Good afternoon, and a warm welcome to Skanska's Capital Markets Day 2023. So happy to see that so many of you have joined us here in London. I would also like to say welcome to those of you that are watching online. We are broadcasting most part of this afternoon, and a recorded version of this will be made available on our webpage afterwards. To introduce myself, I'm Antonia Junelind, Senior Vice President, Investor Relations, and here with me to co-host this event is our Business Unit President for Skanska in the U.K., Katy Dowding.
Good morning.
So you will hear more from Katy later this afternoon, but I have asked her to just briefly orient us on what Skanska is doing here in the U.K. to begin with, before we invite the group leadership team on stage. So Katy, can you tell us about Skanska here in the U.K. and our legacy in London?
Sure, absolutely. Thank you, Antonia. So I joined Skanska in the U.K. in 2003, and coincidentally, that was the same year that this fantastic building was completed. And it's one of the most distinctive buildings on the London skyline. It's truly iconic. And did you know that it's got 24,000 square meters of glasswork in this building? Incredible. The same size as five football pitches, or five soccer pitches, if you're one of our U.S. colleagues. But actually, it's called the Gherkin because it's beautiful, curved shape. But did you know there's only one piece of curved glass in the entire building? And if you look up, it's there. And in fact, because Skanska are a very prudent, careful organization, when we built this building, we produced two of those, just in case.
But the really good thing is, 'cause we're such an expert builder, we only needed one of them, so there's still a spare available to now. We have lots of legacy in London. We have lots of legacy in the U.K.. We've built some of the best infrastructure. We've built railways, we built commercial office buildings, we've built hospitals, we've built schools. Our legacy lasts across the whole of the U.K.. But the heart of our building, heart of our operations in the U.K., are our building and our infrastructure businesses. But actually, we're different from the rest of the market because we can enhance our building and infrastructure offerings, 'cause we also have specialist services. We have specialist piling expertise, we have specialist M&E expertise, mechanical and electrical, and we have specialist facilities management, which means we can look after buildings for their life.
As well as that, we have specialist services around pre-construction advice and design advice. Bringing all of these together truly sets us apart in the market, as well as the strength of our wider Skanska family. This gives us a truly unique integrated offering in the U.K.. I thought we'd show you a film with just a selection of a few of the buildings that we've built in London. I'm really proud of all of these buildings. They leave a legacy. Our customers are proud, our employees are proud. They're projects to be proud of in Skanska in the U.K.. Thank you.
Thank you, Katy. So the main purpose of this day is, of course, to provide you with an update on our group strategy and commercial direction going forward. And here is the detailed agenda. So today we will cover... We have divided the afternoon session into two sections, two main section. The first is also the longest one. This will be presented by the group leadership team, and it will be broadcasted live.... This will cover our performance and operational performance, our strategy in recap, and we will also go through our group financials, digging a bit further into our operational targets and also our financial position. We will also take a bit of a broader view on the outside world and look at the most important trends that are impacting us as a company, but also our industry in general, looking at sustainability and also digital transformation.
Naturally, we will cover all of our four business streams. We will have construction, commercial property development, residential development, and also investment properties to look at our focus areas and actions going forward. We will have a short break at around 2:15 P.M. this afternoon, and we have left quite a good amount of time for your questions at the end of this first session. We're ending the broadcaster session at around 3:30 P.M. GMT this afternoon. For those of you that are here in London with us, we will then take a slightly longer break, and we will be back here on stage for business insights for the final hour. We're ending here no later than 5:00 P.M. this afternoon. Now we will introduce ourselves with a short film, and after that, I will welcome on stage our President and CEO, Anders Danielsson.
Brick by brick, piece by piece, we shape the way people live, work, and connect, leaving behind places that make their mark. Founded in Sweden more than 135 years ago, today we're one of the world's leading project development and construction groups. We have a diverse and stable business across four core offerings: construction, residential development, commercial development, and more recently, investment properties. This means we design and build all types of structures, from hospitals and offices to roads and bridges. We develop homes and communities for smarter, more sustainable living, and we make places where people collaborate and thrive. What sets us apart? For us, it's not just about the projects, but the people behind them. People whose knowledge, foresight, and ingenuity move our customers and communities forward.
With a strong local presence backed by global competence, we value long-lasting relationships with our customers, most of whom choose to work with us again and again. Together, we create innovative and sustainable solutions that support healthy living beyond our lifetime. Our sustainability efforts start at home. We've more than halved the carbon emissions from our own operations since 2015, but there's still a long way to go. Through scaling innovations, we will achieve net zero carbon emissions across the value chain by 2045, using our expertise to transform both our own and our clients' businesses. So the next time you are catching the train, looking for a new home, or working on your next big presentation, you might just notice we are with you, making your daily life or community a little bit better.
All right. Welcome, everybody. It's great to see you all here in person in London. We have a packed afternoon, and I will set the scene and just put the company in the context before we dig into each and every business stream later on here. So I will start with just an overall picture of the company. We are one of the world's leading project development and construction company, and we have presence in the U.S. We have 40% of the operation in U.S., 40% in the Nordic, and the rest, around 20%, is in Europe, and that includes United Kingdom and Central Europe. You can see here the revenue on the upper right-hand side.
The revenue, the vast majority comes from, construction, 87%, and then we have a quite equal split between, residential development and commercial property development. But when it comes to operating income, it's another split here, and this is three-year average, on the last three years. 60% of the operating income comes from construction, and then we have a big part from commercial property development, smaller part from residential development, and start-up investment properties coming back to that 1%. But overall, in the three-year average, SEK 156 billion in revenue, and we have 28,000 highly skilled employees in the company. And this is our business model, if you will. We have four business streams.
We have construction, commercial property development, residential development, and investment properties. Business stream that we announced two years ago, and we have started to build up a portfolio there. But overall, we are unique in a sense that we are working the whole value chain. We have project ideas, we're buying land, we develop the commercial buildings or residential buildings, we construct them, and either we divest them, that we have done successfully during the years, and now we also have an option in Sweden, as you know, that transfer them into the investment properties to gain even more shareholder value out of our development operation. And that's a strength.
So we can use the synergies here, and we have clear synergies when it comes to the financial side, because we are using the cash flow, the positive cash flow from construction. If we working capital, we invest it in the project development. We either divest it, creating shareholder value, or decide to keep it there and create stable cash flow in investment properties over time. So that, that's a good thing. And of course, these development activities also create new contracts, internal, profitable construction contract, so it's we work in the whole value chain here. And that's also that we have a financial strong position also make us unique because we can... We own our own decision.
We can decide when we think it's the right thing to start a project or buying a land, when it makes sense for us and the shareholder to do so. And that's a big advantage, and the history tells us that, if you can work, keep the financial strong position in the downturn in the market, you can really come out even stronger from, when the market picks up again. And that, we're determined to do that, of course. Before I jump into the business and financial update and our commercial direction going forward, I want to introduce the group leadership team. And besides myself, we have seven executive vice presidents, and everybody is here, so I want to present them one by one. I start with Magnus Persson, our Chief Financial Officer.
I continue with Caroline Fellénius-O'Neill, heading up our General Counsel. We have Lena Hök, Sustainability and Innovation. We have Richard Kennedy, heading up our U.S. Construction operation, including U.S. Building and U.S. Civil. And we have Claes Larsson, heading up our Commercial Property Development and Investment Properties. And we have Ståle Rød, heading up Construction and Residential Development in Central Europe, and also Skanska Norway and Skanska U.K. And finally, Therese Tegnér, heading our Human Resources. So you will see everybody on stage here this afternoon. First, I want to go in briefly about our strategy, our current strategy, and also the performance update. How are we doing? And if I look five years back, if I look five years back, we took some important decisions to restore the profitability in the construction stream.
We took decision to continue to grow the project development, and I will just show you how we're doing there. But if you look at the world, what has happened in the market, there has been quite a dramatic changes in the business environment. We had the pandemic hitting us in 2020. We had the terrible war in Ukraine also impacting the whole society, the whole world. So we've seen a lot of scarcity in when it comes to material in the construction industry. We have seen inflation, we have seen scarcity of also labor, so that's commodities and so on, and of course, hiking interest rates. So that has been a lot of things going on in the world up to now. But we have our strategy.
We are firm, we are very stable as a company, and this is a visualization about the current strategy. It's built upon three pillars. You have our strength. You can see that on the upper hand side there. We have our enablers, and we have our ambition, of course, to create long-term shareholder value. If I look at the strength, just briefly, I think this is definitely a strong big strength with Skanska. Everywhere I go, I see exceptional teams that make it possible to build a building like this or other buildings we have seen, and we saw also this morning when we were on a site visit. That is totally impossible if you don't have the right team in place.
We have a great knowledge in the company, and we have outstanding performance in a lot of parts of our company. And of course, our enablers. We will be nothing without our customers, so that is customer-first mindset, that is critical for our success. And also that we maintain a culture of continuous improvement, to always strive to be better and better. That's the only way to keep ahead of the competitors. And also, innovation solutions. I see a lot of that going around the company. The challenge for us is how do we scale it up? How do we get the benefit of being a global company with an operation in many countries?...
Sustainability is the sustainable transition in the society that we're seeing today, that is beneficial for us because we can use our knowledge and really win new profitable work with that. We can see that the demand, the requirement from clients are increasing all the time, so that is an area where we should be ahead of the competitors. But the ultimate target is creating long-term value for shareholder, customer, and society. And everything is empowered by our purpose and values. That is something that goes along the whole organization. We are a decentralized organization. That's a strength, but we need to have common values and a purpose, and that is really something I can see we are truly living out there in the whole organization. I will go into the, just briefly now, how we're doing in each, in our different streams.
I will start with construction. We took some important strategic decision back in 2018 to restore the profitability. We were not performing on a good enough level at that time, so we took strategic decision. We have been disciplined, we have been selective in choosing project, we have done our homework, we have make sure we have the right team in place. So quarter by quarter, we have been able to restore the profitability, and you can see the operating income, the blue bars, rolling twelve, on the left-hand side here. And also you can see the green line is the rolling twelve operating margin, percentage to the right.
As you can see, we, we have been reaching the 3.5% target, the dotted line, and we have been on that level or above the last three years. That is, despite everything that's going on in, in the world around us, in, in the industry. The strategic shift we made in 2018 has really paid off, and we are determined to keep that discipline, profit before volume, to keep delivering good result in the stream. In the project development, now I've merged the residential development and commercial property development. The dark, dark blue here is residential development, and lighter, lighter blue is commercial property development. So here you can see how we build up that capital during, during the years. This goes back to 2014.
You can see the green line here is the return on the capital employed. So here we have a target of 10% return on capital employed for the project development. And if you look at the 10-year average, we have been at 11%. So we have had really good years, and we have performed on a good level. And we also increased our focus on being more diversified, especially in the commercial development operation. So we are more into opportunities in logistics, multifamily, life science, and we'll come back to that later on. But of course, you see the green line, the return is down.
We see that the transaction market doesn't really work right now, so we haven't been able to divest commercial commercial buildings, and we haven't been able to sell residential apartments in the same pace that we used to. That's, of course, something we need to take action on, and we are doing that. We will come back to what we're doing, but it's focus on cost, it's focus on capital turnover, and that is something we will address today. When it comes to investment properties, we announced it two years ago. The first year in operation was 2022. We managed to transfer three high-quality, very good location office building in Sweden, 2 in Malmö, 1 in Stockholm. So at the Q3 now, we had SEK 3.7 billion in the portfolio.
After Q3 was closed, we added another building, Stockholm Four, just next to the previous one, office building within investment properties. So now we're at SEK 4.5 billion. And the ambition is clear. We're aiming at building up a portfolio between SEK 12 billion-SEK 18 billion over time, over some years. And we have the capacity to do it, we have the competence within our company to run such an operation, and we can see that we get the benefit. We will create stable cash flow over time, and we will also gain more value out of it. Since we are developing an area like in Stockholm now, but also in Malmö, we can gain value over time as we develop a whole area.
So there's many, many opportunities to create more shareholder value from this, stream. Critical, of course, to maintain a financially strong position. This is, one thing we measure here. We have an adjusted net debt or net cash position over time. You can see it here on the slide. This is going, five years back, the development. We also see the dotted line, which is our limit of, minus SEK 10 billion in adjusted net debt. We're not close to that, which is good in such a market situation. We are determined to keep a financially strong position. And now, especially now when the investment transaction market doesn't really work, it's even more important to safeguard this, and we will go into this, what we're doing here, and what our focus areas are.
But again, we are determined to keep the strong position. If you look at the other areas where we measure targets, we have a target for the carbon emission, to reduce that with 70% until 2030 in our own operation, and this is a visualization of that. We can see how it go down. We have a baseline year of 2015, and so far, we have been able to reduce it with 58% in our own operation, and we are good on our way to reach the midterm target. The ultimate target is 2045, when we should be net zero in the whole value chain, and that means Scope 1, 2, and 3. With that, I will bridge over to another important area, which is sustainability and digital transformation. So I welcome up Lena Hök and Ståle Rød.
Starting off with the market perspective when it comes to sustainability and innovation, important to notice that the built environment stands for approximately 40% of the energy-related carbon emission. That means that there is a tremendous focus on our industry when it comes to being part of reducing carbon. Equally, it's also an industry that is part of the solutions needed when it comes to the climate transformation. Looking into the IPCC report from the UN, several of the key solutions that are needed in order to handle the climate transformations are within infrastructure and buildings, and you can see some of them up here. The need to transform and shift from fossil energy is also a need to turn towards electrification, and investments in clean energy and energy efficiency is therefore put on the table.
Equally, a shift towards increasingly more public transportation or low-carbon transportation infrastructure. For Skanska, it stands for about 30% of our revenue last year. From a city perspective, a lot of the carbon emission stems from the buildings, so how to operate the buildings, the energy needed to operate buildings when it comes to air, water, and of course, heating and cooling the buildings. Therefore, there's also a need to retrofit and refurbish and have a increased energy efficiency in buildings. Refurbishment of buildings was about 11% of Skanska's revenue last year. And equally, of course, decarbonization of materials. Some of the heavy emission materials are cement, concrete, steel, aluminum, as well as asphalt. All of those needed to be increased resource efficiency, as well as focus on how to shift towards circular solutions, as well as renewables and low-carbon solutions.
Unfortunately, there's also a need to safeguard the built environment and safeguard people's health and safety and societies when it comes to extreme weather event, which also means a search for resiliency or climate adaptation solutions. Foremost, I would say floodings when it comes to the built environment. So in all of this, there are driving forces creating a market potential to do a shift within our industry, and of course, to acknowledge that once the sustainability performance is also valued, it needs to be standardized and defined how you are to follow up on that performance. And that's why there are mandatory sustainability disclosures being pushed forward in several markets. In EU, it's both on environment, social, and governance aspects, but heavily focused on climate and carbon.
There's also pull when it comes to mobilize capital for this transformation, and that's both when it comes to public spending, but also on private. And I guess that some of you have considered the risks and opportunities when it comes to ESG for our industry and others. Equally, also a push when it comes to changing our building codes or customer needs and customer targets. For example, when it comes to energy efficiency of building, being both something that is cost efficiency, having an energy-efficient building, but also a push when it comes to building codes. In Europe and EU, that is stated when it comes to regulatory or energy codes on energy efficiency of buildings.
Also, in the U.S., for example, in New York, you have the Local Law 97, as it is called, that is stating requirement on energy efficiency on existing building, and for those buildings that can't meet those requirements, there are also fines. So all of this, having a push for transformation at the market, including then retrofitting resilience and customer needs. It is from this context and a backdrop when it comes to this market opportunity that you should look at the Skanska climate target and our climate plans for us going forward, and as Anders mentioned, heading towards net zero. And for those of you that have been out on the High Speed 2 project. You have heard about the net zero mindset, how to increase improvements, and how to reduce the need for materials or energy with smarter solutions.
So we have set forth an interim target, both on Scope 1 and 2, that is the energy we use in our own operations, so electricity as well as the fuel. And of course, first and foremost, how can we drive for efficiency to reduce idling on machinery, smarter planning, and logistics to reduce transportation? How can we shift to renewables or electrification of heavy machinery and transportation? That's a journey we have embarked upon. We have a good progress in that. Equally important is our Scope 3 emissions. So those stem foremost from our project development when it comes to materials, as well as the energy needed to operate the buildings during their lifespan, that is 50 years.
So for us to ensure that we are optimizing the design and the planning and procurement of the materials, equally, if we are to design a building that is mostly energy efficient or even producing its own energy, and by that being an energy plus building, that, of course, is also having a customer value by itself. When we are doing this, we are also acknowledging the need for new solutions and innovations, and that's why our innovation portfolio has about half of the themes are actually connected to sustainability, and some of those tools are, of course, the digital ones. Anders talked about the knowledge of Skanska and the possibility we have to transfer knowledge and expertise across markets.
So taking one example when it comes to that, some years ago, we acknowledged the need to have a data or digital tool when it comes to doing carbon reporting and follow-up of projects in the U.S. market. And we transferred the knowledge we had on that in our Swedish business to our U.S. business. Together with partners, we developed a tool called the Embodied Carbon in Construction Calculator, EC3, and we made it open source for everyone to use at the market. It has become a tremendous success. Today, we have 168,000 environmental product declarations in the EC3 tool. That means that we and others and our partners can easily use the tool when we are doing designing, procurement, or following up on projects, and we can show our customers the carbon impact from our projects by that.
Of course, for Skanska, we are gaining the knowledge also onwards, because we are part of the board of the EC3, meaning that Skanska, together with some major tech companies, are still engaged in how to develop and follow up on the data needed when it comes to do carbon reporting from projects. Adding on as well, when it comes to using our different business streams, we have our construction, our project development business, and our investment properties business, where we can take more of a long-term view, understanding the usage and how you are managing the buildings.
By that, using the different sensors and building an ecosystem when it comes to the data and the monitoring and the usage of building, when it comes to the usage of room, the air quality, the energy, the water, all of that giving our customer a value, also giving us and our construction stream a value to understand how to most efficiently operate and use a building in a way that comes our customer to a great value. Moving on, when it comes to efficiency, Ståle, you have some examples from Norway.
Yeah. Thank you, Lena. And as Lena says, when the buildings now become a bit more advanced and more complex in terms of technology, we need to be able to control them and to steer them. So just to give you some examples of what we've done, through our partnership in Senergy, we have created a software engine called Simien. And that software engine, that allows property owners actually to fine-tune the performance of their own building portfolio in terms of energy efficiency and indoor climate, which is crucial going forward. So this is a fantastic tool that is available out there, used by both private and public clients of us. Then you heard Anders said our construction business is a big portion of what we do, and you will hear later on today that our civil construction is a significant part on that.
We work with how to improve the productivity, the cost efficiency, and also reducing our CO2 emissions on the civil side. One of the digital tools that we have developed there is a software solution through a company called Ditio that we are now using in several of our civil projects. You can say all the civil projects in Norway, and now we're trying to scale that up to different market. The Ditio solution enables you to do efficient fleet management, in particular, in project where you have a lot of mass haulage. You're moving dirt, you're moving rock, through the project.
So to have an efficient fleet management and good logistics in the project, enabling you to reduce your idle time, a better mix of machines, and then you can reduce your fuel consumption. So you have more efficient production, and by that, you also reduce your CO2 emission. So this is a fantastic tool that we're using, and we see great potential across the group, and you will hear later on today, civil construction in U.S., for example, a great market for us. So you can say that the construction industry and Skanska is really picking up in terms of digital technology and how we use that in our project. And these technologies that I explained, they are now being successfully used in projects and in region.
For example, through drones and robots, where we do image and video recognition, et cetera, et cetera. But to be able to scale up across a diversified and also decentralized company like Skanska, we need to have a true digital ecosystem where data flows without, in a way, barriers across our group. So to make sure that we can create that is essential. Because we harvest and we generate a great amount of data in our business every day, and obviously, all of that, using generative AI and also a great language or a large language module to optimize our performance, our productivity, that's a huge potential for us. But going back, in a way, to the, to the basis, making sure that you have an ecosystem where there's free flow of data, so you can use it through machines, through units, et cetera.
We have worked for some years on the basis of a clear data strategy, where we have selected and prioritized what kind of technology we use, what kind of platforms we build everything on. We have also worked on standardizing certain processes across the group, so we're able to share data across units and, as I say, across regions. And now it's about implementing all these great tools and digital processes that we have, ensuring that we can increase our productivity, we can increase our cost efficiency, and we can reduce our CO₂ emission. Like this picture from an R&D project we had in Norway together with Volvo, Ditio, and SINTEF, where the ambition was exactly that, to reduce our CO₂ emission, improve our productivity, and our cost efficiency. So that was some words about the digital transformation.
Now, we'll dig a bit deeper into our great company and give you a business stream update. I welcome on stage, Anders again, and Richard Kennedy.
All right, business stream update, and myself and on stage, I have Richard Kennedy, heading up-
Hello.
our U.S. operation, construction operation. So we'll start with the construction. Construction, this is, I addressed it in my introduction here. We have been in a strategic shifts in 2018, being more selective, being more careful what project to go for, and to make sure that we go for project where we can see the competitive advantage, that we have the right team in place, and we have a profitable track record, so we call it our sweet spot. So we did that exercise a few years back, looked 10 years back, and saw where have we performed and where have we not performed. So we have been very selective in that. And if you look at what we're doing, we are having external and internal contracts, of course.
We are in the social infrastructure, and we are in the mass transit, like rail, subway, subways, airports, and so on. Infrastructure, regular infrastructure, highway, bridges, tunnels. We have commercial offices in our portfolio, and also, of course, residential homes for people. And if you look at the portfolio, we have a quite a balanced portfolio. We are diversified both when it comes to segments, but we're also diversified when it comes to to geographies. And 44% of the revenue, this is also a three years average that you see here on the whole, on the whole page. 44% in U.S., which is the strongest market right now in construction. We are in the civil and building operation, and we can see that the market outlook is strong, and we are also growing that business.
When it comes to Nordics, 40% of the revenue, mixed picture, both in the Nordics and Europe. More stable on the infrastructure, the civil market. More, weaker outlook, on the building sector, driven by a weak, residential and commercial, office building. Interesting to see our backlog here in the right-hand side, upper right-hand side corner. The non-residential building is, 51%. 44% is, civil construction, and there's quite a small part is, on, on the building, residential construction, and a very limited part, 1%, in the maintenance, facility management. We have some of that here, here in the United Kingdom, successful business. And the revenue in the three years average, rolling twelve, SEK 147 billion. The vast majority of employees is here, close to 26,000 employees.
Also, you can see the interesting information, I would say. You get this later on as well. Here you can see the split between public customers and private customer in each sectors, building, civil, residential, and service sector. For example, civil, we have the vast majority are public clients in that sector. The strategy has yielding strong result. It's profit before volume. I think this is a good illustration of that. Here you see the blue bars are the revenue, and the green line is again, operating margin, rolling twelve over time. You can also see that we prioritize profit before volume. During the pandemic, we actually went down with the revenue, and which was natural because we didn't chase volume at that time.
We reduced the cost, kept the discipline, and continued being selective and restore kept the profitability on a really high level. So being selective and disciplined, that is key for success here. We also have a strong order backlog, and we can see that the backlog today, we saw in the last quarter, are on a historically high level. And you can also see the dotted line, the book-to-bill development over time, 107% last quarter. So, I'm confident with the backlog. It's a healthy backlog. We have been able to churn this backlog during the last five years to today. The project we have in our backlog today is project that we have won under a new bid regime. So, with that, I hand over to Richard.
Thank you, Anders. Okay, good afternoon, everyone. So Anders just talked to you about our backlog in construction, and as I stand here today in Q4 of 2023, I feel very enthusiastic about the results that we will deliver in the coming years out of that backlog. I'm also very enthusiastic about the profitability that we've been able to deliver in the construction stream, bouncing back from some of the lows and challenges that we had in 2017, 2018, and so forth. I mean, the green line has gone up. First and foremost, that has gone up on the back of the work of exceptional teams that we have out there on our projects. I hope some of you had the opportunity to meet some of those people when you visited HS2 today.
You know, in Skanska, any project you go to, we have fantastic people. We have some of the most talented people in the construction industry working on our projects. I'm proud to stand on the stage and represent them, and talk to you about the results that they deliver. It's our job as a management team and leadership of the company to make sure that we set up our project teams for success, and we do that through successful risk management. Here are some of the elements. Sorry, I thought that was already out there. Selective bidding, you've heard that a few times today. Selective bidding has been our mantra for several years now, focusing on the right projects in the right locations with the right customers, the right contract types, the right margins.
These are the parameters that we look at every single project that comes, every single project opportunity that comes in the door at Skanska, and if those parameters aren't there, we don't go. The same thing goes with the right team for every project. I just talked about our exceptional people, our exceptional teams. We need to make sure as a management team that we are bringing together the right company, competencies, and experience, so that we can put the right teams out in the field and help them to deliver successfully. I'd say in the past few years, that's become a much more, open discussion amongst us as a leadership level, working with our business units to make sure we have all the right people out there to set them up for success. Managing material price and availability risk, and securing subcontractors and suppliers early.
This is a complex business. We have to pull together labor, materials, subcontractors, designers, other consultants, in order to meet our time and budget obligations to our customers. In the past couple of years, it's become very intense with increased inflation. We saw huge spikes in inflation in 2021. We saw a supply chain availability of materials and so forth get really stretched out after COVID and with the war in Ukraine in particular. As a leadership team, we pulled back as part of our risk management process, and we focused the company on inflation and supply chain availability in particular. Now, our teams always look at these things. This is just part of our day-to-day business. But when things get intense out there, it's good to step back, look at things more carefully, and that's what we've done in the past couple of years.
I'm very happy to say that our teams have delivered exceptionally well through the past couple of years. We haven't seen any big hiccups in our business, either because of inflation or because of material unavailability. And it's a testament to our relationships with our customers, too, that we haven't had a lot of claims around that. We've had good dialogues with our customers, helping them to find solutions when, for example, a tile is not available or some piece of equipment that they're looking for, help them find a different solution, bring that to the project, meet their needs. That's what we do every day. Something that's come into effect in the past couple of years, in the past five or six years, I'd say, that's good in our markets, is early contractor involvement. Typically, in construction, we've been a bid build contractor.
If you go back in history, we get a set of plans and specifications from our customers. We bid against a competitive field. We provide a price and schedule. We win on low price, and we go. Our building business in the U.K., our building business in the U.S. is different. It's more of a construction management business, where we get in early with our customers. We work with them on scope, schedule, and budget issues. We help them pull the project parameters together. We help set the table in the right way. It helps us to reduce our risk and set us, the whole team, up for a more profitable project. We've seen more of that come into our markets in the past several years, including on the civil side of our business, and that's a good development. We hope that continues.
See here, conservative claims management and profit recognition. We're conservative by nature as a company in the way we keep our books and account for our projects, and Magnus is gonna come up later and talk about that. That applies to conservative claims, how we look at claims with our customers, and how we recognize profit. If I look at when I stand back and look at the forecast for our projects in terms of their performance and their ultimate profitability, there is a bias to the upside because of the way we account for things. And finally, our internal project tender approval process. This is the foundation for all the projects that come into Skanska.
I joined this company in 2004, and I've been working with lots of great people over the years to help us develop and evolve our approach to risk management. I think it's very, very good right now, and we're working to continuously improve it. We work with our business units down at the regional level, at the business unit level, at a management team level, and also with our board of directors when they review projects. This helps us all, the system that we've developed, to have the right conversations about the right projects, the right ways to deliver our customers' needs. It's a very good process, and again, we're working to continuously improve that. Here's an example that we've introduced in the past few years: portfolio management and risk assessment.
We have a large portfolio of projects across Skanska. We work in a diversified business, as Ståle said, across a large geography. We're in Finland, we're in Sweden, we're in Norway, Czech Republic, Poland, the U.K., the U.S.. We have different contract types, we have different customers, we have different local customs. Sometimes all of these differences can obscure the risk in our projects, so we created this model, if you will, to help us step back as a team and profile our projects on a consistent basis. We rank our projects by risk. If you look at the bottom part of the scale here, you see variable price and scope of responsibility.
So if we have a small project in terms of its value, say, in the U.S., say, a $20 million project, and it's build only, that would be plotted on the lower part of this model. If we have a higher priced project, say, a $1 billion-dollar design build lump sum bid project, that would be all the way on the right side of the project. We have both of those types of products, projects in our portfolio and everything in between. Again, this is just a model. It's part of our risk management process. It helps us as a team to step back, see the portfolio for what it is, and make sure that we're working with our teams to get into the right projects the right way. I think it's been a very good development for us.
So what is the commercial direction in construction? Selective bidding, you've heard that a few times now. Prioritizing stable and strong profits before volume. This has been our mantra for the past several years. This is what has moved the construction profitability up, if you've seen, above our targets for the past couple of years. This is our North Star, and we're going to continue following it because it works. Profitable growth in markets that support this. Anders talked to you about some of the market dynamics that we have in construction. We're weaker in some of the building segments. We have some tremendous opportunities in infrastructure. Norway, Ståle is in front of me. We've secured some really great projects recently in our Norwegian business unit, in the infrastructure market. Same thing goes for the U.S. market. We're gonna talk to you about that later in the day.
Building and civil infrastructure, very robust market opportunities for us. We're set up to go win those opportunities the right way, and we're gonna do that. Seize opportunities in the transition to a sustainable built environment. Lena just talked to you about, in length, about sustainability drivers in our markets. That is real. That's... We've, we've been on that journey since I joined the company, again, 2004. We've been talking about green and sustainability for a long time. Before it was kinda hip to talk about that, we were talking about that. Now, I think the market is meeting the competency and experience that we have. We see that here in Europe. I see it coming to the U.S. We're very well set up to help our customers decarbonize, get better energy efficiency.
It's all about being better stewards of our environment, making more money for our customers. It's all coming together in a great way, and we are very well positioned to deliver that. Increasing strategic focus on digitalization and new technology to improve productivity. Ståle just talked to you about that at some length. I think we're at the near beginning of our journey in that. We have a ton of data in this company. We're harnessing that. We're normalizing and harmonizing the platform across our construction stream. We're finding ways to create tools like EC3 and Ditio and other tools that we can use to help our teams be successful, get out there, meet our customers' needs, and it's all built on top of an innovative and collaborative culture that we have developed in Skanska over many years.
I watched a video last night. I just happened upon it on our intranet, of about 45 people in the U.S. working together, talking about how they are going to deliver innovative solutions to our clients in different ways, sharing resources, sharing ideas and opportunities. It's such a good culture we have in Skanska. Again, built on top of exceptional teams with the right idea about how to serve our customers. Finally, staying close to our customers to sharpen our offering and solutions to meet the customer needs of tomorrow. Anders said earlier, we're nothing without our customers. That is true. We showed you a film earlier. It talked about the repeat business that we have with our customers. It's over 80% in this company. You don't get that if you don't deliver. We deliver exceptionally well to our customers.
We love to continue to work with them, stay close to them, understand what they need to deliver to the market, and that's what we're doing. So I feel very bullish about the commercial direction of our construction stream as we stand here today in 2023.... With that, I think we will now turn it over to Ståle to talk to you about residential development.
Very good. Thank you, Richard and Anders, and I will say some words about our residential development. Just to clarify that first, we do residential development in two streams: the business-to-consumer stream that I will present, and then we also do residential development in the commercial development stream through multifamily. But we do residential development, where we develop, and we build high-quality, energy-efficient, and sustainable homes for our clients. When we say develop, we go out there, and we buy land. We take the land through the zoning process, then we design good homes, we build it, and we hand it over to our clients. In this stream, it's mostly multifamily homes that are owner-occupied or owned by association. Big part of the volume in Sweden, for example, is sold to associations.
Anders mentioned, this is not the biggest part of our business, but it's an important part of our business and has been over many years. 10 years, or approximately SEK 10 billion in revenue over the last three years as an average. We have today a booked value of approximately SEK 22 billion in this stream, and you can see here that the revenue comes mainly from the Nordics. 83% comes from the Nordics, and then the remaining part comes from Europe, and majority of that is Central Europe, with Poland and Czech, minority part here in the U.K. through the concept of BoKlok.
When you look at the 83% in the Nordics, approximately half of it is in Sweden, and the other part then is in Norway and in Finland. This has been a good business for Skanska over many years. As you can see from this graph, you see the revenue here with the blue bars, and then you see this, I would say, light blue or grayish line, which is the underlying performance, the EBIT margin of this business, and it's been very good and stable for the last decade. Obviously, everyone is aware of the market situation now within property development, both on commercial and residential, and obviously, that is also affecting our profitability as of today.
So you can see that we are being hit by the difficult market situation. Our profitability today being hit by the impairments we've done in the last period, but mainly due to the result of the low volume, where we are being eaten by our own sales and admin cost and our, in a way, ability to adjust fast. So in this stream, it's very important that we're taking actions to adapt to the current market situation, and we are doing that across the streams where we are producing a residential development. We reduce our sales and admin cost now to adapt to a different market situation with lower volume that we think will actually last for a while. We do, however, do production start in selective locations with the right products.
We are still selling apartments to customer groups, so we are focusing with the strong balance we have, that we can actually start projects also in this challenging market. As always, project execution, to make sure that we execute the projects in a good way, that we complete, and that we get the handover to our clients, so we can collect the cash back into the company. It's important, and it's also important that we manage, in a way, the buildup of potential unsold completed units. That we have a good churn of the unsold completed units, so it's not growing old on our balance sheet. I will come back to that later on. We have this concept of BoKlok, low-cost homes, affordable homes, and that market has been hit significantly now. So these, say, this customer group that had...
Could hardly afford homes in the start. They are really being hit by the high interest rate now. So we have a turnaround ongoing in our BoKlok concept. We have decided to leave Finland and Norway, so we're focusing now on Sweden and on U.K. And we have a turnaround ongoing also in these markets to adjust to the market situation. Obviously, we are not selling that much now, but we have a good land bank, and we are focusing on making sure that we deliver long-term value to our shareholders. To make sure that we get our land through the zoning process, so when the market picks up again, we have something to sell, we have projects ready for our customers.
And then, despite the fact that the Nordic market is being particularly hit by the market situation now with slow sales, we're selling pretty good in Central Europe. In Poland, in particular, in Warsaw and Kraków, but also in Prague. So to utilize the momentum there and make sure that we get as much out of the good situation in Central Europe, that is something we're really focusing on. Next slide, you can see that we have had approximately 7,000 units in production over the last three years. Obviously, when the market situation is like it is now, it's about, in a way, being very selective in new starts, so you don't end up building a portfolio of unsold completed units on your balance sheet. And I would say that we've done that in a pretty good way.
Obviously, it takes time to do this, but you can see here from the graph that actually our units in production goes dramatically down. And that gives the effect on the, also the unsold in production, unsold units in production. You can see that steep curve go, the unsold units in production. Slight growth in the unsold completed project, but as I say, we are focusing very much on making sure that these units are not getting old on our balance sheet. So this was the situation as of Q3, where we had, just below 400 units, unsold, completed units, where approximately half of this is BoKlok concept. And only 44 of them are more than a year old.
Majority of them are less than six months old, showing that we're handling the situation very well, making sure that the unsold completed units are not getting old on our balance sheet. So to sum up, the commercial direction on residential development, obviously focusing on sales, sales, sales, making sure that these units are not growing old on our balance sheet, that we have products to our clients. We're doing what we can to reduce, I'll say, snagging costs across the different streams, adjusting to a lower volume that we think will last for a while. We do, however, do project starts in selected locations. And as I just said, Central Europe is a good market for us, so we are looking for how we can utilize the potential in the markets where we have right locations, right products to our customer group.
Always, it's important to look for cost synergies between the development arm we have and the construction arm. I think we're doing it pretty well, but as Anders and Richard said, there's always a potential to improve our performance. And then we have some great concept, and one of the things then the learnings from the, in a way, what happens in the, in the energy market, where the energy prices goes up, is that, our customer, they are a bit more interested in their own energy bill. So if you can provide them with good homes where they can reduce their energy bill, that is a concept that works on a private economy. And we have good concept for that. So today, we're building our Powerhouse residential project in Norway, in Trondheim, in Norway.
That is a project that, when you move into your apartment there, you will just have a portion of the energy cost that you have in a normal home, and we see potential actually to scale that concept across our different business unit, to other parts of the Nordic market, and first and foremost, also Central Europe. It's a great potential for us. That was some words about our residential. Now, we go into commercial. I welcome on stage, Claes Larsson.
Thank you, Ståle. This is then what we do in commercial property development. We shape sustainable and smart places where people can work, live, and connect, and we have a couple of different project concepts. Offices has been and will continue to be the core product in this stream, but we have also lately stepped up within residential rental, as Ståle said, which is then rental homes, called multifamily in the U.S., that we then sell to investors. Then life science, very interesting market in the U.S. We have been in that sector before. Now we are planning to return and have secured an interesting pipeline for the future. And then we've also done some portion of industrial, mainly logistic facilities in Sweden through the years. Snapshot of this stream then.
You know the format, so this is the revenue, average the last three years, and allocation between the U.S., the Nordics, and Central Europe, where we have this business. SEK 43 billion in book value, end of Q3. And the market, we experience, obviously, quite challenging markets right now, but it's a mixed bag, so I will run through a bit the overall messages here from us. The leasing market is very slow in the U.S., or slow. I would say it has picked up somewhat this year, suffering quite a bit from back to office. It's a very strong labor market in the U.S., but a lot of people still want to work from home, and companies are trying to get them back.
So it has been now hovering around 50% back to office for quite some time, and this need to shift before companies then can take decision on the future space need. So a lot of hesitation in the market. They need quality space. We are in dialogues, but they don't know exactly how much space before the situation, the post-pandemic effects have settled down. More stable in the Nordics. We are signing leases on a regular basis in our Nordic markets. They are smaller than they used to be because we have, to some extent, the same issue here, that you are hesitating about what kind of space do I need in the future. The strongest leasing market right now is actually in the core markets in Central Europe, and that is Warsaw. I would say also Prague and Budapest.
We have presence in a couple of other cities in that region, but and we also have some weaker markets, but definitely in the core markets, it's a much stronger leasing market, and we'll come back to that and show some numbers and graphs later. Investor market across the board, challenging. You all know that. The interest rate hikes in all markets has made investor hesitate quite a bit. I would say in we don't engage in that many discussions right now in the U.S. We just have one completed projects. We see more activity, definitely in Europe, more dialogues and discussions, but hesitations and hard to meet the pricing expectations from seller and buyers. So a bit hesitating markets, definitely, but better, I would say, on this side of the Atlantic than in the U.S....
Of course, if you don't divest that many projects, we have divested—you saw that in Budapest; we have done some small transaction in Sweden. Then of course, the EBIT effect will be visible in this page. The good thing is that we still have the properties; we can lease them up and get the net operating income from them. But this is then, of course, the effect of less transactions carried out. So what are we doing right now? We are focusing a lot on leasing the properties. We still have vacant premises in some of the properties, and then we lease them up and wait for the investor market to heal. And if you see here, this is a 10-year perspective on the leasing. We had the peak market or peak performance, I would say, 2018, more than 500,000 square meters.
We have gone down, obviously, for known effects, the pandemic, and then terrible war in Ukraine has hit the market. But now we hope we have bottomed out and are sort of increasing the leasing on a rolling twelve. Point out here also, you can see the strong performance in Central Europe, which is a light blue here. So a lion's share of the rolling twelve is actually done in the core markets in Central Europe. We're also leasing better in U.S. this year than last year, a very low level, 2022. We're going down in the Nordics, but that's not because the market is bad. This, this is because we have a very high leasing ratio in the Nordic portfolio. I will come back to that also later. But we feel good about the current leasing activity in Europe, definitely.
I think it's also a sign of strength that we're leasing more this year, despite that we don't have started that many projects. We have not added a lot of vacant space to work with. This one, you following our quarterly reports know the format. I've done one change on this. I will go through that. But first, you see the completed projects, close to SEK 10 billion in book value right now. The good thing is that it's quite high leasing ratios, 76%, pretty solid number, given that we have had some weaker markets lately in leasing. We will add some more projects in Q4. They are even leased to a higher extent, 86%.
Then the change from what you have seen in the quarterly reports is then the light blue parts here, where we single out the completions of residential rental project, and they are empty by design until we open the lease office, and we do that maybe a, a couple of months before completion. So the lighter blue parts that has is 0% leased is not a concern. We haven't started to lease them yet. So the full focus here on this graph is obvious to lease up the dark blue space for the completions 2024, and of course, continue to raise the 76%. So we feel that we have a good bunch of projects here ready to divest when the investor market heals. And the SEK 10 billion, if you take a more granular look at it, 21 completed assets.
It's 10 in the Nordics, and it's leased to 80%, so they don't have that much to lease. That's why you're dropping down here on a rolling twelve. Central Europe, as many projects, leased to 66%. I would say, in general, we have very high leasing ratio in the core markets. We have a couple of low-performing assets in regional cities with lower leasing ratio. Otherwise, it's pretty solid, some of the projects also in Central Europe. And just one project is completed in the U.S. with a high leasing ratio. Then a bit about Started by talking about the concepts here, and we used to be a pure office developer. 10 years back, you can see the breakdown in ongoing projects, 95% offices. We had some life science at that point of time as well.
Then we stepped up five years later, more rental residential became visible. That part is much bigger now in 2023. And then if you take a look at the future here, which is the land bank, the stack bar to the right, and what you can expect out of that. Of course, this is over a longer period of years. But then we have a quite substantial opportunities within life science in the U.S., and still also rental residential, and then office is down to maybe a bit more than 50%, but that will still be our core project going forward product. Commercial development direction, commercial direction forward here. A lot of focus on leasing right now, since the investor market is what it is.
We are actively out there trying to work with divestments, and we succeeded with some deals this year, and we will continue to work on the ones where we feel that we can get a good pricing for our assets. But it's a bit inert in the system, as I said, and we rather wait than to get the proper pricing and continue to lease up the assets we can create the full value from them. And of course, capital efficiency is important. That's why we obviously work all the time also with the divestment work. And then develop future pipeline, we do that always. We have a land bank. Some of it is not even zoned, some is zoned, but you need to change the zoning, some need building permits, et cetera.
We try to get as many projects as possible, shovel-ready, as we say, so we can kickstart them then when the market is back. We still do selective project starts. If the prerequisites, the market is right and still strong, we have the financial muscles to start, but we are very, very selective right now. Then, as I said, we aim to increase the diversification of asset types here to move into other sectors and also to expand in the already present sector, residential rental. Then you've heard a lot about sustainability and innovation, and it's so important that we have a super strong customer-first mindset there and listen to the tenant and investors. What do they want? And shape our workplaces for the future and our homes for the future, along the demands that the, the market currently require. With that, I move over to......
The last business stream here, which is investment properties. Here, the thing is to actively manage a high-quality property portfolio in Sweden. Why do we do this? I mean, obviously, it's a very stable cash flow for the group, constantly increasing here. We also believe there are strong opportunities to create further value over time. Anders was alluding to that in his opening remarks. The current portfolio. We have three assets under management, very high leasing ratio here. We added a fourth one, as you heard earlier, the Stockholm Four, to the portfolio. If we go in a bit more into what kind of progress is it here? We have two of them in Malmö. Those of you who know Malmö, this is in the so-called University Peninsula area, which is in the city center of Malmö.
We have two projects there, Epic and Aura, not that far away from each other. Very high leasing ratio, as you can see, 195%. Super strong sustainability credentials, definitely, and also well-certified buildings. Then we added Stockholm One as well, and Stockholm Four is then an adjacent building. If I talk a bit around what criteria do we have when we transfer them to investment properties, I mean, they should be at least 80% leased. They should be at least 60% occupied. They should be office projects, obviously, in Stockholm, Gothenburg, and Malmö. We see an extra, I would say, plus if it's multi-tenant building, because then we get a larger interface with a lot of tenants. Then, as Anders was alluding to, if we have a big campus or a multi-faceted projects, we usually do the placemaking.
We do the first project, might not be top value on that one if it's a single asset, and then we continue work our way through a campus, and when the campus is completed, then we have created much more value in the first place. So by keeping assets close proximity to each other, belonging to a campus, we think we can drive future value in the earlier phases. So those are the criteria. We take the decision late in the process when it's time to divest. So even if we have more phases in Stockholm One, a future decision to divest externally or to investment properties is taken when it's time to divest. Commercial direction, we have said a portfolio of SEK 12 billion-SEK 18 billion is a good size to aim for.
Then we will have a stable, good, efficient asset management in these, these three cities. You reach some sort of critical mass where it start to become possible to drive synergies. Talk about future value generation. By actively managing this portfolio of asset, we believe we can create, in addition to the net operating income, also further value out of them. Also, of course, sustainability and innovation in focus, and here, going back a bit to what Ståle and Lena talked about, capturing data. This is a unique opportunity. Actually, we own the data in the investment properties. We can capture data from customer survey, energy efficiency, air quality, et cetera, and all that is then analyzed and fed back to our development business and to our construction business.
So by actually capturing and analyzing the data, we call it the feedback loop, we can become a better developer and contractor, and also offer a best, better product for our customers going forward. With that, Antonia.
Thank you, Claes, and thank you to all of those that have been on stage this far. We will now break for a short leg stretch, refill our coffee cups, and then we will be back here in 10 minutes to continue the presentations with group financials, targets, and the Q&A session. For us here in the room, we can find coffee and refreshments at the back end of the, this room. Meet you back here in 10 minutes.
Hello, everyone. Hello, everyone. We will begin in two minutes. If you could take your seats shortly. Thank you so much. Two minutes.
Welcome back. So we are now starting our second session here, or the second section of the first session. We will now go through our Group financials. We will take a closer look at our operational targets and our ability to perform on them, picking them apart a little bit, and we'll also look at our financial position, taken together with capital allocations and capital commitments going forward. To present this part, I welcome on stage our Group EVP and CFO, Magnus Persson.
Thank you, Antonia. I hope you can hear me all right. Yep, you can. So, I will take you through an update on starting with construction. We will look at profitability, but more than history, we'll look a bit at things that are important for us to know that you understand when you interpret our company and how we're going to perform forward. We're going to look at product development and property investments, obviously, balance sheet, and liquidity. I think that this summarizes the slides I'm going to show you. We start with construction. We normally talk about the performance in construction in terms of EBIT. You all know this, EBIT margin, nominal EBIT, and so on.
Internally, we spend a lot of time, looking at S&A and gross margin separately, because in terms of, S&A, as you can see, it's- we have been working very hard with this, to keep it flat, and it's a bit of a challenge sometimes in the construction business, because it is a type of business that is cyclical. It moves up and down with various things, and you always have to be active in managing this. You can never sort of lean back. And as you can see here also, we've been quite successful.
We've been keeping it at very stable, just around 4% or a little bit above 4% historically, which we find is a reasonable and very sort of defendable level of overhead costs for a modern construction organization that has also ambitions to sort of continue to drive performance improvements. And of course, if you, if our ambition is to keep S&A stable, then the performance improvements needs to come from the gross margin then, obviously. So this is sort of the indicator we use a lot to look at how are we moving in terms of project performance. And by and large, this is a reading of project performance. We also have some smaller businesses in industrials and so on, but a lot of this comes straight out of projects.
We have already, with Anders and Richard today, you've seen similar, similar graphs, and we have discussed why this has sort of happened, and all the actions we have taken to manage this performance improvements over the last five years or so. But the important thing here is that we need to work—we keep S&A very stable, and then we focus on driving increased productivity, increased efficiency out there in the operations. We do a lot of that. One thing that, for us, is extremely important, and that I would like to cover in some detail with you, is how we recognize revenue, and our conservative take on profit recognition in the construction business. It lies very close to our hearts.
And the way we do it on the visualization here, you have really one project that is bid on the, on your left-hand side of the, of the chart, and then on the right-hand side, this project is completed. It is 100% completed. So you can see the bid margin. It has a little bit of a circle. We bid this project at, say, 8% or something like that. Then every quarter, throughout the life of the project, we assess what is the most likely final outcome of this project. Okay? This is what we call the most likely margin, and that is represented in this example with the blue line.
And as we move a project, you know, you encounter unforeseen risks, and you encounter risks you knew about, and you deal with them in a good way, and you constantly reassess this. So the most likely margin will move a bit up and down over time, of course. The important thing here is that this is not how we recognize revenue from the project. The revenue recognition is done more cautiously, and if you look at the orange line, it says reported margin. That is, the margin we use when we value the project and when we recognize profits. And then there is a difference here. In the beginning of the project, it's a fairly large difference between the most likely valuation of the project and the reported valuation.
That difference is assessed based essentially on our risk assessment that we have for this project. If it is a very risky project, you will have a bigger differential, right? So the differential here is really to be seen as a risk reserve that we have in the project. Now, of course, as we complete the project, we complete risk by risk, and finally, we have handed over a successful project to the client. If you pick one of these things, take the erection of a steel structure, for instance, something that can go wrong in the worst case. So of course, we have assessed a risk reserve to the risks associated with this specific thing we need to do in the project.
When we have successfully erected the steel structure, we can remove the risk reserve, and then we increase the reported margin, and we get an increased profit takeout from the project. So this is a very good way to illustrate how we deal with risks on the cost side in the project. But it's not only on the cost side, it's also on how we recognize income- or how we recognize income from the clients. Because we are in a business where we sign an agreement with a client, and it is not particularly seldom that we encounter things that is starting to be debated maybe. Is this the client responsibility? Is it our responsibility? And no matter how precise you are in a contract, you can always end up in a bit of a gray zone.
So for us, we never take revenue that is uncertain in any way into our books. This is, like, a key tenet we have internally, and we follow this very carefully. We only recognize revenue where the client has signed off on an amount and that they will pay us. If there is any uncertainty on these receivables, we do not recognize them. We can still keep them in what we call the most likely outcome of the project, but we don't recognize them to profit. So as we move along with the construction operations, you have probably noticed over the last two years, you see a lot less write-downs, and this is because we are being conservative in the profit recognition of the project, in addition to us sort of successfully improving what will be the win for, and also the execution.
But this is a big and important component that I would like you to sort of understand in how we recognize margins here. If we look at, if we skip the example for a second, and we look at reality then, on this visualization, you can see also the most likely margin, still the blue line here. The yellow line or the orange line, that is the tender margin. And both of these margins is the average margin for the top 400 projects in Skanska, the 400 biggest construction projects, okay? So if we start with the, the most likely margin, then you can see that over the last 5 years, the most likely outcome of all the 400 largest projects we have ongoing, has actually increased by close to 2%.
Now, you can also see that, the bid margin has increased. So we have been quite successful with, bidding for piece by piece, a little bit higher margin. And, and how come? Well, we are working internally quite a lot with the risk reward function, focusing a lot on, on what are the risks, because this is very important in order to understand the profit takeout in the beginning of the project. And also to make sure that if we bid for a job and sign off on a bid margin, we need to know that we get paid for the risks we take. We just need to ensure that we don't accept risks that we don't get paid for. And we have been working a lot with this.
It's part cultural, it's part, sort of operation and how we steer things, but it's not, like a cost plus thinking. It is really what risks are we taking on, and how much do we need to get paid for that? And been quite successful in that then. The other thing that I think is very interesting to see here, that over time, if you back up four or five years, the most likely outcome of the project portfolio was actually below our bid margin. Today, it is above the bid margin. So we are now executing projects in a way that makes it possible for us to, on the average, for all of these large projects, have a most likely outcome of that is over and above what we bid the project for. So which really shows an improved execution ability in the jobs.
So that was some of the margin development. Then I want to look a bit on the backlog, because this is as far as indications about the future you get in a construction operation. You have a certain backlog, and if you understand the backlog, you understand the good part of the work that we are about to execute on. On the left-hand side, you have dead revenue, and dead revenue comes when we have a project that is assessed to be a loss maker, a project that we will lose money on. And according to accounting rules, if this happens, we need to recognize the full estimated loss for that project immediately in the isolated quarter when this project becomes a loss maker.
Any further work on that project really means that the revenue we recognize will have 0% margin, so it dilutes the overall margin of the construction business. Now, if you look on the charts on the left there, you can see that in 2018, we had net revenue to the tune of SEK 17 billion. That's 10% or 11% of the overall volume in the business. Now, this volume is SEK 4 billion. So of course, the dilution effect that we have now in the construction margin is a lot less than what it was if you back up five years. If you look on your right-hand side of the chart there, you can also see the backlog split, the whole backlog split up into margin segments, you can say.
And we have split the backlog into four different margin segments. One is one part is 0% or below, and it's the dead revenue. And then you have 0%-5%. It's essentially not covering S&A and some. And then you have 5%-8.5%, 8.5%, and above. And here you can quite clearly see also that over these 5 years, when we talk about quality of the order backlog, this is about the profit content on the backlog we are talking about. We are convinced that we have good jobs in our books at the moment. If you back up 5 years again, we had around 43% of the backlog we thought would close out when all those jobs were finished at 8.5% or above.
Today, that number is 60%. Given the volumes in play here, we're talking many hundreds of billions SEK, because these are a lot of jobs from start to end. This is a lot of money. So it's a good indication that when to why we say that we are comfortable with the quality of the order backlog that we have. If we look at revenue, then this is just a revenue development since 2018 up until today, fairly flat. I mean, I think we had SEK 158 billion revenue in 2018, and now we have SEK 162 billion on a rolling twelve-month basis. So not much has happened sort of on the top line. And in that, we have a foreign exchange effect. The Swedish krona hasn't been the strongest currency over the last years.
And on top of that, we have inflation effects. The current effect on this is around SEK 16 billion. So if you take that out, revenue or volume-wise, you can say, has been decreasing a bit. Inflation effects have mainly been coming up over the last two years. Unfortunately, they are very, very hard to assess because we have the project type of business, but they are to be seen on, on top of that. If we look forward, then at the end of the third quarter, we had around 105 billion of work that was in our books already and to be executed in 2024. So quite a lot of work, actually. 65% of the rolling twelve months revenue. And if we go back historically, we compare this to third quarters another year, it's actually a good number.
So we have, we sort of have a good outlook volume-wise for this volume. But of course, there's still work that needs to be won, and works that needs to be won and produced in 2024. But this is the way it looks today. So where we stand today, no major difference from sort of the last five years in terms of how much work we have already secured for the next year. If we look at the ambitions we have, and Anders and Richard have already been on this, we will continue to focus on profit before volume. We will, we don't have any plans to do anything else but organic growth, and we are quite satisfied with the geographical footprint we have today.
It's, it fits very well with the ambitions we have from a strategic perspective in the home markets that we are operating in. Then I would like to shift over to project development for a few slides, and this is return on capital employed in project development. You have seen this slide before today. Maybe not, it didn't look exactly like this, but, project development, that's residential and commercial development taken together. And for that, we have a target, financial target, saying that we should be at or above 10% return on capital employed. Historically, we have managed to do this. Over the last 10 years, we have, been at or above it, mainly above it, year by year.
But then you can note here, 2022 and the last four quarters as well, not rolling 12 months, that we're falling below here. The main reason to this is volumes, essentially. The property transaction market is slowing down or it is quite slow, and this impacts this return metric in two different ways. One is that we don't recognize as much profits as we would if we had full churn on the divestments. The other part is that the units or properties that we don't sell, they're still with us on the balance sheet. So it becomes a bit of a double whammy on a return target like this. You get the double effects here. And with the market being slow as it is today, there's very few transactions going on.
This target will be out of reach for the foreseeable future until the property transaction market comes back again. We really need to get divestments going, so when the buyer and the seller find each other again, price-wise, and we will start to see transactions going, then this can be in play again, but not up until then. I want to take a little bit of a dive into commercial property development. What you're looking at here is the market values for the unsold land, ongoing properties, and completed properties in commercial development. On the left-hand side, you have it in 2018, on the right-hand side, you have it the last quarter, then the third quarter.
So in 2018, we had invested SEK 40 billion at completion for all the ongoing projects, including the land we had and the completed properties. And the assessed market value of those assets was SEK 49 billion. And on the right-hand side, you can see exactly the same thing, but the different time periods. So when we are completed with all the unsold properties we have ongoing now, if we add to that the land we have and we add the completed properties, the total investment would be SEK 49 billion, and we assess the market value of that to be SEK 55 billion. So how do we assess these market values then? Well, for land and for completed properties and for ongoing properties, we do an internal assessment of the valuation every quarter. So they move all the time, depending on how the market shifts.
For land and for completed properties, we also have third-party valuations every year. We don't have that for the ongoing properties, and I will come back to the reason why. But of course, it's a bit difficult to have a good external valuation on a property you are building. We'll come back to that. You can also see here that the surplus values, which are, or the expected gains, if you will, once we divest these assets, they are represented by the light blue or light gray color. They're becoming smaller. The main reason to that is that yields are increasing on the market, essentially.
And we have today, it's a very low visibility on what is the value of these properties because there are so few comparable transactions on the market, and we can see that there is a spread between the asking price from seller and the acceptance price from the bidders. It's also hard to say how big the spread is. We make some very good deals. We sold the property in the third quarter to an excellent price, and we see these deals happening at prices that are really good, but the volume in the transaction market isn't really there today. If we move on to an example then, and this is an example project. So see this as one project. It is started on your left. That is when we decide to go ahead and make this investment.
And on your right, this project is completed, and it, the chart shows how it could look in a market that is sort of not so good, like the market is now. So if you look at the chart, you have the total investment for the project. It is essentially all the money we need to invest in this project until, up until it is completed. And then you have the light gray part. That is the sort of gain we would recognize if we sold this project today on the market, okay? So the big swing factor in that assessment is the yield. The top green line, that represents the business case that we underwrite when we start this project. And you note that that is lower than the light gray part there, right? So why do we underwrite so conservative business cases?
Well, the reason to that is once we invest money in a property project, we need first to maybe there is permitting left to be done, et cetera. Maybe we sell this project 2-4 years out in time, okay? So a lot can happen in 2-4 years. So we can't just take the current yield observations and apply that to future transaction. So we are being more cautious than that and say that there is a risk here, there is an uncertainty. So let's have a cautious business case. But at this level, we should probably be able to divest this property once it is completed. The difference then between the two green lines here, that is the surplus value that we communicate in our quarterly report that many of you read every quarter.
So that is based on our assessed business case versus the expected cost to complete the project. That is what you can see in the charts in the quarterly report when you read that. If we then fast-forward in time until this project is completed, you can see that, two things are happening here, and in this example, yields have increased. This is what has happened now. So the first thing that happens then is that the market value, the surplus value or expected gains, is falling, and it consumes the buffer we have over and above the reported surplus values or the communicated surplus values. This change, you cannot see. We can see it internally, but since we have a cautious business case, it's impossible to follow.
So this is the main reason to why you haven't seen a lot of changes to the surplus values communicated by us for quite some time. In the third quarter now, and also in the second quarter, we are making changes to surplus values, and that is because the yield increases are now to the extent that we are sort of eating up part of the reported surplus value as well, represented then by the... It says, "Reduced surplus value." So we're coming down between the two green lines here. So this logic is important to understand if you're going to sort of be able to decipher our reporting and what this actually means in terms of being connected to changes on the market. I move on. This is the total property investments we have and investment commitments.
In 2018, we had SEK 43 billion invested in residential development and in commercial development. It's the SEK 17 billion in residential and the SEK 26 billion in commercial development. The SEK 19 billion on top, that is the net investment commitments we had at that point in time. And these are legally binding agreements we have with someone, or the amount of money we need to invest to complete the ongoing development portfolio we have. So that was a SEK 19 billion in net investment commitment. If we move up until today, as you can see, we have delivered on the ambition we have had for a long time, or the strategy to grow project development. We have grown project development itself, SEK 22 billion over this period, and another SEK 4 billion in investment properties. We have reduced the net investment commitments quite a lot.
We are now at SEK 8 billion on that. So it's another SEK 8 billion to see through all the commitments we have with that. And in terms of the project development strategy, we've been aiming to grow this for quite some time, but given where the market is now and given the amount of uncertainty out into the future, the growth strategy is on hold now until we can get a better clarity out into the future. And in reality, it's also like this, that we have a lot of properties to sell. We don't need to produce more properties to sell. So once the market comes back, once it opens up, we have a lot of profit-generating capabilities already now on our balance sheet that we would like to turn into profit and cash, obviously.
In this also, I think it's important to point out that we will continue to build up investment properties, as you've seen already, according to the plan we have. Cash flow, this is 2 lines here, and the dark blue one is the cash flow from operations in construction, and the light gray one is the cash flow from operations in the project development businesses, because these are the 2 big swing factors here. Stable cash flow from construction, the chief thing to keep an eye on in construction, of course, except for project performance, which I already covered, is the net working capital. We have seen for, say, 4-6 quarters that the net working capital in construction has started to come down a bit, and there's nothing strange with that.
I think it's a bit expected because money is now, again, it starts to be tied to an interest rate, so money costs something also for our clients, and we have to work a little bit harder now to get these front-loaded payment plans that we have had or that builds up our Net working capital position. So I would expect if we look into 2024, because changes in this happens slowly, so once you are in a sort of in a trend, that changes very slowly. So probably in 2024, we will continue to see some reduction of Net working capital in the construction portfolio. But nevertheless, it still remains a very solid cash flow that comes out of these operations.
If we look at the light gray line, then cash flow in project development, it has a completely different dynamic to it. It's very volatile, and it depends on the balance between investments and divestments. So we have always a portfolio of started development projects, then we have investment commitments. We continuously invest to complete those projects, but cash inflow comes from us being successful on the divestment market. And if the market is as slow as it is today, of course, the cash flow from that angle shrinks quite a lot then. So that you can see also on this chart there with a fairly big negative cash flow in the last 12 months from here.
I haven't included investment properties here, but, but over time, as we build up that portfolio, this will be another, sort of source of stable cash flow, in addition to construction, to run our project development portfolio on top of. Net cash position, we had SEK 5 billion in net cash end of the quarter. We have a limit of SEK -10 billion in net debt, so that leaves SEK 15 billion in between there. And in relation to the investment commitments that we had at the end of the third quarter of SEK 8 billion, I think we look fairly good there. Also like to point out that net cash or net debt is not the whole story. We also need to make sure we have liquidity.
So at the end of the third quarter, we had SEK 16 billion available cash and undrawn credit commitments, and since then, we have issued bonds for SEK 4.7 billion and also extended one of our revolving credit facilities a bit. So we are now, everything else equal, compared to the third quarter, we will be at roughly SEK 22 billion now, of available liquidity. So very well stacked on the balance sheet and with liquidity, for the future. If we look at the capital position, we have grown equity quite a lot. We had an equity position of SEK 58 billion at the end of the third quarter.
Especially over the last two years, due to the changes in the interest rate and also changes in the foreign exchange rate, actually close to SEK 10 billion of this equity buildup has been through OCI, essentially unrealized equity that builds up, which is represented by the light gray part here, down. Then we can see return on equity, which is the orange line, and we have a target here of 18%, which is the dotted black line. We were up above that in 2019 and 2020 and in 2021, and but 2022, and then the last twelve months, we are below that target. Return on equity for us is impacted by a couple of things, two of them being quite structural. One is the introduction of investment properties, that that's a lower return on equity from that business.
So as we grow that part of the business, it will put pressure on return on equity. The other one is that we have essentially built up a very strong equity position, so it makes it more difficult, of course, to, to get the returns here. But also in this case, because it depends a lot on all business streams to reach this target. So as long as the property transaction market is as weak as it is now, we will not be able to reach the 18% here. But, but we have the solid capital base in place, and I think it's very important. And I know from talking to our in the operations how much value our customers put on working with the company that they know will stand at the end of a long job.
So they see this, they appreciate it, and it's a commercial strength for us to be able to have this balance sheet. With that, I hand over to you, Anders, to talk about targets. Thank you.
Yes. This is our target. We haven't changed them. We have had the same target for some time, and I think they are relevant. The construction margin of 3.5% is, we are on that level, and we've been so the last three years, as you have seen. Project development, same here, 10 years average, 11%. Now we are lower on that level than compared to that level, due to the fact that the transaction market does not work as it used to be. But to Magnus' point, we have really good asset in right location to be able to divest when the market investor market returns.
Investment properties, return on capital employed of 6%, build up portfolio, relevant, ambitious target over time, and the return on equity, 18%, same here. We have been on that level or above, but due to the fact the return on project development is lowering this outcome. Adjusted net debt limit, SEK -10 billion. We are plenty of headroom today, SEK 5 billion in net cash position, and we have a payout ratio, unchanged, 40%-70% dividend on the EPS. And we also have our sustainability target. We are well on our way to beat the first target, -70% of carbon emission reduction in our own operation until 2030.
We also have a -50% carbon emission reduction in our product development, and there we include the Scope 3 as well, the whole value chain. And that is somewhat volatile. When we ended up in 2022, we were at -13%. But the ultimate target is, of course, net zero by 2045. And these targets are also in line with the Paris Agreement, they are also approved, science-based, and aiming at the 1.5 degree in the Paris Agreement. So we are committed to reach our targets going forward. With that, I invite the whole GLT on stage and Antonia to open up the Q&A. Welcome on stage.
Yes. So we're opening up the Q&A session, and while the group leadership team are making themselves comfortable here on stage, I will turn to our online audience. If you wish to ask a question, please use the HD audio link or the conference phone number, and then just follow the instructions by the operator. If any of you here in the room with us have a question, then just please raise your hand and wait for the microphone. We will bring that to you and ask you to start by stating your name and organization. And we will start with a question here at the front.
Thank you so much for the insightful presentation. I'm Arnaud Lehmann from Bank of America. If I could start with a couple of question on construction and one question on commercial development. On construction, as you highlighted selectivity quite a few times, this has been quite successful for you. In a more challenging environment, you know, interest rates are higher, clients are a bit short on cash, how easy is it to maintain this selectivity, when maybe your competitors might be a bit more desperate to get some projects going to keep people employed? Do you think you can maintain the discipline in this environment? And the second question is, you showed a chart showing that you expect margins to be above 8.5% or 60% of the backlog.
Does that mean there could be upside to your 3.5% operating margin for the construction stream? And lastly, on commercial development, I mean, at the moment, very few transactions, obviously, that's impacting your cash inflows because you keep investing, but you're not getting inflows from the disposals. What's the balance between, let's say, trying to get some cash in-house from selling some properties while maintaining some good margins on the project? Essentially, at which point will you be ready to say, "Hey, we give up on the 20-30% development margin. We're ready to take 5%-10% and reduce the price accordingly"? Thank you.
Okay. So I'll start with, Anders-
Yeah, I can start-
And then, Magnus, you can continue.
... Richard can chime in here on the U.S. perspective. I think we have a good order backlog. We are... So I'm very confident in that. If we have a high quality in the backlog, so we're not in a position where we need to chase volume or chase projects. So we can allow ourself to continue to be selective, which is really good in a market like this. So for the European, if I start with European, I see that we rather lowering the volume ambition in some markets, while we excel on the more civil market or the more yeah high better markets. And that's in Europe, that's mainly the civil operation. We have won some really good projects in Norway now, and of course, the U.S. operation.
Richard, you can-
Yes.
elaborate on that.
So to build on what Anders said, your question about interest rates affecting the opportunities that are coming to us. From a U.S. perspective, if I talk about the building side, for example, we've been surprised not to see that so far. The opportunities that come to us with our healthcare clients, educational clients, they continue to come. It's been very robust. We actually believe that if the Fed is topped out in interest rates and starts to lower interest rates, we actually might see a surge in opportunities from our clients. So on the building side, it's been good. On the civil side, there's just a ton of public funding that's been pushed into the markets. Our state agencies are flush with tax revenues, so things are good there. So to build on what Anders said, it's a robust market.
Of course, if it goes down, we have to go down with it. That's the way we manage the business. We have to manage the S&A. Magnus covered that extensively. I stood on a stage in 2021 in the U.S., talked about the markets and our group strategy and say, "Look, markets go up and down. We have a great strategy as a group. We just need to ride through that, whatever that means for us." And sometimes that means reducing your S&A. Other times, it means building it up, you know, building up your forces to capture the market. But I think we've got a lot of discipline, and the lessons we've learned over the past several years tell us that we always need to be ahead of, you know, looking out and seeing what's coming at us and adapting the business to be-
... to meet the needs of the future that we see. You know, the results that we have in the past are in the past, so manage the business very carefully, and that's what we're doing.
And then we had a question on commercial property development. Magnus?
Well, uh-
Or Claes.
I think you should take it.
Yeah, I can take. I mean, we are constantly, as Magnus said earlier, every quarter we are reassessing the market value in our property portfolio. And when I adjusted it downwards quite a bit, as you saw on the slide, and that is our then opinion about the current market value. And if you can hit that level in the market, we do a deal. If not, I mean, then we sort of would like to get back at a later stage with another potential buyer and strike that level. But of course, we would like to transact on our opinion of the current market level.
So the issue is... I mean, there are buyers at the right price, or there's just no market at the moment? I'm talking, I guess, in Europe.
We have several active discussions, but predominantly in Europe, so there are buyers out there. So we don't feel that the market is at all dead or anything. There are buyers out there, and when we meet on price, as we did in Budapest, that was a deal on the level we expected, then we did the deal. We've done also a couple of deal in Sweden earlier this year, actually pre-sold before we even started construction. So there are buyers out there, and we are in discussions. But in the meantime, we'll continue to just add value to portfolio by leasing the remaining space and make the assets even more appealing to the investor market.
Thank you so much.
You have a question over there.
Thank you for the great presentation, Simen Mortensen from DNB Markets. Magnus, you said the growth ambition in CD is a bit on hold, because the market is illiquid, but at the same time, you have a quite aggressive growth ambition in investment properties, which is yielding much less.
Mm.
Can you tell us about your rationale for going into investment property investments, which has a return on capital employed of 6%?
Mm
... while growing down? And should we see these one matching up together? And also, how are you thinking about the committed capital and sales, and what we should expect going forward, given your statement?
Yeah, that's good questions. So the sort of difference—there's many differences between these two things, obviously, growing project development or growing IP. But one reason that we say we can't continue to drive a growth strategy in project development is because we have a lot to sell already, right? We have a business, the business we are in is to sell properties and make money for shareholders. Now, we have a lot to sell, but we need to see that there is a market that is balancing, so we can have sort of a good visibility into pricing of new projects before we can continue to drive that on and grow it again.
So we will be in a period, and I think Claes highlighted this in a very good way, where we will focus a lot on divestment, because we have a lot of very fine, well-leased, even if we have some leasing still to do, of completed properties on the balance sheet. There's a lot of value in this, and we need to realize that. We have a market now that is a bit hesitating, and there is this bid-ask spread, if you will. You know, and I think you have one part of the market that are being a bit, you know, trying to make stellar deals because there are no one else showing up.
And then we, as a strong company, we need to have enough patience, waiting out until there's sort of the market comes back to some extent before we can start to divest that. We don't have that issue in investment properties because in that part, there's no transaction market that stops that. The trick there is to get the right valuation, obviously. But in terms of the dynamics, we don't have the same dynamics there. So I think it's a good choice here to continue to build that up because it... what it will create is a solid, additional solid cash flow into the group that we sort of want to have going forward in order to continue to have the project development operation on top of it.
So it's a very strategic move to continue to do that, while at the same time, need to wait a bit with the further, sort of, to push on further with growth in project development. That makes sense? The other part of your question, I'm not sure if I understood, really.
It was basically around for us to understand your overall capital commitments, ID, RD, IP. Where do you think this is going, or should we think it's going? Because you have-
Yeah
... a lot of assets to sell-
Yeah
... but you, at the same time, want to grow-
Yeah
... where you have the lowest returns-
Yeah
... in an environment where interest rates are going up.
Yeah. Okay, good point. For investment properties, we don't have any capital commitments whatsoever, because when we complete the project that is in one of the designated cities we are in, it's three in Sweden, that has the right mix of tenants, then we come to a divestment situation, and then we make the decision whether to take it to investment properties or go and sell this property externally. We don't have any commitments there in that sense. All the investments in the properties that moves to investment properties is done in the commercial development stream, so that's where we have the commitments there. And then in terms of the outlook for commitments, of course, today, with the balance sheet that is... We still have a lot of ongoing projects that we need to complete.
So we have this net commitment of SEK 8 billion, and we're being very careful, as I think was well explained by both Ståle in RD and Claes in CD, with starting new projects today, because that's very difficult. We have too little transparency or visibility into future pricing. In some cases, we can do it because it's a super good project. We have experience from a nearby project or something like that, that makes it sort of makes us comfortable in our assessment. So because we're starting so little projects today, because on that basis, the net investment commitments will probably come down until we see a change in the market, where we can sort of step on the gas a bit in investments again.
... final question for me is on the negative working capital-
Mm-hmm.
which you commented quite clearly, well, which direction we'll take.
Yeah.
How much of that is referring to interest rates being higher? Should we look at the percentage of revenues, for instance, the last time-
Mm-hmm
... interest rates were as high as they are now? I know your range is 13%-15% normalized.
Yeah.
Do you think that is still a rational level that we should expect to bottom out that?
This is the most difficult question I ever get in this job. But, you know, I don't have a level—I don't know how much of that is interest rates, to be frank, and I don't want to make up a number. But it's clear to me that it is impacting over time. It's not like an immediate impact, but of course, if money becomes more expensive for someone, they will hold it harder and not want to—it's not as easy to get the forward-leaning payment plans done. So I think that's a big reason to why we see this slope here, then. And we can also see that when changes in working capital like that happens, when it has reduced or is coming up, it happens slowly.
I think we can expect that in 2024, we will probably continue to see a bit of coming down. What that is, it depends on the volume, development, and construction to a large extent, obviously. It's hard to say a nominal value.
Thank you. Erik Granström with Carnegie. I have three questions, and I'll start with construction. Could you say something about what kind of competition you're seeing in Europe and the Nordics now that the market is turning away from residentials and moving into much more non-residential building and civil construction? Basically, everyone is scrambling to get into the two other areas that are now stronger markets.
Yeah, I can comment on that. And we can see increased competition, because a lot of residential construction company there are see no market for them in the near future, so they look into other sectors. Having said that, in my experience, it's not easy to just put your organization into a completely new direction. So but we can see it, and I expect there to be more fierce competition, but I'm confident in the situation we are in that we can be select and go for project where we can see that we have a competitive advantage, and also that they have the right organization in place. So I'm, I think we are in a good position there.
And also that, I expect the clients, we can see more two-stage project right now, especially in Europe, but also in the U.S., that the client, they choose, the competitors or the construction company, not only on the price. They, they, they, evaluate the ability to execute the project, the organization, and so on. So, and that we have a good experience at and a good high win rate, actually.
Thank you. My next question is regarding your sustainability targets. You obviously focus on Scope 1 and 2, for quite obvious reasons, and there, most companies tend to show an improvement, but Scope 3 is probably where the biggest impact is at and where I assume most of the efforts are being made. So just to try to explain to us, how do you work to reduce Scope 3 emissions, and why is that so much more difficult than 1 and 2, since you are the one controlling your suppliers and subcontractors, meaning you can push them just as hard as you push yourself internally?
We focus a very high degree on Scope 3 emissions. And that's one of the things that we have done, as I was talking about, was the EC3 tool, making sure that we, in all of our U.S. market, are able also to track and follow up and also show the performance of Scope 3 towards our clients and towards also our suppliers and designers and others, for all of them to join up on the Scope 3. We are also looking into how to, per project, doing life cycle analysis, both on the materials on Scope 3, as well as on the energy on Scope 3. So to us, Scope 3 is really important. One aspect is, of course, the resource efficiency on materials.
Another aspect is, of course, also the energy efficiency on the energy needed when it comes to operate the building during their lifetimes. So we have quite the focus on the Scope 3, and we do find it really important to keep on pushing that one. However, it is quite cyclical when it comes to Scope 3. That may making it more harder to show at an overall level. You have to understand, as we have not divested as much in our CD business, you don't also see the release of the Scope 3 when it comes to, for example, on the energy needed for using the building during their lifetime.
Okay, and then my final question is regarding... Well, I guess it's part financial targets as well as development operations. You mentioned that the 10-year average has been 11% versus a target of 10%. Those have been 10 years of good to, I would say, extremely good markets, and also lower interest rate environments. Now, you are up above SEK 60 billion in terms of capital employed, and we could also argue that as shareholders, you should aim for even higher returns now that the alternatives are more interesting, given that we have higher interest rates.
So how long do you think we should be able to wait in order for you to sort of reach back to a 10% return on capital employed target for the development operations, given that you're at more than SEK 60 billion in capital employed?
... I can start, and then Magnus can chime in. You're right, but we have been clear here that we have a lot of capital employed in complete the project, but especially in the commercial development, SEK 10 billion. And if you look a few quarters ahead, we're gonna increase that. Main focus now is to divest and make sure they are ready to divest, and we're not in a position where we will continue to grow. Magnus was clear on that. The growth ambitions are put on hold, so we need to divest, and that's clear, and that's automatically gonna lowering that capital employed. So that's... Magnus, you want-
No, I think you have a very valid question, Erik. And, of course, the thing is that we have this ongoing portfolio of ongoing projects. We don't want to stop that. We want to complete them, because otherwise we destroy a lot of value. And we have properties that are completed, they are fine, they're on our balance sheet. So in that sense, the option in order to get return on this is to sell them, because we, you know, with a strategy, so to speak, or a tack, that we're going to be very careful starting new projects, but we're going to push for divestments. I mean, the consequence of this is, of course, that the capital employed will be reduced. For how long that is until you can see the return, I can't guide you on that.
I don't know. But we need a market that works, obviously. Otherwise, we can't realize the values we have on the balance sheet. So that is absolutely important. Otherwise, we will not return to that. So the market needs to be working.
We have another question down here.
In the Q3 results, you have, for the commercial development, you have a completion profile, and in Q3, you pushed that back. It looked like more buildings were gonna complete in later 2024 or 2025. What is the rationale for that? Are you holding back completing buildings because of the weaker leasing market? If you'd explain what's going on.
I'll take that question. It's a good observation. Not everyone sees it, but it slipped one or two quarters. There's two reasons to it. One is that we had slippage in some project. The other one is that we tightened up our sort of internal qualification on when a project is supposed to be sort of defined as completed, and then that had that consequence. There's no change in the operations to it. It's just a reporting thing.
It'll be a one-off effect. It won't happen again in Q-
No. Well, projects can slip, obviously, but the main part here is that we sort of sharpened up this definition, and then, you know, you have this effect in the reporting. That's it.
Talking about market value-
Yeah
... for the major projects, what kind of buffer? Are there projects with zero market value? Are there projects, a whole bunch of projects with-
Mm
... market value 10% above the investment value? If you could give some sort of color.
Yeah, I can start, and then Claes, maybe you can add. I mean, there's a range, obviously. We have some project, and Claes highlighted a couple of places where we have projects that we call challenged, that are more... You know, they, they are not performing as we would wish, and then the buffer is sort of gone, and it's very slim. And we have other projects that stand up very well. So in between, there's a whole range here, of that. So it's very difficult to say that, you know, it's in one, one way, because it varies quite a lot. Maybe you want to-
I think you nailed it, but, I mean, there is a lot of complexities in assessing the market value. And if you have a low leasing ratio in the market, a very non-transparent pricing at present, then it's a big uncertainty. If it's a fully leased building in a market where we have good investor contacts, of course, it looks a bit better. So it's, as you say, it's the full range.
Mm.
But we don't go in and comment, single valuation, obviously.
No. But, sorry, can I add here? Because it's an important question, and, I mean, it all goes back to the sort of what market value to assess the properties against, because we know the cost to complete them, right? It is difficult today to know exactly the value, and we track the market as much as anyone else and try to sort of understand any signals, and how is this moving? At what rates are buyers closing? And we see the transactions we are sort of closing ourselves and all the discussions in that. So I think you have a big collective out there in the property market. All of them are searching for sort of answers to this question. So, with that, we are still reporting or at least communicating surplus values in our portfolio.
So on the average, we have a surplus value in the portfolio, but, I mean, that will move as ... with the market. And as soon as we get more intelligence on where the market is, you know, these values will be adjusted, obviously.
Just one last question from me.
Yeah.
On the U.S. commercial book, what yields are you assuming to get to those market values?
I don't know if we should comment what yield we put in. That's to comment on each and single business case, but it, it's very uncertain right now. But as, as Magnus said, how we build up the business case when we start a project, at that point of time, we had a healthy cushion on the cap rates or the yields in, in the U.S.. And as things goes along, you can say that that has been, to a large extent, consumed. And then we, on top of the total investment upon completion committed, we have done the assumed profit when we started the project, and that's where we are right now. Do the best we can in a non-transparent market to assume the correct yields, but we don't give any detailed numbers on it.
We have a question from Stefan.
Okay, Stefan Andersson from Danske. First question, three questions. I can take them all. First, on construction, you've done really well, you know, lifting the margins despite cost inflation on material and subcontractors in the last few years, so I guess that's, you know, pushing risk up and down a little bit. Now we're seeing some contractors struggling a little bit, smaller players struggling a little bit. Just curious if you're at all concerned that that could hit you in any way if you have, you know, bankruptcies or whatever down there on the supplier subcontract side? I'm assuming you would say no. So, follow-up on that is: How do you make sure that you avoid that?
And then on the Resi development side, a little bit you're curious just to understand, you're selling off the completed apartments. How big of a... You have a spread, of course. Some apartments are sold without a discount, but you know, looking at the biggest discount you've done so far, what kind of percentage would that have been? And then the third one, on IP, I guess with a relatively good leasing pace, but very difficult investor activity, we could assume that you would actually ramp up the pace selling properties to IP. Is that a correct assumption, or would you like to say something else about that? Thank you.
I can start with the construction, and also can comment on the IP.
IP.
In Europe, it's different. In U.S., we are well-protected through insurance program. It's a subcontractor default insurance program, so we there we are protected. Not so much in a European context, but we here in Europe, we are very careful which subcontractor we select. So we have a firm process in place to check. We have our internal financial services to really control the subcontractor before they sign up, and we also are very careful not to pay upfront. So we make sure that we just pay for what they, what we have been executed on, on site. So my experience having been through some downturns and seen some subcontractor default, we are pretty good in handling that.
So I'm not too concerned over that, but we will see some subs struggling. On the IP, I can say leasing is good, but we're not in a position where we try to transfer asset that are not so good. It should be a high quality and the right location, and in line with our strategy. So we're not changing any direction in that. So the... It's planned. And Resi discount?
Yeah, I-
Ståle?
... I can comment in general. You could say that if we look at our overall portfolio, we don't give a lot of discount. But in single projects, right, in single apartment, sometimes you come in a range of 5%-10%, and then you will have a sale. But it doesn't necessarily have to be in a way, the discount, but sometimes you equip them, right? To a certain level, and then you sell. So yeah, project by project, apartment by apartment.
Just one additional comment on the IP. I mean, it's just a small portion of the actually ongoing, on the completed property portfolio that could meet the criteria. So this is not sort of a solution to divest projects. You need to fulfill all the criteria I mentioned in my presentation earlier in order to even be possible to divest.
Mm-hmm. Now we have a question over here from Jefferies.
Thanks very much. Graham Hunt from Jefferies. Just two questions from me. A lot seems to ride on bringing the buyers and sellers back together on your project development piece. What are the mechanisms that you're really expecting this to drive this in the midterm? I mean, what should we be looking out for? Is it just a case of rates coming back down, or are there any drivers on your side or levers that you can pull on your side with the portfolio, maybe learnings from the IP business, that can bring buyers up to your level? And then whilst we're in this period of sort of lack of transactions, how do you think about the dividend policy and returns back to shareholders? Thank you.
Maybe you can comment on that-
I can start on the first one. I mean, one mechanism that is super crucial for us is to fully lease the buildings. I mean, we have had discussions with investors, and if there is sort of a still too much vacancies in the building, it's less interesting. Then, of course, you can guarantee that space, but to get them up to 100%, that is a mechanism where we have sort of, you could say, loaded it with a full value potential, and then it's more appealing for the buyer. Then, of course, the market need to heal to some extent, but we are operating in a top quality segment. So, I mean, there are buyers seeking only quality assets, and that is the prime investor community we are targeting.
There's a lot of opportunistic actors out there, value add, and stuff like that, and in our core market, with our prime products in the core markets, we will go for the core investors. So I guess they need to come back to some extent also. But we can do our job first to lease out the buildings.
Regarding the dividend, we don't give any forecast for the dividend. We have to close the year before we take a discussion in the board, and that's a board decision, and we will come back on that in early February.
Thank you.
That was, as it seems, all the questions you had today, and therefore, we're now concluding the Q&A session. Thank you for the questions. Thank you to the group leadership team for answers, and then I will leave it to Anders for some final remarks.
All right.
... To conclude this afternoon, we are one of the world's largest construction and product development company. We have a unique offering. We are operating in the whole value chain, which makes us more competitive, a more reliable partner, and we also a trustworthy actor, because we're not only a construction company or a developer, we actually work we are a long-term real estate owner as well here in Sweden. So we also have a well-run construction operation. We have a strong and stable margin. We have no other ambition than to stay on a high level and provide profit from that. When it comes to product development, we have a high-quality asset portfolio. We have properties, they are flexible, they are sustainable, they are in the right location.
We have been talking about this a lot now in this afternoon. When the investor market, transaction market comes back, we are in a really good place, and we can, we are in a really good place financially as well, to wait for that. Synergies, operational synergies, working in a whole value chain. We can learn from each other, learn from investment properties into our project development, and also in the construction unit. We can see that as a competitive advantage when we meet external clients, because we can provide some of the experience, knowledge, and really have a competitive edge and advantage there, so that's good. So we are definitely creating competitive advantages and customer value, and when we create value, then we also can increase our margins going forward.
We have some headwinds now in some of our markets, but the long-term trends in where we operate are clear. We see continuous growth in the urbanization. We see that the sustainable transition in the society really creates opportunities for us because we have the knowledge internally, so we can provide knowledge and experience and add value to the customers, because the demand and requirement from clients, that is increasing, and it will not stop, so that is a great opportunity. We have a diversified business, which is also a good thing to have. We are diversified in segments, sectors, and also in geographies. So when the market now is strong in the U.S., and more weaker or stable in Europe, that's a good thing to have.
We can focus where we see the biggest opportunities for the company. And also, of course, commercial and residential are weaker in basically all markets, but we can see that the infrastructure, the civil market is stronger. And I can see good opportunity also when it comes to digitalization and innovation going forward, because that is something we can do something about. It's our internal efficiency, our productivity to create better opportunities and competitive advantage. Our financial strength really provides us with the power to stay true to our strategy and to follow through on our commercial direction. A strong financial position makes us more attractive as a business partner and a contractor in the market, and that is required when we're bidding and executing large, complex project.
We have the right teams in place, but you also need to have the financial stability, and we have that. We also own our own decisions in the project development, so we can decide ourselves when it's time to start a project or when it's time to buy, acquire land. All in all, we have a tested strategy and a clear commercial direction. We will continue to execute on this to continue to create value for shareholders, customers, and society at large. Thank you for listening this afternoon, and with that, I hand over to Antonia.