It's actually three questions I realize now. First one is, how many residential starts do you hope for this year and next? I'll take them one by one, I think, maybe.
Yeah. We don't give any forecast, as you all know. We do believe in a stable market. We have increased our start. If you look at the nine months, we have increased our start compared to last year. Our intention and our first priority is to start new projects because otherwise we're running out of homes for sale, and that we will not allow that to happen.
Great. Second question about the dead revenue in the U.S. Is there any left? If so, how much and for how long?
Thank you, André. Is there any dead revenue left in the U.S.? Yeah, there is some left, but we're continuously working that down. I would say that the absolute chief amount is sort of handled. There are always tails on the difficult projects that you need to deal with. There is some left, but not a tremendous amount.
Good. The last question, it's about cost inflation. When does cost inflation become a real issue to margins?
We have seen this coming now for several quarters, the cost escalation, and it could become a problem if you cannot handle it in the right way. Our approach to mitigate this cost escalation is to secure as much as possible before we even bid for a project, as much cost on material and subcontractors and so on. When that's not 100% possible, we do that as soon as possible after we sign the contract. We consequently avoiding to take any risk in the further cost escalation. That's our approach.
Great. Thank you. That was all the questions. I just want to remind you of the Capital Market Day on December 7, and invitations are going out next week. Have a look out for that one. With that, we thank you for your attention today. Thank you very much.