Okay, good morning, everyone. It is 9:30 A.M., and it is March 21st, 2019, which means that it's Skanska's Capital Markets Day. I am André Löfgren, I'm heading up Investor Relations at Skanska, and I'm very happy to welcome you all to a full house today, actually. And luckily, as well, we have a webcast. There are more viewers out there today. So this is gonna be exciting, I really hope, and I hope you think so as well. Just wanna start off with a few words about safety. We have four exits, two in the back and two in the front.
Just locate the nearest one to you, and then if something happens, go to that direction, go the same way you came in, then make a left when you get out on the street, to the big parking lot, where we all can, meet up. All right. Now I'm gonna show you the agenda for today. We will start off with a few words about our operations in general and get into the markets a bit. Then we will zoom in pretty quickly on the construction, operations, looking at what we have performed and what we are gonna do going forward. After that, we have a healthy coffee break, and then we get back in after 20 minutes. I hope you get out there and mingle with the Skanska employees that we have here in the room.
After coffee, we're getting to the project development operations, and focus on that and our way forward there. Then we'll take a deep dive into the financials, and we will end with a Q&A session with all of you here in the room. Then we will wrap this whole thing up, and then serve, again, a healthy lunch. And with that, I want to hand it over to our CEO, which is Anders Danielsson.
Thank you. Can you hear me? Yeah, good. Okay, good morning. I'm also want to welcome you to this Capital Market Day. I am really excited to be here, and together with my team, who am I gonna present later on here, show you and present to you where we are today in the company, where we are compared to our current business plan, but also, of course, what's the plan forward? Where in what direction, what strategic direction are the company going? And here on the picture, you can see Slussen, a project that goes on for many years. It's well known, of course, for all the people who live in Stockholm, and we'll come back to that later.
But first of all, I want to present my team, so please, the group leadership team. We're quite a small team, as you recognize, and we will all be on stage during this session this morning. I want to present Kirsi Mettälä, who are heading up our HR in the company. We have Richard Kennedy, who are in charge of the U.S. construction operation.
Morning.
We have Claes Larsson, heading up the commercial development in both in the Nordics, in Europe, and also in U.S. We have Caroline Fellenius-Omnell, legal department and Head of General Counsel. And we have Magnus Persson, the CFO for the company. So please, you will have plenty of room later on. First, Skanska in brief, as we get the context here. We are one of the world's most leading construction and project development companies, and we have our footprint in in Europe and U.S. We have a lot of footprint in the Nordics, Central Europe, U.K., and pretty much all over the U.S. And we have a revenue last year of SEK 170 billion, and we are 38,000 employees. I will break it down to the construction stream.
The biggest one, revenue-wise, is construction. We have 86% of the revenue comes from construction, 7% from commercial development, and also another 7% from residential development. But you can also see on the EBIT, there's a bit of a different mix here, and that's one thing we address all the time now, is that we are performing on a very high level on the commercial development and residential development. And if you look at the last year's the infrastructure development, that has also been a successful business. This is a three years average, and the three years is the first three year in the current business plan that goes up to 2020.
But of course, the construction part of this 25% needs to be—should be higher. And that's due to the fact that we are underperforming in several markets. A new thing here going forward is that the infrastructure development will not be reported as a separate stream from 2019 going forward. And the reason is we have closed the project development within the infrastructure development, because in Europe, we don't see that the pipeline is sufficient to fund a permanent organization. And in the U.S., the market has changed a lot. It's a lower equity stake, and there's much higher competition on the project, so that's for us, it doesn't really make sense, and the risk-reward level is not attractive for us.
So we decided that, and we will of course keep. We have a lot of good assets in here, so we'll keep. We have a strong organization to make sure we get the most out of those assets. To remind you our business model, we have construction and project development is synergy, very strong synergy there. And of course, one synergy is that we use the cash flow we get from the construction to invest in the project development, and then we get back internal contracts from project development into construction. So that is, of course, a way to finance it. But I think the most beneficial synergies I can see is the cooperation between construction and project development.
Because I can see clear trend in all markets, every market we have commercial property development, that we earn more money. We have a higher profitability, both on construction, and as you know, we make a lot of money from property development. We're also a company that's heavily dependent on external conditions. We have the political stability, for example, we're dependent on transparency and well-functioning political systems. We're also dependent on having a good business climate, which is crucial for us, when we develop projects, commercial development, residential development, that we have a good business climate, and also consumer confidence. The climate impact is also getting higher and higher up on the agenda.
And we can see that during the last 10 years, this has really changed the business environment for us as well. So if I look 10 years back, we have very quite a small number of green projects in our construction revenue, and today it's 46%, i.e., close to 50% of the revenue in construction as an average in all our markets are considered as green. And that's a really competitive advantage for us because we have the competence, we have a unique competence to provide that sort of solution to our clients. And in the commercial development, we are close to 100% of our commercial development projects are green, has a green label on it.
That's also a competitive advantage because we can clearly see that our projects, our facilities are much, are a lot more attractive for both tenants and also from investors. Another external trend is, of course, a growing population. A growing population and also urbanization. You can see on the next slide there that urbanization is a really strong trend. You can get surprised. If you look at 2017 figures here, you have over in the Nordics and in U.S., over 80% are already today living in cities. That's a definition, well, that's, of course, a definition how we define a city. It's a greater Stockholm area, for example. But that's a strong trend, and we are a city builder, so we can really benefit from this.
Another trend in the market is sustainability, and this is in different aspects here, so I'm going through a few of those. First, the green building, which I explained to. We are at 46% today. I expect it to increase even further. We can see that the climate changes also are important. We, the construction and real estate industries are real contributor to emissions and energy consumption, and it's up to 40% in average. So of course, we can provide better solution, and we can really provide a solution for our client and make a difference. And that's what we're determined to do. And we also see that a lot of cities, a lot of countries talk more and more about the resilient solution.
You need to build more resilient cities, because we have weather changes, we have more extreme weather. We have seen a lot of investment. We have been involved in a lot of them, too, in New York, after the storm, Hurricane Sandy in 2012. So, and that's a trend that we can see in a lot of our different markets. Partnership for innovation, it's also a strong trend. That, and a couple of examples I can see in our company is, one is from Norway, the Powerhouse. We call it Powerhouse. It's a concept that it's actually office buildings that are plus energy. They provide more energy than they consume, and so they can actually sell energy to the market. And that's done on a commercial basis, and it's done...
The last one we are about to complete now in Trondheim, that's pretty far up north. So if it's possible by solar panel and other solution to build it in Trondheim, we, we can really see the business opportunities there. And another good example for trend is, we have a cooperation with Volvo, and we tried a pilot in end of last year, that we built a quarry emission-free quarry outside Gothenburg. And that was done, you can easily find it on our web page, but that is also the future, I will say. Partnership, we can't do it, solve everything alone. We need to find the right partner, and that's what we're working hard with that. The last one here is the employee well-being. What is that?
There is kind of sort of new thing, and it's a certificate for that you can certificate the building to make sure that the people, the employees who's going to work in the building are comfortable and are satisfied with the building, the working environment. Very important today, where it's a war of talent in all industries. And that's also we have started with a few already today, a few well-being certified buildings in different markets. A little more about the political landscape. Of course, we are dependent, as I said, over the political stable system, but Skanska has been around for over 130 years, so we're in it for the long run. But we can see some political uncertainties now in different way.
We have Brexit. Every day, we follow them very carefully day by day, and we can all read it in the newspaper. So, that's uncertainty, of course, for the construction industry, and it creates, or especially our private client, they're hesitating to do investment on the commercial, commercial buildings. So, we are following that. The shutdown in the U.S., the government shutdown, also created some uncertainty, but they didn't have any direct impact on us. But, of course, a bit of uncertainty. And Sweden, go back to here in Sweden, where first, record time for creating a government. Took Sweden 131 days to establish a government of the election last year.
But overall, when I look at our footprint, I can see that we have. I am confident. We have stable political system. We have democratic system in place, and that's crucial for us, that makes me confident that we are in the right places. GDP growth. We are heavily dependent on GDP growth, that's for sure. You can see here the development last year, strong development in the U.S. Somewhat slower GDP growth in Europe, and quite stable and strong in the Nordics. And the GDP is, to a large extent, driven by investment in constructions. So you can see on the right on that chart that the Europe and the Nordics area, they have been around 10%, have been on that level for quite a long time.
While in U.S., it's a bit lower, around 5%-6%, and that's been, and that's natural. U.S. is a more consumer-driven economy than the rest, than Europe. People. People are definitely our most valuable asset. We are heavily dependent to have the right people in the right place, in the right project. So, Kirsi, heading up our HR, can you tell us what we're doing there?
Absolutely. Thank you, Anders. Skanska is a company that is full of fantastic people. It is actually our employees who generate the value for us as shareholders. And that is something that I think that's why our people, they are the company's soul and backbone. In the labor markets, we work very actively on issues that are important to us, such as diversity, sustainability, ethics, and work environment, to attract and recruit the best people to work with us. We have also the possibility to use our wide knowledge and experience from various markets and operations to be better together. And that actually brings the value for our customers and shareholders. Strong values are a crucial part of our culture, and value-based culture attracts new employees and makes us also better place to work. Oh, sorry.
One of the most important factors when it comes to our people is actually our strong values. So in the labor market, we work actively with issues such as diversity and sustainability, ethics, and work environment, and that is because we want to have the best people. Young people of today, they have the option to choose the company they want to work with. And being attractive in the labor market very much entails making the most out of our employees, and working with value-related questions, too. Safety has been, and it's still, the number one in our agenda. We want to make sure that our people can work and go back to their homes healthy and safely each and every day.
Health and safety is also a very important part of our daily leadership, but that is also the responsibility of every employee and subcontractor working in our project and offices.
Thank you, Kirsi. So, our second value here is act ethically and transparently, and I'm proud to say that we work with a very high degree of integrity and transparency. The construction industry has quite high risks when it comes to ethics, and this means for us that we set very high standards on ourselves. And this also builds trust among our employees, but also among suppliers and customers and other business partners. But we also put a high standards on our business partners, which means that before entering into contracts with them, we do a quite thorough screening with most of the business partners we have. And we also ask our employees to do the code of conduct training within one month before they start working for us, and there we have a 93% fulfillment of that target.
In addition to that, all our 37,000 employees, they also do the code of conduct training every second year, and there we have a 100% fulfillment of the target. Setting high standards also means that we have zero tolerance for any breaches of the code of conduct. Going over to our third value then, being better together. We have heard about us speaking about how we really leverage on the fact that we are an international company. With the different competencies we have, active in different geographies, also working between the different streams, construction and project development. And I think this really sets us out and make us different from our peers.
It makes us better fit to win some of the projects, but also to execute them when it comes both to technical and quality, and also from a cost point of view. And this also leads to the fourth value, committing to customers. So all the time, we try to work much closer with the customer, and I think the best way to illustrate is by giving an example. So, Anders, I will hand over to you-
Thank you.
to speak about the ESS project in Lund.
Indeed. And this is a very good example of working according to our values, be better together. This is a project, it's a world-class, one of a kind, world-class research facility. The owner of the project is representing around 15 European countries. And this is close cooperation, both internally, because we in Skanska Sweden we realized that we couldn't build this on our own, so we cooperate internally with the Skanska UK, who's more used to building facilities like this. So, it's both a close cooperation with the client and internally. And we also have several actions to improve the sustainability here.
That one is, that we have cut the energy consumption with, 50% by different, measures, and we also, using the surplus energy, because it, it's this facility, when science is there and using it, it creates a lot of surplus energy that we distribute out in the district heating. It's a good example. Now, we're going into the performance of the Skanska Group. First, I want to go through, what we said, before we started the current business plan, and, that was, before 2016. We said in 2020, five years from now, we said at the time, we should be an industry leading in total shareholder return. We said we should be recognized as the preferred partner when it comes to solution and the customer needs.
Of course, living our values and recognized as a value-driven company, that's building for a better society. That's important, because that makes us more attractive, both for new employees. A lot of questions when we hire people, new talent, is, "What do you stand for? What's the purpose of the company?" And we really have a strong base there, as Kirsi and Caroline just described for you. We also want or determined to create an injury-free environment and ethical environment as well. Nothing is more devastating when we hurt people on site, and that's totally unacceptable, and we are working very hard to avoid, and in my view, all accidents can be avoided by better planning and better preparation.
We also said that, we want to be the most attractive employer in our industry. Again, we're a people, people company. We're competing on talent, not only with the construction companies, we are competing with other industries. So we are determined, very important for us to be considered as the most attractive employer. We want to be a company that fostering One Skanska and high-performing team, improve the operational efficiency. We have a lot of do there, and that's actually something we can do on ourself. We can always address the cost in the company, the cost for construction projects on both offices and residential. And of course, we want to have a balanced value creation, we said, between construction and project development. And how are we doing there?
That's the next, next slide there. You can see in 2010, we had created more value from the construction compared to the project development. So the ambition was to level it, leveling out. But like you can see to the right there, to have a strong value creation, both from construction and project development. But as you can see, 2018, we have not reached that. We are doing fantastic on the project development, commercial development, residential development, earlier infrastructure development, but the construction is underperforming big time. Coming back to what the detail of what we are doing about it, of course. But that's how it looks.
Here, where we have the biggest potential, in my view, to creating value for, for the shareholders, is to restore the profitability in construction and continue to grow the project development in, in a very successful way. Talking about project development, here you can see two bars, the blue bars is the EPS, the group EPS, if you go back to 2010. You also have the green bar, the unrealized gains per share in project development. Of course, the EPS is good. We, we have delivered good results during these years, the blue bars. But you can also see that we're actually building up for the, the value creation for the future. So that's very encouraging to see, and that's also why, why we want to grow that, that business. It's definite ambition we have.
Coming back to our targets. Project development, we have a return on capital employed target of 10%. We, if you look at the average outcome the last three years, we have way above that target, 15%, as an average. Very good performance. Construction margin, 1.3%, compared to our target of 3.5%, on an unacceptable level. The last two years is even worse. We had 0.8% and 0.7% last year. So, that is something we're really addressing hard time. The group financial strength, we changed the target here, but coming back to that, this is the current one. 11, we are at SEK 11.5 billion, compared on operating net financial asset and liability, compared to the zero can be negative target we have.
So very strong financial position. Return on equity, we have 18%. We have been above that as an average for the last three years. And we also have ambition to be the preferred partner and stakeholders. So we have health and safety, again. We think that's crucial for our company, the ethical management, the green green solution. I've talked about it when where you can see the strong trend going forward. Training and development, our people. One thing is to attract people and make them come to the company, but the biggest challenge is of course to develop and retain the people and make sure they see their future career within Skanska. And I really have a strong message to the organization. I want to see more of the One Skanska projects.
I want to see more of these, project development in cooperation with the strong construction units. We can improve and really make a difference to our customers. And here's a return history, as of December 23rd last year. And you can see on the return on equity, the target is the green line. The dotted yellow one is the average, the last last years. So we going back to 2000 and the last 10 years. So we have been above 20% the last 10 years. So good return on equity. Dividend has also been on a high level. As you can see, we dropped it last year. The proposal is to reduce the dividend for 2018.
The reason is because we want to invest more in project development. We think that is a very good opportunity going forward. And also, of course, that we want to keep our financially strong position. That's crucial for us.... That's crucial because when you have a strong financial position, like we had after the financial turmoil in 2008, if you have a strong position, you're not that many companies around that can take advantage of the opportunity that shows up in the market. One example is how we build up organically the commercial development operation in the U.S. We went in straight after the financial turmoil in 2009 and bought land and developed a company, and today we are in four large cities in the U.S.
If you look at the annual shareholder return, average five years, you can see the left bar here is the Skanska five years average. Not too impressive if you look at the shareholder price, 1% increase, as an average year on an annual basis. You can see that the dividend is somewhat offsetting that. So it is definitely important, also easy to understand that, by redoing what we're saying, we're doing, restoring the profitability and continue in the construction and continue to grow the project development. We have a lot of potential here. Now I'm going into the performance and actions in construction. First, we give you the context of how does the revenue looks like.
We have a revenue split in 2018, U.S. 41%, crucial part of our market. Richard will soon tell you what his plan is for the U.S., but very important part of the operations. Sweden, strong 22%. We have U.K., also a big part, 14%, and then you have the rest of the Nordic and the Central Europe. But this is how it looks like. And this is the revenue, the blue line, and also the operating margin going back five years. And you can see that the revenue has been a slow increase year by year, and, unfortunately, the operating margin has then dropped down to, as I said earlier, unacceptable levels, so that's really something we will do something about. And here's one example how we are addressing this.
This is a slide where you can see the size of the bubbles represent the size of the business, and the green one is the units, the business unit, where we can see or that we think they are performing on acceptable or good level. And that goes for the Swedish operation, very strong performance. Finland, also very strong performance. U.S. Building, good, good performance on a large part of the business, as you can see. And then we have our red ones, Poland and U.S. Civil, which we consider as a turnaround cases. We have done a lot of action going into this soon here, and big, large potential there.
There we also have the orange one, and these are the units that we're not satisfied, they're not the turnaround cases, but we're not satisfied with the profitability level. So we're addressing those in big time as well. We are doing this is the structure, the method, the approach we have for going further down in our organization, because all of these business units, they are having the operating units on the level down. It's the same picture there. You have some good ones, you have some average one, and then you have the turnaround cases. So we are deep in the organization.
That's also why we changed the organization a year, a year, more than a year back, that we I chose a smaller team to work with, and the European construction units, their business unit presidents reporting directly to me, because we think it's right. We think it's right to have management, I as a CEO, together with my team, wants to be closer to the operation. I want to be out there and see what's going on, because I think that's where we can make the largest increase in the shareholder value for the company. If I go overall, what's the measure we take, we are taking now to improve profitability? We are leaving the energy sector, the power sector, and a certain contract type in the U.S.
We have a major restructure going on in Poland. We are well on track, but it's a major one. We have pretty much cut the company in half in Poland. We're focusing more on the core business in the U.K., the same in the Czech Republic. We are more decentralized way of working, more accountability, and that's why. We have also pushed more responsibility out in the organization. So I'm telling my business unit president, I expect you to step up and take more responsibility, not only to delivering results, but also to continuously improving the business and continuously driving innovation and change.
Because I'm confident that we are better off to have more of a bottom-up approach here than trying to have a top-down approach when we, as a small team in the headquarters, trying to figure out what's best for the business. So that's not the way we're driving it now. And we're also reducing cost, of course, both when it comes to the headquarters. We're also reducing cost in the business units to adapt either to tougher market or adapt to the fact that we wants to be a we have a smaller scope in construction by our strategic actions we took one year ago. We are much more selective in bidding.
I can see that clearly that the fewer projects we go for, but the one we go for, it's really the one that where we can see we have a competitive advantage, and the one where we can see we have the competence, and also where we have performed in the history. So for all of these units you saw on the previous slide, we may look 10 years back. We look 10 years back and to see where have we made money, or in what type of contract, what size of contract, in what segment, and so on. So we have a, we call it the sweet spot analysis.
Of course, we compare our new bids that the proposal for bids that comes up on the table to the Sweet Spot Analysis we did last year, or we started already in 2017. We are much more careful about the risk and claims management going forward. Richard, why don't you tell us about the U.S.?
Thank you.
Your plan there.
Thank you. Good morning, everyone. I'm happy to have the opportunity to speak with you about our construction operation in the United States. It's been my pleasure to lead that operation, starting from January of last year, as part of Anders' new group leadership team. I've been proud member of that organization for the past 15 years. I started with the company in April of 2004. We have a fantastic company in the United States in the construction operation. We have a long history of successful projects in our Civil and our Building group. You see one project there. It's a project recently delivered by our U.S. Building group in Seattle.
We are well positioned in metro markets around the U.S., and I'll get into that a bit in a few moments. We have fantastic people. Kirsi said it, Anders said it, we're a people business, and we just have absolutely fantastic people in the construction operation in the United States. Hardworking, smart, talented, dedicated, experienced people who come to work every day to build amazing projects and deliver shareholder value to Skanska. I'm proud to be part of that group. They do a great job. As many of you know, we've had some challenges in the U.S., on the construction side. Anders mentioned it, touched upon it, particularly in our U.S. Civil group. We...
As part of growing over the past several years, we took on some large, complex projects that presented challenges for us, that resulted in financial challenges, writedowns on the projects that have negatively affected our profitability, and so we've had to take measures to improve that. As you'll see here in the slide, contain and complete low-performing projects. Last year in October, we issued a profit warning, and that was a consequence of writedowns on two very large, complex, complex P3 projects in the U.S. And, you know, the measures we took there to step in, help those teams to right the ship, look ahead, make the right plans to drive those projects forward, and help them to navigate their way to the best result possible. Anders also mentioned that we've exited the power sector and stopped bidding for engineering, procurement, and construction contracts in the U.S.
Our civil group actually had a good history of success in the power industry in New York, and as the economy grew, civil stepped more deeply into that market, but we found that those projects were too complex for us. From my perspective, I don't like the risk-reward equation in these EPC projects. You have owners demanding output guarantees, very heavy liquidated damages if you are late on those projects, and for me, it's just the risk-reward out of balance. So we've decided to exit that sector, and I think that's absolutely correct. Anders also mentioned the P3 market in the U.S. Skanska has a very long history of successful projects in P3 here in Europe, in Latin America. In 2012, we won our first P3 project in the U.S., Elizabeth River Tunnels.
That was a very, very successful project for us. The P3 market in the U.S. grew, has been growing sort of for the past 15 years. We targeted that market based upon our success here in Europe, and we’ve secured a few of those projects, but what we saw, what we started to see, I’d say, in particular over the last couple of years, is that the competitive pressures in that market just increased in a really interesting way. When we first got into the P3 market, the idea was, these projects are very large and complex, and only a few contractors can participate in that. We were one of them. You can make money in two ways. You can make money on equity, investing in project development company that sits on top, and you can make money in construction.
Because they're so large and complex and only a few players can play, the competition is limited and so increases our ability to win. But what we saw in the P3 market in the U.S., in particular in the last, last year, we saw it on two projects that we bid on, that there's more supply, there's too much supply chasing, not enough demand in those projects, if you will. So we, after a comprehensive study, we decided it was time to pull back on that part of our development stream, and I think that was absolutely the right decision. Anders mentioned selective bidding. Great thing about the United States is our robust market. We saw the GDP growth. We are in almost the tenth year of an economic expansion.
I think it's the second largest economic expansion in U.S. history, and we've been a beneficiary of that in terms of the opportunities that we have in the market. Taking some of the lessons learned from some of the challenges that we've experienced over the past couple of years, we're you know, our message to our people is, as Anders said, sort of the sweet spot. What are we good at?... the right people with the right competencies for the right opportunities. We have plenty of opportunities in the U.S. and projects, and we need to be selective, and we are being selective. Focusing on claims management. We've always had a good, focus on claims management in the U.S. From my perspective, on the civil side, they're a traditional bid build contractor working for public agencies. That's just part of that business. Same thing on the building side.
Claims management is just part of how you operate on a day-to-day basis. But I saw a change following the global financial crisis in 2008, in particular. We're a relationship business. We're not going to get away from that. But after the global financial crisis, I started to see a major shift in our clients. They became more contractual and less relationship-based. We had to respond to that, and we have responded to that. Last year, in particular, working with the group leadership team led by Caroline, who's our General Counsel, and she's going to talk about this in a while. We got the entire group together, not just the U.S., focused on claims management, making sure that we're doing that in a good and robust way across the operation, including the U.S.
I'm confident that we've got a good handle on that, and we're going to... And that will help us improve our profitability in the U.S. And then Kirsi and Anders both talked about people, attracting and recruiting the most talented and experienced people. Skanska has a fantastic brand in the U.S. We have a long history of successful projects, as I said, we have the right values as a company. We have a great purpose to build for a better society. We care about sustainability. That is attracting the right people to our company. I feel very good about that, and the key for us is to develop and train them. One thing I would tell you, if you go back 10 years in the U.S., that we weren't great at, was training.
We had sporadic training, a lot of PowerPoint presentations, live training, but we created a Skanska Learning Center over the past five years. We have over 100 courses in there. We bring new people in. We can do it online, so it's a modern way of training people as well as in-person training. That's been very good for us. We focus a lot on developing people. You know, people have the opportunity to develop every day on our projects, become leaders in our organization. I think we have a very strong focus on that. Now, this isn't a slide I'm too happy to talk about, but these are the facts, so I have to deal with them. This is the dead revenue in the U.S. dead revenue is revenue that comes from projects with a margin at 0% or less.
Last year, you can see we had, as Anders said, an unacceptably high volume of dead revenue in our backlog, SEK 10 billion. It's come down this year to about SEK 8 billion. That's for the forecast, and then you'll see it step down through 2021 as we burn off some of the challenging projects that we've taken on in the past few years, and we replenish that with healthy backlog. You'll see here the measures to contain and reduce dead revenue. Task forces. Great thing about Skanska is we have super experienced people all over this company, in the U.S. and in our global operations. On the two large projects in particular, that I mentioned earlier, that resulted in the profit warning write-downs last year.
We created task force, task forces from people from outside the projects, brought them in, helped the project teams to analyze their issues, their operational issues, commercial issues, and helped them plot the course forward to navigate us through those projects in the best way possible. These large projects are very complex, and they can make our teams weary. If you can imagine being on a tough project, the teams, they get very focused on what they're doing, and sometimes they can miss what's around them. So bringing in task forces really helps with that. I also talked about risk management. We're very focused on making sure that we're getting into the right opportunities so that we don't add to this Dead Revenue in the future. And then claims management. An opportunity that we have is to recover some of this.
We're very focused on that right now. Not all of that money is gone. We have the opportunity to go collect that, entitlement, entitlements under our contracts with, our owners, with our design firms, et cetera, et cetera. So that's just the process we have to work through, and we are doing that. Now, if I get to some good news, say, the U.S., that's our footprint in the U.S. We're heavily concentrated on the coasts, East Coast, from Boston down to Florida, on the West Coast, from Seattle down to Los Angeles, and we have, strong U.S. building operations in Texas, Houston, San Antonio, and Dallas. On the building construction side, we work in small to large projects in selected states. We have 26 offices on the U.S. building side, around the U.S. Very good operations, large and small.
We focus on education and healthcare. Bless you. Education and healthcare. Those two sectors are typically our two largest sectors. In the past few years, aviation has moved into the number two spot because we've picked up some good work in that sector. We also do, office buildings, both for external clients and my partner, Claes Larsson, on the commercial development side. We have fantastic, we have fantastic opportunities working with commercial development in Boston, D.C., Houston, and Seattle. Very strong for our building group. We typically work under a construction management cost-plus contract. 80%-85% of our work is in that, is in that format. I describe that as a low risk, low margin business. We get in early with our clients. We work with them and their designers to come up with scope, schedule, and budget. We work through that process.
We go out to the trade contracting community, we subcontract out scopes of work, and then we manage through. And for that, we yield a nice, a nice, pot of cash for Claes and his team to use in the development stream, and we earn a good profit. On the civil infrastructure side, we focus on medium to large projects. I think medium-sized project for civil, I would say about $50 million is a threshold where the size of our organization is very well suited for, up to large projects. Concentrate on the East Coast and the West Coast. If you know the civil business in the U.S., its center is in New York. That's where it has its longest-standing operation. It's always one of the top contractors, civil contractors in the New York market. Very robust market there.
And we're also concentrated very heavily down in L.A., another robust market with large demographic drivers for our civil group. Typically, the civil group works in a design, bid, build contracting format, public agency issues a set of plans and specifications. We bid on that in a competitive environment, and low bidder wins. Very, very good at that, done that forever. Another contract type that's come into fashion, if you will, started on the West Coast, is called CMGC, Construction Management/General Contractor contract. It's a little bit like the building group, where the civil group will propose a fee, they'll propose a staff. They'll get selected, and then they'll work with the client and its designer to develop the project scope, budget, and schedule.
Unlike the building group then, the civil group will then general contract major scopes of work on a lump sum basis. The good thing about that delivery method is it lowers the risk profile because the civil group has the opportunity to understand the project better before they bid it and lock into the pricing. That's been very successful for them. I'm hoping that will migrate across the U.S. into some of our other jurisdictions, but right now it seems mostly heavily concentrated on the West Coast. So I think, Anders, you're gonna talk about Poland next. Yes.
Yes. Thank you, Richard.
You're welcome. Thank you
Going to Poland. As I said, a major restructure in Poland. We are scaling down big time. We're focusing on the largest cities, the seven cities where we have commercial development, and we also have residential development in a couple of them. And we are much more selective in bidding in general. Even where one thing is we scale down to seven cities, but we're also much more selective as well. And we are improving processes. Some of the processes wasn't in place, when it comes to core processes to run a profitable construction operation. Like how do we select projects? How we do the estimation, risk management, planning, and procurement, all of these.
So we are making sure that we have the processes in place, and we're also making sure that we have implemented the processes further out in the organization. And that's also to improve the expertise. We have taken quite senior people from other parts of the company. We have a few from Sweden in the management team, and we are strengthening the team, and also to make sure that because we have such a successful history in Skanska Sweden, so we are making sure we have exported people. That's the best way, actually, to share knowledge and experience. And we're also training and developing the people that's left in the company. But again, it's about 50% left in the company after this restructuring.
And we also have some dead revenue, as Richard showed you in U.S. Here's how it looks like in Poland, where we have the dead revenue. The good news in Poland is a much shorter backlog. So the bad backlog that we took up until 2016, there was a big change after that. So I can see clearly that two project we took in 2017 and forward, it's on a much better, healthier level because we had things in place in 2017, how to do risk management and how to estimate the projects. So it will fade out during this year, and that's good. And we are on track.
We have some, as you can see, some, problem projects still in the backlog, but, we are working them, working on quarter by quarter, they will, fade out. Again, Poland, it's, on the building construction, where the focus here is, internal project, residential development, commercial development, but also selected external clients, selected external market in these seven cities. Because that's my, experience. You need to have some part externally, so you don't get, uncompetitive, and just, you need to be on your toes and try to be better and better all the time. And also, selected civil infrastructure project in this, in this market as well. If you go to the U.K., the target here is, the building construction is a non... Continue to have the non-residential buildings.
The civil infrastructure construction is rail, highways, tunneling. It's a core competence. We have selected some of the maintenance projects that we, that we see in U.K., but the main focus is in the Greater London area going forward. Czech Republic and Slovakia, that's the target market going forward is on the building construction, is internal residential, commercial development projects again. And we also have selected external building clients on the building, in the building stream. And the same here, selected civil infrastructure projects, but we're in a much better place in the Czech Republic. If you look one year back, we did some changes there and scaled down the scope, but we haven't seen the same issues.
The good news here, Sweden and Finland performing on a very high level, and, of course, it's crucial for us that they continue to do that, and I don't see any reason why they shouldn't. But it's all about keeping you need to be on your toes. You need to continue to try to be better and better, to train the people, and I can tell you, Skanska Sweden, they're like the factory for improving and developing talented people. Well, that's we need to continue to do that. And continue to be that most attractive employer, and we are in Sweden, and that's a very good position to be in. And that's again connected to our values. In Norway, we that was considered as orange, as you remember.
We have some issues in the building stream in Norway that we are addressing. So we are improving performance. And again, we are doing this, have done this Sweet Spot Analysis, and have a big plan in place to improve the profitability. It's not on a satisfactory level yet. And we also can see some opportunities, even though the civil is performing on a good level in Norway, we can see even there opportunities to improve the profitability further. And one thing overall is to improve the profitability, Richard touched on this, is the claims management.
And that's also where it's one thing when you have seen that we're running into issues, delays, and design changes, and so on, that creates a lot of cost that we have to take, but we can't take the revenue because we haven't settled with the client. So, but that work has to be much more proactive, and that's what we're working really, really hard on now to be more proactive. And Caroline, you will explain our approach here as General Counsel.
Thank you, Anders. So, we have been working a lot during last year with our governance, and really to focus and streamline our processes and policies, et cetera. One of the most important processes that we have is the one relating to claims management. Of course, as a construction company, claims are quite a natural way of the business and how it proceeds. But as we heard Richard explaining, there has been quite dramatic change in the market during the last 10 years. We need to adapt to that change, and we have, of course, gradually done that, but we felt that we really need to put in place some more stringent way when it comes to looking at claims. There's another factor to take into account here.
So we take a quite cautious approach when it comes to our project accounting, and this means that we do not recognize a change order or a claim until we know that the client is going to accept the change order or commit to pay the claim. This is also an opportunity for us. You have seen those write-downs, and some of those write-downs we can hopefully recoup now with the claims that we have. And therefore, the claims management process is directly linked to our profitability. So what do we do then? Well, we have ramped up our trainings when it comes to commercial management, and we have also strengthened the process around claims management, as you see here.
Very fundamental is, of course, understanding the contract terms, but really taking ownership of that, and knowing when to make notifications, et cetera, knowing the ins and out of the contract. The second step is change order management. Change orders is something positive, normally, something additional that we should get. But then we also need to know, you know, when to get the entitlements to really make sure that we get the acceptance from the client. And of course, if we do proceed to a claim, to have the proper claims management process in place, and final litigation management, which we would like to avoid. But this really requires that we do meet all the steps in the processes that we have beforehand to not come into litigation. Anders, handing back over to you.
Yes, thank you. There's a lot of potential there, I can assure you. Here's a slide of the order bookings that you can see the orange bar is going down, and that represents what we just described for you in the construction stream, that we are more selective, we're more careful how we price the project, and where the risk is, and everything. So, that's expected to go down. So even though we had a pick-up in the fourth quarter, but that's you shouldn't look at one quarter isolated when it comes to the order booking. You should look at the rolling twelve instead. If I go through the market here, there is high activity in general in our market in the construction.
If I go through them, Sweden, very strong in non-residential building, strong civil construction, and also a slower market in the residential. I expect it to be slow, at least for the next year. There's no sign of recovery there in the near future. In Norway, a bit slower market on the residential, also strong civil market. Finland, stable. They have been growing their economy for a couple of years now after quite low GDP growth, but it's a stable market. U.K., big uncertainty due to Brexit on the non-residential commercial buildings market there. Civil is stable. There is still a good market in U.K. for civil construction.
Czech Republic is stable on the non-residential, residential, and the market in civil is still quite slow. I expect it to increase in the next couple of years due to the expected to get more EU money into their system. But still slow and quite very highly competitive. Poland market is stable. It has been very, very hot market there, overheated, I would say, but and still on a high level there. And Richard, could you elaborate on the U.S. market?
Sure. Yeah, I don't need that.
No.
So, just on the U.S., as I mentioned, U.S. is in its tenth year of an economic expansion, and you can see that in the check marks, they're both green. On the building side, again, we concentrate education, healthcare. There's just strong demographic drivers to that. Anders showed that urbanization slide. We're in the markets that are the recipient of that urbanization, in the U.S. So healthcare, education, aviation, strong drivers for that, as well as offices, working with our commercial development group. We don't do residential in the U.S., except with our commercial development group. So we do it in a very controlled way. I don't like that market, but I do like doing it with, when we do it internally. The civil market, again, strong drivers in that market.
If I look at New York, we have a large market in New York. If you know anything about the New York civil market, Governor Cuomo, one of his signature platforms as part of his administration, is driving infrastructure upgrades and improvements in New York. He's targeted about $150 billion worth of improvements. Our building and civil group are actually now executing the Moynihan Train Hall project, a great project for us in Midtown Manhattan, part of Governor Cuomo's program. Civil opportunities are fantastic in New York. Same thing in L.A. and up the West Coast. There are bond measures that are generating funding for infrastructure projects. I think the U.S., in general, if you've seen it over the years, it's in need of upgraded infrastructure, and we are positioned well to participate in that. Thank you, Anders.
Thank you, Richard. Again, I want to remind you of the slide I showed you earlier about the size of the business in the different markets. In our biggest market, the U.S., representing 41% of the construction revenue, Sweden, over 20%. It's the biggest market we have a good, healthy operation activity, which is encouraging. All right. Before we go into the break here, I want to show you a very good example of construction activities. This is Juvelen. We're building it in Uppsala, north of Stockholm. It's an office building and a very strong green profile. It's 55% less energy than the regulation in Sweden, and we are using new technology.
We're cooling the building by boring holes into the rock, and we also have solar cells on the building, and it's actually close to zero greenhouse gas emissions. So, great example of to wrap up the construction. So thank you, and leave it over to...
Thank you, Anders. Coffee break, it says, and that is true. And we are also ahead of schedule, three minutes, which Skanska usually is, so this is perfect timing. We will be back, or you should be back at 11:00 A.M sharp. Then we'll get going. So please go out there and mingle with the Skanska employees and your peers. See you later. ... Okay, everyone, it's 11:00 A.M, so it's time to get going again. I hope you had some refreshing snacks and coffee and also mingled a lot. Now we will turn the attention to our project development operations. And Anders, you will once again start this whole thing off.
Yes. Thanks, André. I will start with a residential development. Starting with how our footprint looks like. We have operations in the Nordics and Central Europe. You can see all the blue dots here is cities where we have our residential development operations. So we are in the major three cities in Sweden, of course, and we- but we also are, have operations in the largest university cities, cities where we can see growth and a healthy market, residential market. In Norway, we are in five cities, Oslo and the, the largest one, Trondheim, Stavanger, Bergen. And we're also in Finland, we have selected market. It's university cities. They are growing. We, we can see a high increased demand for residential. And in Central Europe, we are in three cities.
We are in Warsaw, we are in Prague, we also have a couple of sites in Kraków, south of Poland there. If you look at the housing prices, the market, and also again, going back 10 years, you can see that Sweden has had a tremendous growth in the prices. And this is housing prices overall, i.e., including the existing stock. But that market has slowed down, and I don't expect it to recover in the near future. Norway, a slow but steady growth in the market. We haven't seen that big increase, which I think it's healthy because I still can see a good demand there. The Finland has been stable for a while, and if you look at Finland, that's a good market because it's a healthy market.
It, there has been on a high level for many years now. And if you compare to Sweden, for example, there has been built per capita a lot of residential in the history, actually twice as many if you go really long back in the history. Czech Republic, strong growth last few years, and also in Poland, strong increases in prices. And if you look our residential development, and here's the two lines, the one of them, the blue one, is the sold apartment, rolling 12, and the other one, the yellow one, is started. So they are pretty much following each other, which they should, but as we have sold less, we went down in the sold apartment last year, so you can see a gap there.
Going into revenue, the revenue versus the operating margin. The revenue went down due to the lack of sold apartments or the decrease in sold apartments. But the operating margin was continued to be on a very, very strong level, and that's due to the fact that we have sold some, we have completed some very good projects from the really strong market we have seen the last few years. But it's also some land divestment, and we have said the underlying performance in the business operating margin is around our target of 10% in residential development. But it's also about revenue recognition. It's a lot of things in the media about IFRS and segment reporting, so I would like our CFO, Magnus Persson, to elaborate on this and clear things, sort things out.
I'd be happy to. It's a good point in this presentation to sort of clarify how we deal with revenue recognition in RD. And essentially, we have two different ways that we report this externally. We have the segment reporting, and we report also according to IFRS. There is an important difference between these two. If you take the segment reporting, we recognize revenue from sales at the point in time where a client signs the contract. As you can see on the bottom chart here, if we sell apartments prior to production start of the project, we do not recognize anything, but we recognize the accumulated sales up to the point in time where the project is production started, at the point in time when it is production started.
And after that, we then recognize it as we go along, the sales until the project is completed. According to IFRS, we do not recognize any revenue whatsoever, until the project is complete and the units are handed over. So there's a very big difference in sort of the timing here, when we recognize revenue in these two different ways of reporting externally. And the reason that we, we're using the segment reporting is that we think this gives, everyone that looks at the company and RD a much better, much more current read of the commercial performance, of the business stream, because otherwise you would have to wait quite a long time until the units are handed over, until, you can sort of see what was the commercial performance of what has already been done here. And we're quite comfortable with doing this.
I mean, it's a little bit more forward-leaning revenue recognition, you can say, in comparison to IFRS. But the level of cancellations of signed deals is low and quite stable here. So over time, around 5% of the contract or less than 5% of the contracts that have been signed are sort of canceled, and for reasons of health and reasons for not obtaining financing from the client, and so on. So there you have it, two different ways.
Thank you for that clarification, Magnus. If I go into the sales rate, the green line here is the sales rate. We have been between 60% and 70%, which is a comfortable level of this operation. So we were at 68% at the end of 2018. And you also can see the bars here, so how many we have sold in the production, how many are unsold in the production, and also the green or the orange one is the unsold completed, which is on a very... Compared to the operations, on a low level. If I look at the completed unsold, of course, as I said, it is on a very low level compared to the operation we have. We're close to 8,000 units ongoing.
But it's also, if you look at commercial, if you look at the duration, how long was it since we completed those apartments, and the vast majority is newly completed apartments. So I'm not concerned over this, but we keep a careful look at it, I can assure you that. The residential development market. If I go into the Swedish market, the price correction is mainly in Stockholm. We have seen that in Stockholm, and also in the high segment. I think there's built too many high-end apartments in the Stockholm area, and that stock needs to be absorbed by the market before we can see an increase. We have an oversupply, we have lower sales pace in general.
We can see that consumer confidence has decreased, especially in the fourth quarter, we could see a decrease, and that's also when we adjusted our forecast for the market in the coming 12 months. We don't see any recovery soon. It's also much more difficult for people to get bank mortgage. We can see that the financial restriction for amortization and also from the requirement from banks makes it a lot, a lot much more difficult for people to get into the market. So a lot of the people that we have sold apartments for already today, about 60% of them would be affected by the second amortization requirement that was implemented last year. So, that's a real concern.
Customers signing up closer to completion, which that's a strong trend we see, and that's natural, I would say. There's uncertainty in the market, where will the prices go, and you want to sell and buy in the same market. That's natural. But the underlying factors makes me comfortable that in the long term, this is a good market to be in, residential development. So we will stay here. We are adjusting our costs to the current market conditions, but we are here for long term, and we see opportunity in the long run. And actions. Of course, we're monitoring sales very closely. We have done minor discounts in selected projects. But of course, we adjust the prices due to the current when we start projects, due to the current market conditions.
But we also made some minor adjustment in older projects. We are reviewing the cost structure, both on the SG&A and how much production can we have in the company. We are more selective in the project starts. We want to make sure we set the sales rate target for each and every project, and that targets can are dependent on where we are, location, and how the market in general looks like. And we also have a mix shift in the portfolio, including rental housing. And we are determined that it will show up opportunities in the market. It's a matter of time.
We have already seen that some actors in the markets and competitors are leaving their land back to the city of Stockholm, for example, and that will continue. So I'm confident that it will show up a lot of good opportunities, and we're there to evaluate them, and we have the strong financial position to grab them. A little about the portfolio mix shift that I talked about here. Here you can see the split in 2016 versus last year, 2018. The green one is BoKlok, our affordable housing, in cooperation with IKEA, very successful. We have the yellow part here is rental residential, and this is for Sweden. And the blue one is more core business. It's co-ops in Sweden that we develop and sell to clients.
So you can see here that it has mix-shifted a lot. The core has proportionate smaller value here, and the BoKlok has increased a bit. It's around 50%, and the rental is around 30%. So it has been a strong development, and that's a strength we have. We are diversified, not only when it comes to geographies, we're in different markets, in different countries. We are also diversified when it comes to segments, which is a really good place to be, because we can easier shift our proposal for the clients. And the way forward. The way forward. We are of course managing a more challenging market in Sweden, and we are determined to come out stronger. We can take the opportunities that's out there.
We will focus on the capital efficiency and market risk. We will maintain our position in Norway and Finland. The underlying need for apartments and houses is strong there. We will continue in Eastern Europe. And since Claes, you're responsible for residential development in Eastern Europe and also BoKlok, can you please elaborate on that?
Yes, absolutely. And, you saw on Anders', graphs earlier that the two lines... We have a very strong market. I would say the bottleneck currently for further expansion is actually to get land and get permits and zoning in place. That takes a very long time. And Poland has been the big growth focus from small levels. I would say they are up pretty good now and selling on, on a higher level than historically, while we in Prague, is sort of a bit in, in a gridlock on a couple of permit processes, but we will get through those. So but, but the market is there definitely. Moving to BoKlok, I think Anders captured the Swedish situation. We also sense the slowdown in, in the market, definitely in BoKlok.
But, a lot of our projects are actually selling right according to plan, and then we have a slower sales pace in general. It takes a longer time to sell out the projects. Norway and Finland, we have presence there as well with BoKlok. It's a small business so far. It has taken a longer time than expected to build a land bank, and also there to get through the zoning and permits. So there, I would say the focus is future pipeline. Then something that is really exciting for us is a potential entry into the U.K., and we have done a comprehensive market study of that during the last year here, and come to the conclusion that it's definitely a strong potential for Skanska to enter with the BoKlok concept, together with IKEA, obviously.
We see that we can position us in a segment where actually very few developers in the U.K. are interested in being, which is to produce quality homes for everyone, you could say. So that's a very interesting niche, and we have been in contact with customers, with counties, municipalities, and we feel sort of a great interest in seeing us enter the market. So right now we have feet on the ground to further evaluate this and see if we can find suitable projects for the future. Obviously, Brexit is a big thing to consider, but once we have a potential first business case, we'll consider the potential impact and effects. Before leaving BoKlok, this is a nice project. I think it's nice with these project examples that we have.
This is an example of how we take responsibility and engage in the communities. This is a project in the southern part of Stockholm in the municipality of Haninge. It's called Geografen, and here we have actually then provided a solution for an, because an urgent need, an issue in society currently. So part of this project is actually leased on a long-term lease by the municipality, who then provide homes for newly arrived immigrants, making them-enabling them to faster integrate into the new home country. So I think this is a splendid example of we fulfill our purpose to build for a better society. Also, a note on BoKlok, we are super proud of defending our position as the number one in Sweden. We have the most satisfied clients among all residential developers in Sweden. That's a big achievement, I would say.
With that, moving over to the third business stream, commercial property development, and start with a footprint here. You see the countries colored green here, nine out of eleven Skanska home markets. That's where we have, you could say, a big business. We have sort of a focused business unit doing only this. We cover the Nordics, the four capital cities, and also Gothenburg and Malmö. Down in Central Europe, the capital cities in Poland, Czech Republic, Hungary, and Romania. And then you see a lot of other dots there in Poland. Those are the additional six cities that, Anders was alluding to when it comes to the city building concept for construction. And why do we have such a big presence in Poland?
It's one of the largest economies in Europe, and the complete market in Central Europe from a tenant perspective is driven by international companies looking for talented people at low cost, green premises at low cost, and putting their back-office operations. So this is a very vibrant business community to act in, actually. And we have the most leasing, actually, square meter-wise in this part of the Skanska footprint. So we're covering the Gdańsk, Poznań, Łódź, Kraków, Wrocław, and Katowice in addition to Warsaw. Over to the U.S., we, as Anders said, since 2008 has been a very successful venture so far. We tried in to get a very diversified mixture here when it comes to exposure. Tech up in Seattle, energy sector down in Houston.
Boston was life science, higher education, and then we wanted to have something around the central administration in Washington, D.C., because that creates a lot of sort of business around what's happening there, especially in the legal sector and lobbying and stuff like that. So I would say that's a very diversified footprint, and I will come back to that the market operates not completely in tandem, so it's good to have a mixed bag then. Capital allocation currently, 1/3 of the donut roughly to each sector here. City number 21 is U.K., London. It's not green because here we have done two projects. We have a third one under construction. The idea in U.K. is to do low-risk development, meaning pre-lease, selling pretty early during construction. We have the same concept also in Norway, Sweden, and Finland.
And in those four countries, this is run by the construction operations, and they can do housing for elderly, courthouses, police houses, detention centers, stuff like that. Single tenant, usually public tenant, and should be fully leased before we put the shovel in the ground. The green countries and the CD units, their product portfolio is offices predominantly. Then we also do, Richard talked about multifamily or rent residential. We do that in the U.S., in the CD unit. We also do rent residential in Copenhagen in the CD unit, because we don't have the construction operations residential focus there. We also do select the logistic properties in Sweden, so that's the portfolio. But I would say, 85% is offices. And then the construction unit do their stuff with sort of housing for elderly and sort of public buildings, et cetera.
So it's a complementary offering in the market. This is a graph pretty much showing what we're doing now. We have ramped up the business quite a lot. The way you should read it is this is showing the starts to start projects every year. So if you start a project 2014, the full committed capital goes in that year. So it's not the balance sheet, it's what we will invest. And one takeaway on this 11-year is that the last three years, we have the same amount of committed capital as the first eight years. That shows sort of how we get built up for future harvest. And you also see the breakdown here, that the CDN has been active all this period. CD has ramped up quite a lot, and especially 2017, 2018, when it comes to starts.
U.S., we have fewer projects in the U.S., but they are bigger, so it becomes a bit lumpy when we start a tower. Suddenly, the green part is very big. The yellow part stands for construction-driven commercial development, which is this low-risk development I talked about earlier, public, public buildings and, and housing for elderly. And that's a pretty big part of the pie as well, but lower risk and lower return, requirement. Revenue and operating income, you don't see the same dramatic increase in revenue and operating income, and that's because it takes 18-40 months to complete the project, and then you harvest it after that, basically. Depends on size and complexity and how much you need to build below grade, what is the actual execution time. Revenue, obviously, is mostly the proceeds we get from the investments of, of projects.
We have some net operating income on completed projects waiting for being sold. The green non-operating income, basically then gain on sales, net operating income minus the cost to run the machine, sales and admin. But I think we have had a pretty stable performance over the years, ticking slowly upwards. And then the future, then. This is a good slide. I think you all are familiar with this one in always in the quarter package. Shows what is yet to be realized every quarter. So the only one that is the true one now is the Q4 2018, basically, because the older one, then we have eaten from them and transferred into realized gains. So the line shows a rolling 12, what we have realized, and the other one is what is yet to be realized.
I think the big takeaway here is that we are maintaining the sort of total unrealized gain, the surplus value in the portfolio on the same level, at the same time as we're increasing the realized gains, showing that we are sort of having a strong positive momentum for future harvesting. This is just a simple sensitivity. I will not comment the numbers here, and obviously, this is not a sensitivity on the surplus value. This is a sensitivity on the market value of the portfolio.
Obviously, the biggest factor that affect the sort of surplus value is the yield movement, and 50 basis points would be quite a big shift in the market, and of course, that would have then a bit of an impact, both positively and negatively on the current market valuation of the portfolio. You see some combined sensitivities here, also rent isolated and combined in the middle. But obviously, the yield is the thing that we are looking at, and we are very mindful of the fact that when you start a project, it takes 18-40 months to complete, and then you divest it. We never, ever, start a project and assume we will sell it on today's yield level that we view as historically very low.
We would potentially underwrite today's rent level because you will start to lease it tomorrow, but you will not sell it yet. So we keep a healthy cushion, you could say. And this is, I think, a slide that has been requested, that we should be more transparent on exactly how it looks when it comes to leasing risk. The way you read this is the, this, each quarter, we show how much is completed, and then the bar here is actually the total investment upon completion for the project completed in that quarter. And then, you have the ingoing balance, you could say, is the orange one. Otherwise, you see that we will complete every quarter, the next eight quarters, and then we need to backfill the pipeline later on when you start, obviously.
The percentage is the occupancy ratio, and you might then react on the fact that it should be falling down and be very high to the left here. So some words of explanation is good here. 69% on the completed, that's a low number for being completed, but you could say there's a reason also why they are completed and not sold. Here we have the two assets in Houston, which I would say is by far the most challenging project we have had in the portfolio the last 10 years. 2015 and 2016, Houston plunged completely as a real estate market. That's the quickest downturn I've seen during 29 years in the industry. And we had two high-quality assets out in the so-called energy corridor, the outskirts of Houston, which we had not fully leased up.
They were leased to actually 41% and 73%, respectively. It's not, it's not a catastrophe, but obviously, the market became very silent, and also the... When the energy companies contracted, a lot of sub-lease space came to the market. So that's why we have this still. We don't do fire sale. We don't need to do it. We keep them, and we will lease them up. The market is slowly getting back. Q4, we completed two projects in D.C. D.C. is the softest market next to Houston, actually, globally. A bit too much supply at the moment. We have two very well-located assets that are slowly leasing up, a bit slower than anticipated. We are leasing, have a good traction during the spring here.
I'm not concerned, but it will take a couple of more quarters to lease them up. The third bar here is easily explained by the fact that, SEK 1 billion out of SEK 3 billion here is a multifamily project under completion. I was there two weeks ago, beautiful project, but we will start the leasing after completion, because no customer want to go on a concrete slab and sign up for a rental apartment. So that's standard procedure. So the rest of the portfolio is a fairly good leased. And then you see, more the expected occupancy ratio. The two big bars here is due to the fact that we will complete the two towers in, in Houston and Seattle in Q2 and Q3, and I will talk briefly about them later. Leasing, fantastic leasing last year, and especially fourth quarter was a stellar performance.
511,000 m² is a new all-time high, more than 500,000 m² globally. The lines here, I like to see the lines move in tandem. That's the average weighted occupancy ratio and the average completion ratio of the portfolio of ongoing projects. Leasing has been lagging behind completion, for four years, but we actually did catch up, end of last year. We ended with bull's-eye, 50% completed, 50% leased, which I think is a very solid, position, and I think we have risks under very good control when it comes to the leasing in the portfolio. A bit on the markets. First, investor market. These are some external benchmark doing a 10-year, delta analysis. I would completely agree with the Nordics.
What we sense when we are out in the market, still very low yields, a lot of capital seeking trophy assets. We don't feel it will not go down, and further, we can't feel that, but we don't see a strong push upwards either. In all the six markets in Nordics, we feel a very strong traction for our projects. Central Europe, it's a bigger gap. The low cap yields you will get in Prague, that's the most tight market, so difficult to get permits and start projects. So very few good assets for sale there, and a lot of investors would like to place capital in Prague. On the other hand, you have Katowice, Łódź, Poznań.
We still have seen actually some yield compression in some of these markets, and especially, I would say, in Bucharest, Romania, coming down from mid-7% to potentially below 7%, which I think that market deserves due to the quality of the tenant base there. U.S., big interval, the 6.6% is probably the current uncertain benchmark we used on, since it's not a lot of transactions there. I would argue that 4.8%, I think, the lower cap rates or yield, as we say in Europe, in the U.S. is you can definitely get lower for trophy assets. So I would disagree a bit with that as a starting point. Otherwise, this is pretty much the way the market looks.
Then we have Jones Lang LaSalle's Property Clock, and here you see all our markets. They're spread around the clock a bit. I talked earlier about Washington, D.C. It's not a catastrophic market, but it's a slightly too much supply right now. So the rents has been slightly going down, you could say, or more pressure on concessions, meaning if fit out contribution and rent free periods. Houston has been through a really rents falling down, stabilizing right now. We have one big project in downtown that I will comment on later. That is a much better story. I would put Wrocław actually down at six o'clock, along with all the Central European markets, except Prague, where we have been able to see growing rents. Otherwise, Central Europe is very stable.
Supply and demand seem to be always in some sort of sync. Up in the left-hand corner, you see, if you take out Helsinki, we don't sense that Helsinki has, is that far up, but the rest of the markets, we have seen real strong rental growth the last couple of year, and there might be some more to harvest, but we are probably approaching some sort of peak. And then the philosophy we have in Skanska is to start project, when the clock is like this, and hope the clock move clockwise and not anticlockwise. And then obviously, lease is, the lease is then lagging a bit.
So what we did in 2009, 2010, I would say we were the ones starting projects before anyone else, when the clock was maybe 4 o'clock or 5 o'clock, and then we could harvest on sort of having premises ready for completion later on. Then the idea is to land bank, like we did in 2009 in the U.S. and got a kickstart. And D.C. is a good example. We closed on a fantastic site in Downtown in January this year. We're looking for opportunities in Houston. We're always active on the land bank frontier, but it's tougher when the market is at the peak. So building replenish the land bank is very important going forward.
Green, I think, Anders captured it excellently, the importance of green, and this is the value for, obviously for investors and tenants. And I will also say there is a higher awareness among tenants that actually green health environment creates bigger attractiveness towards the recruitment of talent and creativity, and ultimately, productivity will prosper better when you have a green building. Also, of course, you have the cost side, lower energy cost, et cetera, but there are bigger values at stake that I think is appreciated by both investor and tenants, and all relevant stakeholders. So to wrap up this section a bit, I would say we have a very strong platform that we've built over the years. We have a business model. We constantly exported that business model to new markets.
We're slowly entering into new markets, usually one city at a time, to make sure that we don't do any mistakes. The only exception is the U.S. entry. Then we did D.C., Houston, and Boston simultaneously, waited three more years, then did Seattle. It's important to do a controlled expansion and to use the resources you have. So I mean, when we started in U.S., we sent people from Europe, and then gradually we started to recruit local talent. So I think that has been part of the concept. You have a business model, you expand it organically, very, very slowly and controlled. The ambition in Nordics and Central Europe is to keep a very strong position. I don't really see that there is a big room for increased market shares.
In a lot of the markets, we are up to, you know, 25%-30% of the development is Skanska. And I would say if you take the Nordic footprint or the Central European footprint, we are the leader in those markets, covering all those markets with a big volume of projects. We don't foresee to enter into any new cities, either in the Nordics or in Central Europe. We think we have a good footprint. If we add more cities, it will be in the U.S. We did a comprehensive study two years ago, ended up with seven potential cities, and then we ended up shrinking it down to Los Angeles. So we are pretty convinced that Los Angeles might will be a good future fit for us in the U.S.
You remember the four niches I discussed earlier about, you know, tech, biotech, and stuff? Here we will also add the whole media and entertainment industry producing content, in addition to, of course, a lot of tech tenants in Los Angeles. But we will add, you could say, another leg. We have feet on the ground also here, looking for opportunities, so this will then be the fifth market to launch. But one market at a time, and do it in a responsible way, and we don't have a rush. When we enter a market, we intend to stay for the long run. Then we talk a lot about market development currently to try to see around corner.
We are very mindful that we are, I wouldn't say at the end, but we are far into a very long, positive real estate cycle, and we need to be a bit more cautious maybe to start speculative development, like in D.C. I wouldn't start an office project today. I might start a multifamily. You might need some more pre-lease on some of the project. So we follow and monitor this very, very closely, but still very strong tenant markets in most places, and I would say the investment appetite is still there, coming a lot of new capital. In Europe, we see a lot of capital coming from Asia, for instance... And then building future pipeline. It has been difficult the last couple of year to buy land, honestly.
If you would be the winner in an auction of a very simple piece of land with permits, you probably overpaid. What we try is to buy bigger stuff, more complex stuff, that we are much more competitive and where the rest of the competition is much more limited. Finally, a word on the 2+U. This is the 2+U, the single biggest investment ever in Skanska's history in CD. So it's a $430 million investment. I visited last time, two weeks ago. It's a fantastic project, due for completion in September. We're more than 40% leased, and it's a super strong traction on the remaining space, so I expect some really good news here during the spring and early fall. This will for sure be a very successful project for us.
And also, I guess, a fantastic achievement by the construction unit who is building here to actually build this extraordinary design here with the lifting structure, with this big concrete column you see here. This is in downtown Seattle, with beautiful view from two-thirds of the tower over the Puget Sound. And last but not least, this might not look like an exciting project, but it is. This is actually the rooftop terrace on top of a very tall parking garage in Houston. This is the biggest CD project ever in terms of leasable space, so it's 1,123,000 sq ft, and most of that is office. Downtown Houston, we started this one 2017, in the midst of the meltdown of the sector in Houston, but it's a fantastic example of good place making.
This will be the greenest building in Texas by far. It will be following the most stringent version of the LEED Platinum certificate. And also, I would say that we are implementing most of the requirements that would be needed for a WELL certification, even if we will not go for that one here. So it's very healthy workplaces. And from a commercial standpoint, 84% leased before completion, an additional 10% is committed, so we have just 6% actually out there in the market. So also here, a very, very strong commercial success, and it's due for completion actually this month. With that, we might back to Magnus for infrastructure development.
Yeah. Thank you. I will talk. I will begin by going through infrastructure development or the remaining, what we call run-off portfolio of the PPP projects that we still have in the group here. As you already heard, we will cease reporting infrastructure developments as its own business stream. Going forward, starting Q1, you will find the financial impact of the PPP assets in our central stream on a separate line where you can see them, and we'll of course continue to disclose the portfolio values as long as they are sort of meaningful in size here. When we divest assets, it will become abundantly clear in our external reporting what the impact has been here.
If you look at the portfolio we have now, we have, as already been laid out by Anders, an asset management organization in place to sort of be the custodians of these assets and continue to develop the value of them up until we divest them here. These are the six assets that we have in the portfolio, and you should read the chart as such, that the size of the bubbles represent the net present values of the different projects there. The projects furthest to your left are those that we started most recently construction on, and the projects to your right are those that are actually completed in construction, where you see the line that theoretically represents construction completion as being the dotted white line here.
Riksväg 3, that's a Norwegian road project, which we just started execution on, expected to be completed in 2020. Then we have the redevelopment of the LaGuardia Airport, which is a very large project that we have just outside of New York, expected to be completed 2022. We have I-4, which is a development of a motorway that cuts straight through the city of Orlando in Florida, in the U.S. We add emergency lanes and general use lanes to that motorway. We expect that to be completed in 2020. Well, Papworth, which is a hospital building in the U.K., this is already pre-divested, pre-sold here, but we are awaiting construction completion.
Then we have NKS, which I assume is familiar to most of you, and the Elizabeth River Crossings, which is a tunnel in, in Virginia, in the, in the U.S. here. And how this goes is that normally, when we complete the construction of an asset, we, we like to run the asset for a ramp-up phase in order to, to stabilize the performance of the assets and also to, to sort of improve the performance, if that is needed, and to collect commercial data on the performance of the asset. And not until this ramp-up phase is done, do we put these assets on the market here. So here you have the overview of our remaining PPP assets.
Now I'll go into the more financial part of the presentation, and I want to start with the construction part, and then we'll move into project development. We'll have a look at the capital structure, and the financial position of the company, and I'll end with a look at the financial targets here. So if you back up about one year when we initiated the strategic actions for the company, we also communicated that we expected these actions to have an impact on the revenue in construction, around -9% against a base of 2017. So I think it's only fair to show what we have, what effects that we've seen so far....
If you look at this chart there, you have the revenue in construction 2017 to 2018, and you can see that around 3% of the revenue decrease has been the effect of the decision and execution of the strategic actions in the year 2018. We have a growth in the underlying portfolio, the part of the portfolio that we think is good, and we want to keep. It's good that it's growing. There was significant currency effect also over the year, taking us then to 2018, where we had roughly SEK 160 billion in revenues. These total effects of the strategic action, it takes some time for these to materialize and actually impact revenue.
We are in a business where when we have contract, we need to see them through completion, so it's not an immediate effect there. So around one third of the expected total effects on construction revenue have materialized in 2018, and we expect roughly two thirds to remain here, and then come into play in 2019 and beyond. If you look at the margin, it's been said several times, we've had a dismal performance in 2017 and 2018 in the construction business stream compared to our targets. And you should read this chart as the target of 3.5% margin is represented by the dotted green line here.
Just to reconcile the performance here in 2018, we performed at 0.7%. If we then take the loss-making projects that we have and adjust for the Dead Revenue and the write-downs in those projects and add that back, we were to be at around 3% margin. If we then add back all the other one-off effects that we have reported externally, including the positive one-offs that we have had, earlier, in the early part of 2018, we would be back to 3.5%. That is how we can sort of reconcile 2018 here.
If we then look forward, unfortunately, the significant amount of dead revenue that we need to recognize here as we complete the problematic projects will weigh on performance in construction for some years here. Taking this into account, we believe it's unlikely that we will reach the 3.5% margin in 2019 and in 2020. If you look at this, this is a summary then of the dead revenue, our expected recognition of dead revenue from what we had in 2018, and then how we expect this to pan out in 2019, 2020, and 2021 here.
So as you can see, if we take 2018 as the example here, even though it's sort of past history, the dead revenue amounted to 11% of what we had as turnover in construction for that full year. And if you take that 11%, and you just think that how much would that 11% had to perform in terms of gross profit, in order for the entire portfolio to be at 3.5%? You would end up with around, SEK 1.3 billion-SEK 1.4 billion at the gross level, because you have to recall that the overhead is the same. We still have these projects, and we still need to have the organization to run them.
So the healthy part of the portfolio would have to compensate quite a lot in order for the total stream to reach the stream level target. So that compensation of SEK 1.3 billion-SEK 1.4 billion in gross profit, that is 0.8% in margin. Another way of putting it is that if the healthy part of the portfolio does perform according to our target, just by sort of dragging around this dead revenue, the stream level margin would just be 2.7%. So that gives you an indication of the weight that we are carrying on the margin here. If you then take 2019, the expected recognition of that revenue in 2019 is approximately 70% of what we had in 2018.
So the expected margin dilution in 2019 is then 70% times 0.8%. So say 50-60 basis points, will be the margin dilution as we expect it now in 2019. And that is, of course, an example that I now give, starting with the assumption that if the portfolio were performing at the target level, but it's clearly tougher here to sort of reach the higher echelons of the target. Moving over to project development, we have expanded project development quite significantly over the last two years here.
And if we take just the last five years, as in this case, we have added around SEK 18 billion in invested capital in RD and CD, to the balance sheet of the company here. So we've grown the project development actually by 70%, over five years. It's quite a lot, and I don't think that should be particularly surprising given the performance we also have had in this area. It makes, of course, a lot of sense here. What is a good sign of performance also is that at the same time, we managed to increase the surplus values in this business by 80%, and that's a pretty good thing, obviously. The strongest part of the growth there you will find in commercial property development.
If we then move into return on, on capital employed in, project development, and here you have, RD, CD, and ID in this measure, because that is the way we have been tracking ourselves against our external target there. We have a ROCE target of 10%, that we are holding ourselves against, too. And as you can see, the performance historically have been good. We have either been at or above target. And in one year here, 2016, well, maybe even three years, I'd say the performance have been quite a lot above the actual target there. I think we also need to recall that this return target was put in place in, in a slightly higher interest rate environment as well. If we look, here you have, yeah, you have the target in the, on the green line here.
And you've already heard Anders go through the residential development markets, and Claes, the commercial development markets. In most of our places, we are sort of high up in the business cycle here, with low yields and rents at good places, strong tenant demand, and so on. Of course, in a good cycle, after a while, when economies grow, you get sort of a cost catch-up. And this is something that we experience in some of our markets today. So I think we're going forward here, this target is very relevant, but we'll probably have to fight a little bit harder to remain at this level of performance. The ambition going forward is, of course, to continue to grow project development.
What you see behind me here is the growth level of investments that we have done in RD and in CD. And you have the three-year averages for different time periods, just as a way to illustrate how we have ramped this up over the last few years there. And this is a six-year history, as you can see. So the last three years, we have averaged around SEK 20 billion of gross investments in RD and CD on a yearly basis, which is a very high pace, of course, of investments here. We want to continue to grow project development. I think no one in this room has missed this message here. We also will be quite sort of responsible when doing that. This is not us saying that we will absolutely grow this business each and every year.
We will assess it against available opportunities, the situation in each and every market, but our long-term ambition is to continue to grow this, because we have a very solid value creation machine, in a way, in project development. This is a slide that shows how we have financed the growth in project development, and it merits some explanation, the table here. Essentially, this is the group balance sheet, and the changes to the group balance sheet over the course of five years. If you look at the asset part, we have had growth in property assets, we have had growth in working capital assets, and we have had growth in financial assets. The working capital assets are, in this slide, netted against the working capital liabilities, and the same thing for the financial assets against the financial liabilities.
So if you summarize things that way, essentially the growth in the group's balance sheet has been in property assets here. And of course, this has changed the composition somewhat of the entire balance sheet of the company. It happens a little bit every year. When you back up five years, it becomes quite significant. What you also can see here is that this growth here has been financed to a large extent by net changes in Net Working Capital. The majority of this is driven by construction. We have seen increasing volumes in construction, and also slightly improving Net Working Capital ratio over the last five years. And in addition to that, the other part is equity retained earnings that we use to finance this.
In addition, actually, we have managed to repay around SEK 2 billion of net debt there over the last five years. So when we sort of entered the second half of 2018, we've done a very comprehensive review of the capital structure of the company, and what do we need in order to be able to continue to grow project development long term, and at the same time, maintain this financial position that we are talking about? And we have done this by looking at each business stream in a sort of an isolated fashion. What do we actually need in terms of equity in each one of these pieces from a standalone perspective, in order to, for it to be sort of a sound business with a stable balance sheet?
Then we add these things up, and we end up at the group level. And I will now take you through sort of the model behind this, the reasoning here, to give you a view of how we're thinking. If we start with residential development, we have property assets in various categories. We have land, obviously, we have ongoing projects, and completed projects. The sum of the current asset properties here is around SEK 17 billion. Of this SEK 17 billion, around SEK 6 billion is already sold to clients. We have not yet completed the units and handed them over, but we have signed a contract, a sales contract with the client there. Our assessment is that had this been a standalone business, the debt capacity of this business would be around 60% loan to book value.
This actually represent around 50% loan to market value. So we could finance this SEK 17 billion by using around SEK 10 billion worth of financial external debt there. Then we say that we have an equity requirement in this business. We think a development business here, the residential development business, we should have an equity position that represents 40% of the risk-bearing capital, which in a way is the unsold part of the net invested capital in this business. And on top of that, in the residential development business, we enjoy a situation with a slightly negative Net Working Capital that we can use to sort of make this equation complete.
So then you have the SEK 17 billion of assets that we use to create value, and the funding of this split over the potential, sort of, the financial liabilities and equity requirement, the Net Working Capital. We do the same exercise for commercial property development. We have different numbers, but the underlying theory is, of course, the same. We have land, ongoing projects, and completed projects. In total, these are current asset properties of around SEK 27 billion, of which SEK 25 billion is unsold. In this case, we think, as a standalone business, we could also here take on around 60% loan to book value, which again represents around 50% loan to market value. 40% equity requirement of the unsold or risk-bearing part of the net invested capital, that is an equity requirement of SEK 10 billion.
In the CD business, this is a very clean business. It's a very sort of simple balance sheet. There are no Net Working Capital here, so that's essentially zero. So also here, you have the balance here. Now, in reality, what is not disclosed here is that we have, of course, though, gone into each part here, the land, the ongoing projects, and the completed projects, and really sort of at a much more granular level examined what we believe is the debt capacity of each one of these parts here. So the 60% you see here, that's an average, for the whole different streams here.
If we then take construction, we have a slightly different approach to this, because in construction, we are able to finance the whole balance sheet and some, in addition to that, via the negative Net Working Capital. So in reality, from a pure funding perspective, we sort of don't need equity, but of course, we need equity for other reasons. We need it to show stability to clients, show stability to, to partners, to insurance companies, and so on. And of course, equity is risk capital, so you always need to have sort of a, the right equity position for the, the business you are in here. Our view is that in construction, we do need equity in the tune of 10% of revenue. And with SEK 160 billion in revenue last year, that becomes SEK 16 billion for the construction business stream.
Now, an interesting twist to this that I think you should be aware of is that because this is fine, because the construction stream is financed, the assets thereby negative Net Working Capital, that sort of financing through the working capital is more than what we need to finance the assets in this business stream. So we have a negative capital employed. Basically, money we can use in other places of the group here. And as we don't need really the cash from the SEK 16 billion equity to finance the works we have in construction, the 16 plus the 6 in the capital, negative capital employed, that is actually cash that can be deployed in other parts of the group here. If we then wrap this up, we say that we have an equity requirement of SEK 16 billion in construction.
We have SEK 4 billion residential development, SEK 10 billion in commercial development. So the subtotal here for the recurring operations for the group is SEK 30 billion. Then what you cannot see here is, of course, we have some central matters that also may or may not require equity. For instance, the PPP portfolio that we now have, which we own through shares and participations in each one of the different holding companies that we have here. We also have some other off-balance sheet liabilities. We assume, we think that these undertakings are netted out against the diversification effect, that we can enjoy as a big company exposed in different markets. We have different business models, and so on. So the total group equity requirement, according to us, is around SEK 30 billion. We closed 2018 at SEK 29 billion.
Then you can sort of easily see here that according to what we believe should be the bottom for our equity, we closed 2018 at somewhat below that. I think this is one of the important explanations to why we decided to move ahead with a proposed lower dividend also here, to just sort of close the loop of the argument here. If we then go into the other important part of the company to continue to fund the product development expansion here, that is the Net Working Capital, and the majority of that part comes from construction. And what you can see behind me here, that is the Net Working Capital position in absolute terms, represented by the light blue bars.
We start with SEK 19 billion in 2013, taking us up to SEK 26 billion in 2018. Then you have a lighter blue line, or may it be gray perhaps, that represent the KPI that we report external, a Net Working Capital over revenue. As you can see, it's been a good development of this KPI, 14%, 12%, 12%, 14%, 14%, and then it jumps up to 15%. And you can also look at the nominal values in 2018. Something seems to be happening. It's a very good nominal, sort of nominal level where we closed, where we closed out 2018 for Net Working Capital, yeah.
Now, in all transparency, I think this, the Net Working Capital is a little bit, sort of inflated, because, as you already saw on my slide with that revenue, we have actually significant amount of remaining works to be done in projects that are recognized to zero margin, and then are loss makers or are not making any money. And, we need to recognize loss provisions for all of those, projects in our balance sheet, and those are loss-making provisions and surplus non-interest-bearing liabilities. Hence, it increases sort of the Net Working Capital, but it does not really represent the funding opportunity for the group.
This is just cash that has not sort of been used yet to complete the projects that we are into. So when we now have done this review of the capital structure, we have, of course, as our role is, been thinking a lot longer than one year. We need to design the right capital structure to take us a few years forward. And we cannot design it based on the outcome of one individual year here. So we use the average year, where we think is what we think is very relevant, the 13% net working capital ratio.
This is what we think we need to have, the capacity to take on a shift in the working capital position down to the long-term mean, and still keep, funding any property assets that we have bought into, and still remain in a financially strong position here. If we then look at the sensitivities here of working capital, if you recall the revenue slide that I showed you on my first, my first, slide here, we have some expected remaining effect of the strategic actions that will come in, 2019 or beyond, approximately 2/3 of 9%. And, here represented by an estimate of an example of five, 5%. If volumes comes down 5% in construction, that means then, a lower net working capital of around SEK 1.5 billion.
Then we also need to be able to, in our balance sheet, house the potential shift of the net working capital position from the very sort of good position we closed 2018 on, down to a more long-term average. We need to be able to handle that. Whatever we invest into, we need to take such a shift into account, not perhaps immediately over a couple of quarters, but over a couple of years. So in total, this sensitivity analysis under these assumptions, that would indicate that we would have a sort of lower working capital of SEK 5 billion-SEK 6 billion here. To get this together, we also have looked at how do we want to display and track the financial position of the group then?
We have decided that we would like to use a measure that is much, sort of clearer on what is the group's external need for external funding in order to run our operations. So we will move away from the previous measure we've had, operating net financial assets and liabilities, into an adjusted net debt measure. And essentially, they, they work in similar ways, but the adjustments are different. Let me just quickly take you through this. Should be nothing strange about this, I hope. If you look at 2018, we closed the year with a net cash position of SEK 3.2. When we move then to adjusted net debt, we add back the net pension liabilities. We also add back the lease liabilities. This is not sourcing money from external sources.
We also adjust for the restricted cash that we keep on our balance sheet, because this is sort of, cash that is held in joint ventures, often construction joint ventures. They are not available for us to use in other places. They are sort of restricted to that legal entity often. That takes us down to an adjusted net debt. The effect here in 2018 doesn't become so large, and we have then a pro forma for 2019 here, where we added the impact of the IFRS 16, the lease liabilities. So there you can see, we would have, starting January 1st, a net debt of SEK 4.3 billion and adjusted net debt of SEK 2.1 billion. If we look then at this adjusted net debt, historically, it looks like this. And as I said, we closed 2018 at a little bit over SEK 2 billion.
Then we have also, as a part of this, review of the capital structure, looked quite a lot at what is the sort of, reasonable level or, or acceptable level of, external financial liabilities, that the group can take on. We will now be going forward, establish a, a floor or an external target, if you will, that says that we will not go below -SEK 9 billion in debt here, in adjusted net debt, sorry. Then the question becomes: How much then is the company's available investment capacity? Of course, if we have a time span that is a year or a little bit more than that, we need to take into account, the potential changes in the volume of construction and also the potential changes in the net working capital position of construction.
So if we start with the SEK 9 billion, which represents- is represented by the orange line at the bottom here, then we have to add back, say, the SEK 5 billion-SEK 6 billion. This is a net working capital buffer, if you will, that we should be able to handle, should the market shift a bit. Because when we have invested in the property development assets, we are there for long term. We need to be able to see those projects through and be able to manage them on the market in a, in a sort of, responsible way, and to guard the value creation, that and not be stressed financially from it.
Then the remaining part between the current adjusted net debt position of SEK 2.1 billion down to down to the level of where the buffer start, that is actually our available investment net investment room today, which, if you do the math, is about SEK 5 billion-SEK 6 billion then. Some other changes, we've already talked about infrastructure development. We are also making a change in the external reporting of return on capital employed in project development. Because we are sort of ceasing to have infrastructure development as its own business stream, we will take that away from the KPI of ROCE in project development. And we will also change the definition of return on capital employed in commercial development.
Previously, we have used an adjusted measure, which in a way, looked at, the development profit from that business, defined as it was, equated via, leasing in the business. So as we leased, that is how we created profit, a little bit simplified. What we will do now is to change to the more traditional measure, meaning that we will look at EBIT adjusted for financial costs over capital employed. We think this will make it easier for all of you that wants to track and reconcile our numbers and understand the company performance with the actual KPI that we're reporting and that we are holding ourselves to, in terms of the target there. And on the right-hand side, you can see how these two different measures, have looked over time.
The light blue one is the new one, and the dark blue one is the old one here. So here you have the impact of the isolated changes then. If we take a five-year average of return on capital employed, 15% for the project development, this is what we have reported externally. And then you have the impact of taking away infrastructure development. That takes away 0.8% from this measure. Then we have the change in definition of ROCE for commercial development. That is, takes away 0.7%, and this may look a little bit strange because the underlying value creation is, of course, exactly the same. It's just a matter of how we define the measure. That takes us down to 13.5%.
And then on top of that, we have now the great fortune of being able to account for lease liabilities going forward, which of course will have an impact on our balance sheet and also on the return on capital employed, and that impact will be roughly half a percent, fifty basis points. So the 13% you see on your right-hand side is exactly identical to the 15% you see on the one you see on the left-hand side there. So I think this change is important to bear in mind when you look at our numbers going forward, if you look at this KPI here. So taking this together, the financial targets, we have the target of return on capital employed, 10% in project development.
We think this is a very relevant level of this target, also going forward. Then we have construction operating margin. Given what I've told you and sort of the analysis with that revenue and the performance situation we are in today, we believe, as already said, it is unlikely that we will reach the target in 2019 and 2020. We're changing the measure for financial position in the group, moving away from the on-balance sheet position to an adjusted net debt, according to the definitions you just saw. And we're also putting an exit target in place, saying we will not go below SEK 9 billion in adjusted net debt there.
Then return on equity, we have a target of 18%, and I think it's fair enough to also say that if the group are performing at a 10% return on capital employed in project development and at 3.5% construction margin, the outcome from the group would be slightly higher than the 18% return on equity. So if we are delivering on our target in project development, but falling slightly below in construction margin, it does not automatically rule out that we will fulfill the return on equity target there. Okay, André, I hand this over to you.
Thank you, Magnus. Thank you, the rest of the group leadership team. We're done with all the presentations now, actually. Now it is your turn. We will start a Q&A, so I will like to invite the whole group management leadership team up on stage here. We will have microphones running around in the room, so just raise your hands if you want to ask a question. Please state your name and the company you represent. So let's get going.
Thank you. My name is Simen Mortensen. I'm from DNB Markets. You started off in construction. I have a few questions, three or four. In construction in the U.S., you said you're gonna be more selective, less power, less PPPs, and we all know these are projects that historically been in the civil business, which has the best margins in the U.S. How do you think you will compensate for that in terms of the profitability?
So in the civil group, I don't know if you can hear me. In the civil group, you know, I said our core markets there are New York and L.A. That's where we see ourselves focusing ourselves on the two coasts. We can venture up into sort of the North Pacific Northwest from California, and then we can go to Boston and down into sort of D.C. area on the civil side. But traditional bid build projects, those CMGC projects that I mentioned, road, bridges, railway, tunnel, mass transit, that's those are sweet spot projects for our civil group. They're good at those, and there's a sufficient pipeline out there to make up for what we thought were going to be good markets for us in power, for example, like I don't see that as a good market.
As I said, I don't like the risk/reward equation in that, so I think it's good for us to leave that market. And the P3 market, that's interesting. I mean, we. I've been in the organization 15 years. We thought that was going to be a good market for us. Certainly, large projects for the company. But as I said, the competitive landscape there has changed so that it really doesn't fulfill the requirements that we had going in to those types of projects, time to back out. So I think there's plenty of opportunities for civil going forward, the right opportunities where they can be profitable.
To follow up on the working capital element, at what time do you plan for that potential drop? You have a negative book-to-bill already, so roughly SEK 1 billion will be lost there. We could assume next year. In terms of 13%, when and how will that phase out? Will it be negative due to negative cash flow from those dead revenues, or is it other elements coming into it?
I have two elements that we had. One is sort of the impact of sort of decreasing construction revenue here. And that we think the effects of the strategic initiatives that we still haven't seen, they will come in 2019 and beyond, and it's hard to say exactly when that is. For the Net Working Capital, it's very much as I just went through here. This is a buffer that we feel we need, because to predict exactly where the working capital will go in a construction business, that's very hard. But we feel that we are investing in long-term assets. It takes a long time to develop the right land banking. When we go into large project, we would like to make sure that we have a buffer to handle changes in that position.
So it's not that we have, like a trajectory that we see ahead of us, when in time that will happen. That's not the case.
It seems negative working capital is a risk. You already stated you have less equity than what you think were suitable for your capital requirement-
Mm-hmm.
Long term. If this materialize, how do you think about the dividend potential?
You know, I don't want to comment on future dividend potential. I think that's a decision that needs to be taken every year.
My final question comes to residentials, just in terms of accounting there also.
Mm.
You have started a lot of developments, more than you have sold. But typically, we see that based on your accounting, on segment accounting-
Mm
-profits will be recognized when the project is started, because then it's sales book. How comfortable are you with the current sales level of the ongoing production, and how do you think that will pan out, and what risks are you willing to take on?
Should I...
I can, I can start commenting. I'm, I'm very confident with the sales rate that, that we have. We're, we're at 68%. We have a very low number compared to the total operation when it comes to unsold completed. And we are in a good position because we are diversified, not only in geographically, we are also diversified when it comes to segments. So, we have been able. I think we have shown that in Sweden, that we have been able, which is the most challenging market. I think we showed that we are able to shift the mix of the, of the business.
One more final question, if I may. In terms of the commercial return on capital, it's been very good for many years. But you touched upon also on the yields. It has helped. And you also showed us a new accounting principle, which you will use going forward. But based on if there weren't any yield compression, how would actually that segment have been performing? How much of the return on capital can you actually contribute through your own developments versus what has happened in the market in terms of the yields?
You want to choose?
Me.
Probably. I mean, what I said earlier was that when we are starting a business case, starting a project, we're not underwriting the yields as of today. We're assuming that we will divest it at a higher yield. So if the yield then stays or compresses during the execution of the project, obviously, we have excess profit to be realized. And of course, during this sort of long, very positive cycle, we have been able to harvest excess profit. So that, that's a fact. So if yields stay flat for the coming year, there will be more excess profit coming out, obviously. But the important thing for us is to make sure that we have a business case that can stand sort of uptaking yield to some extent, and that is what we sort of foresee when we start.
I would say we have a very cautious approach when starting commercial development.
Thank you.
Yes.
Tobias Kaj from ABG. I would like to start to ask a question regarding your construction margin target. If you can give some more details of what kind of levels do you need in each geography to reach the 3.5% average for construction?
I can start with, to reach the 3.5% target we have, we need to get rid of the dead revenue that we have in the, in the operation today. We also need to have the different markets. Now we have Europe, we have Nordics, and we have U.S. So those units, also the underlying units that I showed here, they need to perform on a good level to be able to reach 3.5%. We're not going into details of forecasting for each and every operating unit here, but, they need to, they need to reach a acceptable level, then it's possible to get to the 3.5%.
Regarding dead revenues, you explained the effect of the negative effect on the margins on the current levels of dead revenues, which was 11%. Do you know the figure, if you look at the average in the past 10 years, how big volume dead revenues have you had in that period?
... I don't have the figure. I can start, and, Magnus can comment, as well. But, it is on a very high level if you compare to the history right now, that's for sure. You, in a construction operation, you will always have some dead revenue. That's the natural of the business, but, it is on a extreme, on a high level today.
I think one way of answering your question is if you look at the bar chart that was up there a while ago, you can see the dead revenue split out by the different geographies. And you take our most well-performing geography, which is the Nordics, and there you have dead revenue to the tune of SEK 2.5 billion, then you should be compared to a revenue in 2018 of approximately SEK 60 billion. In a sort of well-performing situation then. But can't really say that this is the normal level, can't give you a normal level of that. But it's not unusual. I mean, in a construction business of the size that we have, you will have some dead revenue in the books. That's the way it probably is.
One question regarding your residential development. You showed the change in mix, that you have a bigger proportion now of, of rental apartments than BoKlok. With the current mix, is it still relevant with the target of 10% return on capital employed, or should we expect a lower return as long as the mix is what we have today?
It is a bit lower, I would say, but it's the our 10% target on return on capital employed, that operating, is still valid. We're not far from that. And you can see that in the last quarter in Sweden, for example, we had over 80% of the revenue there was just BoKlok and the affordable housing and rental. So we're not far from the 10%, even though we have a different mix.
One question to Claes also regarding the commercial development. It's quite obvious that you aim to increase your investments in the development streams. But based where we are in the cycle, is this the right time to increase your investments? And if so, which specific markets do you see the biggest potential in?
I mean, still we see we have very healthy leasing markets in potentially 75% of our markets, where we could consider to start on, you could say, a large portion of speculative development. So we don't see really that it's a big downturn that we feel in the market right now, but we need to be more mindful. So I would say we will be more cautious. Like I said, we'll probably not speculate in D.C. The Houston project I saw here, I forgot to mention, that was actually a 29% pre-lease. That's the reason why we sort of decided to start that in the midst of a sort of meltdown. I would say in some of the markets, we might not have the footprint. For instance, in Gothenburg, we have nothing for quite some time.
Now we start the Citygate project. So there are markets where we haven't had the zoning and permits in place to start projects, and there we would like to start if we have the opportunity. So it's, the bottleneck has been land and permits historically. So we can do more in certain geographies, and certain I will be more cautious on. I think I addressed which market I believe most in, short term here. If you take out the U.S., which is a big market, Houston is difficult. D.C. is very slow. Boston and Seattle is super strong markets for us. Very different landscape there.
U.S. is, as you mentioned, you have very, very big projects, and you mentioned those two projects, one in Seattle and one in Houston.
Yeah.
And at least the one in Houston has a very satisfying letting level. Seattle is slightly lower, but on the other hand, it's quite strong, strong leasing market, so I guess you're not too concerned about that. If you're able to reduce the unleased spaces, and you will complete those this year, should we expect that both those two units will be divested during this year as well, or will you, for tactical reason, keep one for next year, so to say?
I mean, first you need to complete the projects, and then you need to move in tenants. So see, some of the projects, like 121 Seaport, is a good example. That one was actually substantially completed end of 2017, and then you had a lot of tenant fit-out works to be done during the whole spring and even part of the fall of 2018, and that is a substantial piece of work as well. So we talk when I'm talking about completion in Houston in March, April on that one, it's the tower is done, but then we need to start to work with sort of moving in the tenants. So there will be sort of additional construction works in-house, and part of that we are doing, part of that we are not doing.
To answer your question, it takes more than just substantial completion before a project is ready to divest.
One final question, if I may. You mentioned that you plan to enter the Los Angeles market as well.
Yeah.
Is that more like a long-term ambition, or do you think that you, in the near term, actually will be able to acquire land and be able to start projects? I mean, based on the... it seems like a quite strong market-
Yeah
... and maybe expensive to buy building rights in the current market.
It is, but we have a team of four people actually on the ground. They're working with sort of creating the business plan, looking for land. We know which submarkets we would like to target. That's pretty obvious as well. And their goal is to bring sort of the first investment proposal up to us when they find something. But, as I said earlier, there is no rush. We would like to buy the right piece of land, and we will not win any auction on simple pieces of lands. We would like to find the difficult, complex ones. You will not see a project start in Los Angeles for some time. Of course, first you buy land, then you need to do the entitlement, zoning, and permits.
... So this is more, you could say, a long-term goal, but we are there actually operating on the ground right now. The decision is to enter the market. But it takes time to build a pipeline, always.
Thank you for taking my questions.
Any more questions?
Yep.
Over here. Over there? Oh, you already are. Sorry.
Sorry, I'll grab the microphone. Thank you. Erik Granström with Carnegie. I had a few questions, and perhaps if I could go back to the construction margin target and the slide where you show that if we exclude all the dead revenues, the one-offs, the restructuring costs, you were actually at your target, and you compare that to historically reported margins. Does that mean that in order for you, over time, to reach the target, underlying, you need to be fundamentally above that target, since you will always run some sort of dead revenue? That seems to be the case year after year, so meaning that underlying, in order for you to report the target of 3.5%, excluding dead revenue, the margin in the construction operation needs to be higher than that.
I can start, and you can fill in. Some of the writedowns that we have communicated over the course of 2018 and 2017 has been in projects that are not loss makers. So that means that they are not captured as sort of loss makers here. So of course, there's even in those parts of the portfolio, we, as a management team, are looking at any part that we think is not performing the way it should. So in that sense, you're right, right? We need to raise the margin performance also of the other parts here, but not to any level that is sort of historically unheard of. I mean, this is quite normal, but it's a job that needs to be done here.
Yeah, may I just to elaborate a bit more. In Skanska Sweden, for example, they have been on a very high level for more than 10 years now. But it's not that we haven't seen issues that we need to address in that unit as well. But the overall has been on a very, very high level, so you're right.
If I could comment, I would say, you know, if we're running in the right state, sort of steady state, you're gonna have some Dead Revenue, as we said. But the claims, that's where the claims comes in. If we're, if we're running at the right levels with the right portfolio of work, we'll have some issues and projects, we'll also be claiming something. Dead Revenue doesn't mean completely disappeared revenue, we just have to go and get it. So those two things moderating together, I think, drives us to the 3.5% target.
Okay, thank you. And then moving on to residential development, is there a difference in the way that you account for rentals versus your co-ops? When you showed the fact that you're doing the segment reporting, is there a difference there, since you don't have a sort of consumer client or-
No.
How should we view that?
It's the same accounting reporting principles, accounting principles. You can say we report or recognize the revenue at the time when we sign the sales contract, and that goes even if it's a rental building.
But that means it's extremely late then in the process, because you usually don't sign a rental agreement with the tenant until they actually move in or a few months after.
Depends on when you sell the asset, of course. But, but, it's more lumpy in the rental business than what it is in a standard housing, a standard rental apartment projects, because then you have multiple smaller transactions, but in a rental project, you will have one big one, so.
Okay. Then finally is a question on the way that you view your capital structure and your needs. It seems that you've sort of moved into a rather pragmatic way of looking at it, and I assume that you will do this on a running basis, but then definitely at the end of each year, you will look at these requirements. Is that what bases your then decision and your recommendation to the board, without looking in hindsight of, in terms of the dividend capacity for previous year? Meaning that you're gonna be very pragmatic. If something changes, the recommendation for each year will then be presented to the board in terms of what you feel that the company can distribute to shareholders.
I think it's important to have some sort of predictability in this area, which is why we also spend some time here to demonstrate how we are thinking around this. So of course, we will track ourselves sort of continuously along this model here. Then, I mean, anything can change, and of course, we also adapt the business to circumstances here. So, it's... I'm not gonna sort of tie ourselves into some argument now, reasoning now around what the future decision would be, but, but, I mean, this is the way we view the sort of capital need for the business here, and I think it's good that we, to be open with that.
Yeah, and I think we have shown today also that we have done this in a very careful way. And so stream by stream, how much capital do you think we need? How much equity? And also, it's shown that our ambition to grow the project development, and that this level, that proposal for 18 supports that strategy long term.
Okay. Thank you.
Yes. Hi, Niclas Höglund here, and Nordea. A couple of questions. I'll try to be, keep myself to three questions. Firstly, if we look, we talk a lot about... You talk a lot about what the Dead Revenue diluting the margins. But when you look at the sort of conviction of the remaining Dead Revenue or the problem projects not continuing to sort of show losses, so what's your feeling now if we compare it with your sort of analysis in the sort of fourth quarter? What's the sort of downside risks from here for further projects being sort of dead and further losses not sort of compensated by the recovery?
I think there's two things, so I can address that first. As I said at the beginning of my comments, you know, the two major projects that led to major write-downs last year, and that contribute substantially to that dead revenue for the U.S., they're currently at about 65% complete. We're through the design phase on those projects. We've bought out those projects mostly. We've got our feet on the ground. We've seen production trends. So I think we've taken the right, we've taken the right operational and commercial measures there to help our team to guide that to the forecast that we have. And then the second part is, you know, our focus on risk management, you know, making sure that we replenish the backlog with quality projects.
As I said, at least in the U.S., we have a strong market that provides us good opportunities, and we just, you know, we're focused on the right people, the right competencies for the right opportunities. That's, that would be my thoughts on that.
In Europe, I can comment. It's Skanska Poland where we have the, the biggest issue or had, have the biggest issues. There, it's a shorter backlog, which is good. I can clearly see that the project we won from 2017 and forward, it's on a much healthier level, more, more like the other parts of the company.
Okay. And then the second question, still on this sort of dead revenue. When we look at the accumulated dead revenue from sort of 2018 up until 2021, we're... Well, you're showing around $24 billion in the U.S. You talked a little bit, very briefly on the sort of claims and the potential of claims reversals. Could you share some thought of the sort of potential on the sort of- on the dead revenue accumulated? Are we talking about a 10% of the sort of potential gains to be reversed, or are we talking about 50%?
I don't have a precise figure for it.
Okay.
We do track that, of course. We have our claims side. I don't have the precise figure in my mind. We track our claims on both the building and the civil side. That's a quarterly process, and then we sort of handicap where we think we're going to come out on that. And then we, if we do things the right way, we should have some substantial recoveries over that period that you can see on the slide there.
The profile will be tilted towards more 2021, or should we?
It's hard to predict, and sometimes these things move faster than slower, but it's my experience with claims is they would take longer than you would like.
Fair enough. Then my final question. On your sort of redefining the return on capital employed, you're talking about the 2% delta. I mean, 13 is the new 15 on returns. Why... Could you. But you're still quite comfortable with keeping the sort of above 10% target for new investments in the CD stream and the sort of potential of SEK 5 billion-SEK 6 billion in investments. Is. Have I understood it correctly?
Yeah, we still think that that target is very relevant for the business stream there. Then, as I said, I think, I mean, one change in the environment is that the overall economy has sort of caught up a little bit, and it's a bit little bit tougher. We feel cost escalations in certain areas, and we have to stretch a bit a bit more now to continue at that level of performance, of course.
Okay. Thank you.
All right. Any more questions? Down there in the back. Oops.
Yes. Hello, it's Marcin Wojtal from Bank of America. So just a clarification on your dividend policy. Can you confirm you will be still using a payout ratio of 40%-70%? Because I think it was missing from the PowerPoint presentation. And number two, on construction, so you mentioned the target of 3.5% is unlikely to be reached in the next two years. But are you suggesting it is likely to be reached in 2021, or it is too early to really have some sort of guidance for 2021?
I can comment. We haven't changed the dividend pay ratio. That remains the same, and we are within it, with the proposal as well. And on the target, the 3.5%-
Yeah, we say it's unlikely that we'll reach the construction target margin for 2019 and 2020. We don't speak about beyond 2020 here, so.
Thank you.
Questions down there to the left.
I can just add to that. I mean, I think I cut your question short, but I mean, the reason why we sort of stick with the 3.5% target is also that we feel that given the current mix we have in the construction portfolio, with the markets, the contract mix we have and so on, if we don't have any major problems, but things are performing the way they should, that is a relevant level of performance.
Claude Kahn, Société Générale, France. Some questions about development. In construction, do you exclude totally external growth? Do you... Don't you intend in the five next years to buy companies? Second question, do you never go elsewhere in terms of geography on a project basis, like some other players often do? And the third question, also about construction, is this 3.5% is pretty high. I imagine in Sweden, you are the first player, and you have obviously a good position. Is this related to the benchmark you can see from your competitors? Because in a number of geographies, it's difficult to reach good profitabilities. So U.K. is well known as being very low profitable for contractors.
Poland is very competitive with everybody from Europe being in Poland, for instance, everybody, et cetera. So, the benchmark of Sweden is high.
Yeah, the first question I can say, we don't have acquisition or construction companies on the agenda today. We want to use the capital, available capital for increase in product development. We have no plans of getting outside our home markets in construction, so we're not looking into new geographies for construction. And the last one, 3.5%. Yes, we are very, very successful in Sweden, where we are between 4%-4.5%, the last if you look years back. And that's way above our competitors as well. Of course, we use benchmark in every market.
So I believe in the Nordic, they can be on a very, very high level, and I believe that the U.S. operation is also. There's two mix, where the building operation, where it's a low margin, low risk approach, like Richard described, but you also have the civil that we work hard with to get back on track. In Central Europe, yes, high competition. I agree with that, and we can see that, but we can also see that, and that's one of the reason why we chosen a more smaller scope, if you will. So we want to focus ourselves where we can see we are competitive, have a competitive advantage, especially where we can use the synergies with the commercial development and residential development.
There, we can see that we have a very, very, very healthy margin on the construction as well. So that's the approach for the Central Europe. U.K., that's the approach there is to scale down a bit to focus on the core business, and that's what we have as a strategic action going forward.
All right. One question here in the middle. Who's running? Shall I? No.
Stefan Andersson, SEB. Three questions from me as well. Start with the cost side. We talked a little bit about demand, and you showed the graphs on that. But if you look at cost inflation, material, employees, and so on, complex question, many jokers, but if you could elaborate a little bit on the development you're seeing currently on that.
I can see. We have it under control in the Nordics, I would say. Where we have—if you do your homework right, you can secure the cost in an early stage. So I think we're successful at that in the Nordics and also in the vast majority of the U.S. operations. So it's not cost increases that cause the problem in the U.S., it's other stuff, but design changes, delays, so it creates a lot of cost increases. In Central Europe, though, we have seen extremely high cost increases the last few years. We have an overheated market, we have inflation for salary increases that go sky high, and that influence us, they influence our subcontractors.
So, in that market, we haven't been able successfully in the past to secure that and compensate ourselves and charge our client, if you will, when we price the project. That's also one thing we changed now the last couple of years, to be much more careful in evaluating the bid and making sure we have subcontractors in place, stable subcontractors that we work with over time, so they won't run away from the project, to secure that before we make the bid. But we're in a much better place now.
If you look at the situation right now, are you seeing any trend, if at all, that it easing off a little bit, or is it still as tight?
If I look in Poland, Czech Republic, I would say it's still a high, high pressure. It's a very low unemployment rate. It's around 3%, both in Poland and Czech Republic, which is a challenge, of course. But I would say it's getting, I see good signs in market because, in, if you go a year back, we used to call the subcontractors asking for prices or resources. Now, they're calling us, and they'll say: "Can we get, do you have any work for us, and can we partner up with you?" So that's a good sign.
Okay, and then the second question, the U.K. business and Brexit are different scenarios there. Construction is a local business, so might not be too much impact on it, but what is your preparation and your risk, so to speak, in either scenario?
I can start. We have done, even after the Brexit referendum in June 2016, we started to work with the mitigation plan from different scenarios. So when we went through all the projects, and we also now have increased that work, of course, because we're getting very close now to the Brexit. And we don't know if it's a deal or no-deal Brexit, or if it's a Brexit at all, it will be postponed. But we have mitigation plans in place for all projects, so we try to encourage people. Because we need people and material, and some of those comes from other parts of Europe. So we need those in place. So we encourage people to apply for visa, which you can do already now. We have tried to...
Fasten up the procurement, so we get the material into the country. And there's a lot of cooperation with the different authorities, where because everybody wants to get materials, the borders need to be, you know, open up at some point. But if it's a no-deal Brexit, it will be disruption for the whole industry, so that's for sure.
And then last question. Finland and the asphalt cartel, there's been a ruling not long ago. Just wondering if you've seen any activities for, say, for anyone to actually taking action, and the risk you see that anyone would actually go on it?
You mean in putting forward claims against us?
Exactly.
Well, actually, I mean, this is actually a case which dates back many years. I think the actual anti-competitive action in form of the cartel was already concluded then in 2010, sorry, 2002. And then in 2009, we got a fine from the competition authority in Finland, and this is mainly municipalities that are then claiming the private damages. So we already know which these are, if the Supreme Court in Finland would potentially confirm the ruling from the European Court of Justice. So it's very important to remember that this is a preliminary ruling, and then we have to see if the Finnish court will actually enforce that as well. And what we deem, based on what we know today, is that the amount is not going to be material.
Thank you.
Okay. Any more questions? The last, last, last question.
The one topic we haven't spoken about is infrastructure development, and when we are to expect any sale of the ERC, no, ERC or the Karolinska.
Mm.
Can you give us any indication on that?
Yeah, I mean, I gave you the overview of the different assets on the slide there, and you could basically see that both the ERC and the NKS is completed in 2017. I also said that we normally have a time period of two years or so, where we test the asset and drive it. That is as far as sort of forecasting will go here. We're not gonna give you a time when we put these to the market.
Thank you.
Okay. Any more questions? If not, then we turn... Oh, sorry, yeah, okay. Tobia s.
Yeah, thank you. I can also follow up with one more question. And regarding this equity requirement, which you went through for the different business streams. For residential and commercial development, you assume the surplus value of roughly 20%, which is based on how much you can lend for the operation. And today, especially in commercial development, it's more like 35%-40% compared to capital employed. How much would the equity requirement decline if you would use current situation instead of a theoretical situation?
I'm not sure I follow the question. We are using the current situation. I don't see that we're at a 40% surplus value in CD. That is in that case, if you compare the value that we allocated to date, with this estimated surplus value upon completion, which is a difficult sort, but you can't really realize those values today. You need first to keep on investing and complete the assets there. Make sense?
Yeah, but you mentioned that, you used a 60% loan-to-book value-
Yes.
- and that implied a 50% loan to market value, which indicate that you have roughly 20%-
Mm-hmm.
- upside as, as kind of theoretical situation.
Yeah. But okay, so the dots are connected like this: You have the surplus value at completion, and then you have to expose that to the completion rate of the assets. So the surplus value that is included in that calculation is only sort of pro rata to the completion of the assets. Otherwise, I understand your question, we're coming in from that angle, yes.
But the capital employed, you mentioned, was also based on the current completion rate. You didn't include the future investments in ongoing projects, let's say.
No, the capital employed is the current completion ratio, you can say. Basically, the current book value of the assets, with some adjustments, given that you take it from the capital employed, and then you use the surplus value, also pro rata, to the completion rate, of the different assets there, and then you end up with that value.
All right. Now, I think we're emptied out all the questions, right? Good. It's soon time for lunch. Thank you all, guys-
Thank you.
- for this Q&A. You can have a seat. And, I'd just like to hand it over to you, Anders, for just some final-
Yeah, some-
Final comments.
Short, final comments here. To wrap up the whole session here today, you're looking at a very strong company here. We are leaner due to the changes we made last year. We are a leaner, more effective company. We are more decentralized, and we have a great potential in increasing the shareholder value by turning around the construction units that's underperforming today. And that's by strengthening the control. Don't mistake me, misunderstand me. We haven't left the control over the company by decentralizing. Yes, we are decentralized, and pushed on some responsibility, but we actually strengthened the control of the business. And we also strengthened the discipline and accountability of the business. And that's very, very important. And we're actually reducing the risk in the construction stream. That's the way forward to restore the profitability.
The residential development, commercial development, we have a great, great performance and great potential for the future as well. We are, growing in the long term, as we heard today, and we have a very strong, balance sheet to be able to do that. And I want to end up this session by showing you a very good example of increasing shareholder value. This is, 121 Seaport that we divested in the fourth quarter. The highest ever divested value. It's a divested value of SEK 4 billion, with a gain on sale of SEK 1.3 billion Swedish. Very good. Innovative design, 50% energy savings, and, less cladding, and also LEED Platinum. So, this is, one good example how to continue to create shareholder value. Thank you very much for listening.