Good morning, and welcome to the presentation of Skanska's First Quarter Report 2022. My name is Antonia Junelind, Senior Vice President, Investor Relations, and I joined the team this spring. As you can see, we've decided to change format for these presentations, so you can join us here at our headquarters in Stockholm, or you can watch the presentation online via webcast. We will, however, follow the traditional flow today. First, our CEO, Anders Danielsson, will present the group and business performance and provide some business and market highlights. Our CFO, Magnus Persson, will take us through the financial highlights of the quarter. After that, we will open up for questions. You can ask your questions either in person here in the room, on conference call, or you can text us via the webpage, webcast webpage. We will answer as many questions as we can.
With that short introduction, let's get started. I hand over to you, Anders.
Thank you, Antonia, and welcome everybody for this Q1 report, 2022. If we start to look at the picture here to the right, it's fantastic projects in Malmö called Epic. It's developed by Skanska, constructed by Skanska, and also divested to our new Investment Properties, our new business stream. Let's go into the figures. If we look at the first three months of the year, we have a solid performance in the Q1. Construction, we can see continuously increased revenue, which is expected. We saw it last year as well in the Q4. Residential Development, good performance overall. Increasing the profitability are above our targets there. Operating margin in Construction, 2.3%.
Q1 is usually a slower quarter in construction this year due to some fixed cost in the first quarter compared to the revenue. Overall, a stable quarter here. Return on capital employed in the property development above our target of 10% on a rolling 12-month basis. Return on equity 18.3%, where we, as you know, have an 18% target. Very strong financial position. That's important for us, and we continue to have that. We also managed to reduce the carbon emissions with 49% since our base year in 2015. In our own operations, I should say. Let's go into the different streams, starting with Construction. Here we increased our revenue with 6% in local currencies.
The order bookings was slightly down compared to last year, but we have a solid order backlog on a record level. We also have the book-to-build above 100%, 109% on a rolling 12 months. Order backlog SEK 228 billion , which is really solid. Operating income increased in absolute numbers and but the margin reduced somewhat compared to last year. We can see that volume's returning. We can see improved activity and coming back to the outlook for the coming 12 months. Supply chain disruptions has been the case for quite some time, and during the pandemic and also now, we expect that to continue since the war broke out in Ukraine in the first quarter.
We have not seen any material impact of the war in Europe in the first quarter. We have been able to handle and mitigate the cost escalation that we have seen for quite many quarters right now. Residential Development, slightly down on revenue, and we have reduced the number of homes sold and started. We are on a historically high level when it comes to ongoing projects in production. We are close to 8,000 homes in production, which is a good number. We have the capacity to start new projects. We have good sales rate in the ongoing project, and we have also very few unsold completed. We can start new projects and that is also the ambition.
Operating income, SEK 570 million, and we are above our target of on the operating margin of 10%. Return on capital employed also above our target of 10%, and we have good activity and strong profitability, and we have not seen any major effect so far. We have, during the first quarter, we have a good pace in our market when it comes to sold homes. The focus is, of course, to start new homes and also focus on the zoning and permitting, which has been and we expect it to be bottleneck going forward. We are in a good position, and we have a good pipeline.
Commercial Property Development, also a bit slower quarter when it comes to number of divestments, but we have divestment in the quarter, and those has been on an attractive level. That is continuing to be good. We managed to be just shy of 10% target on the return on capital employed. That is a substantial amount we employ in these operations. 35 ongoing projects corresponding to SEK 26 billion upon completion. The occupancy rate, 28% versus 42% completion rate. Those should be, that gap should not be too wide. The focus is definitely to continue to lease our projects, ongoing projects. We started one new projects in the first quarter.
We also can see in the market now continue to be a very solid investment, investors appetite for our high quality buildings. That remains, and we haven't seen any tendency that they sort of want to withdraw from any divestment, which is good. Soft leasing market. 13,000 sq m leased in Q1. We saw as we reported in Q4, higher activity in the late 2021. But that sort of soft and slowed down really big when the Omicron hit us in the early January, and we also saw when the war broke out. We still have good dialogue with the potential tenants, but they hesitating to take the final decision.
We just need to work hard with that. That's the first priority, definitely. Investment Properties. New business stream since for this year, we announced it late last year. We're targeting high-quality office buildings. The ambition is to have a portfolio between SEK 12 billion-SEK 18 billion in the next few years. We have a strong, stable cash flow that will give us that, and we will get benefit from increased value, especially when we have a cluster of buildings where we develop new areas. That definitely will drive value for the company. As I mentioned, we did our first acquisition here in the first quarter, Epic building in Malmö. Fully let, multi-tenant building, highest quality when it comes to sustainability and health certification. Cluster of Skanska developments.
We are in that area, and it's a coming area, and very attractive part of the city. It sort of hit all the criteria we set up for this new stream. If I go back to Construction and look at the order bookings, as I said, record level on the order backlog. You can see it in the bars, the blue bars. You can see in the yellow line here, the book-to-build on a rolling 12. Going slightly down in the first quarter, but still on a high level, above 100%. You can also see here order bookings on a rolling 12, and also by the quarter, the orange line. If I look into each and every region here on the order bookings, it's quite good, order book-to-build in all geographies.
Nordics over slightly over 100%. Europe slightly below 100%, but that's expected. We can see some postponement of projects, especially in Central Europe, due to the war in Ukraine. We, as I said, have not seen a major impact so far. In U.S., very strong order intake. We have book-to-build of 120%. I will come back to the overall market outlook, but it's an important market for us, so over 40% of the revenue. It is really encouraging. The months of production we have in the order backlog, 18%, that is also historically on a high level. We are in a good position here to continue to be selective in the market, continue to focus on the project where we see competitive advantage and where we can make a good profit from them as well. With that, I leave it to Magnus to go deeper into the figures.
Thank you. If we start with the construction and income statement. Anders said we grew revenues 14% actually, but underlying volume was 6% up. It's a big currency effect. I think that the volume growth it comes on the back of something we have alluded to in a couple of quarters. We've booked quite a sort of solid amount of work in the latter part of 2021. It's been about to sort of be able to start these projects. We can clearly see now that these jobs, they're coming online, and we're starting to produce in them. Hence, we're stepping up a little bit in the volume area.
I think it's a very good signal because we have not let up in any way, shape, or form on the tight bid criteria that we have. We know that this order backlog we have is of a solid quality. It's good growth we are experiencing here. That is comforting. Look, it looks good for the future. Gross margin 6.8%, SG&A of 4.5%. Good control of the overhead costs here because we have to recall, Anders already alluded to this, that the Q1 is seasonally a slow quarter for us, where we normally have a lower absorption of any overhead costs. Nevertheless, we managed sort of to come down a bit in SG&A here, though.
The 2.3%, operating margin, you compare it to last year and say, it's a bit lower, but you have actually to go a little bit further back in history to get some solid reference points. 2.3% in the Q1 is actually pretty good, I say, in construction. If we look at how our operation is phased over the different quarters of the year and so on and so forth. Rolling 12 months, we are trading at 3.7% EBIT margin. I think the rolling 12 months, that is the relevant measure to use when you compare us against our own targets that we hold ourselves against.
A solid level of performance there. If we move to the next slide, and we look at the different geographies, you can see Nordics keeping up profitability 2.8% in the isolated quarter. Sweden 2.3%. Then we have Europe. Now something is happening here. I'll move back. Europe is negative in the quarter. It was slightly positive than last year. I see there's two chief reasons to this. One is volume, and I already spoke about that on the last slide. It is a seasonally sort of low volume quarter, Q1. On the back of that, you saw bookings a bit slow in Central Europe, and of course we have had the pandemic and so on. A bit of a challenging volume than in Central Europe in particular.
We have decided to sort of keep the overhead costs where they are because we think we're right-sized as an organization. You have a lower absorption, essentially. On top of this, we have two businesses if you will, two business units inside the European operating segment here. It's in the U.K. and then it is in Central Europe. Both of these business units are right now changing the legacy ERP system, so that also adds some costs to the quarter. Underlying performance, if you sort of strip away all of this stuff, I would say it's basically at par with last year. For the U.S., 2.7%, we continue to improve the performance in the U.S.
It's been a very solid run, I'll say, in the successive development of performance at U.S. construction operations. Move to Residential Development. We saw revenue decline here, 5% down, at good margins of 16.3%, and SG&A, then a 4.3% take us down to around 12% in operating margin, which again is a good level here. The comparison quarter is very tough here. We were up to 14.8%, so close to 15% in the first quarter in Residential Development. That is of course a stellar result there. Very, say, good quarter here. Overall, the RD markets have been quite favorable during the first quarter. Anders Danielsson alluded to, and we will come back to, and also commenting in the quarterly report.
Outlook is we see some uncertainties in the outlook, but actual quarter have been quite okay here from a market perspective. If we look then at the different geographies, we can see slightly lower margins across all the different geographies, especially in Europe, as they're coming down from 21%-14%. How much should you read into this? Well, first of all, you have to look at the volume of the business here in the first quarter. You have essentially little bit similar effect here as you had in the construction business, a bit of volume effect there. And again, overall across the geography, it's been quite an okay quarter from a market perspective. Home Started and Sold. If you look at the green line, that's the ammunition, if you will, that we have.
It's the new started projects that we need to start projects in order to develop them and sell them further on. This has increased since the middle of 2020, very much in line with what we have communicated in terms of our ambitions to continue to grow the product development portfolio here. On a rolling 12-month basis we started here around 4,100 units to be compared then to 3,800 that we sold. It's hard to compare individual quarters because suddenly you get the permitting, you get permit for an individual project, and they come out, and you can't really plan that quarter by quarter.
When you look on a longer term perspective here, it's clear that we are continuing to drive for sort of a very responsible growth in Residential Development. Homes in Production. Here you can actually see, I think by plain figures, what I just spoke about. The growth, of course, in number of starts, sold and handed over will be displayed in a growing volume of units under development. Now we have 7,900. This is all the numbers. Slightly down than from the fourth quarter because we've handed over a lot of units, of which we have sold 75%. A very strong, maybe a tad on the high side sales rate, on the portfolio, and basically no issue at all with unsold completed units.
What we develop is in high demand, so we don't have an issue with that. If we move to Commercial Development, we had an active quarter, made several divestments here, a strong gain, so close to SEK 1 billion. We sold projects in Central Europe. We sold projects in Sweden. We did the first divestment to the new business stream, Epic. A very interesting and a very good start of the life of this new business stream, and I will come back to that. We also managed to divest two challenging properties that we have alluded to on a couple of occasions over the last two years, which are the West Memorial properties in the Energy Corridor in Houston. Tough market situation in that very specific micro location, and we are now completely out of that.
Of course, if you look at the numbers and you do the analysis, you have to recall that these entities are diluting the development margin a bit, if you will. If we look at the Realized and Unrealized Gains, we have 35 ongoing development projects in commercial development. These have an estimated surplus value or unrealized gain, if you will, of around SEK 6 billion. Then on top of that, we have around SEK 2.5 billion in surplus values or unrealized gains in projects that are completed. We have another approximately SEK 1.5 billion of surplus in land and development properties. Those are where we have not yet started a project. In total, approximately SEK 10 billion in coming gains that we will realize.
We have been at this level now for three quarters, and you can clearly see a big step up since before. Again demonstrating evidence that we are growing the property development business stream. We can also note then that, which you have on the orange line here on the presentation, on the slide, which are the level of realized gains that we sort of recognize in the profit and loss statement on a rolling 12-month basis. Despite the fact that we keep the unrealized gains very solid, around SEK 10 billion, we are managing to recognize approximately SEK 4 billion of gains on a rolling 12-month basis. It's a very strong development of a very good portfolio. If you look a little bit deeper in the portfolio, this is the completion profile that we have.
A bit complicated slide, but I think by now most of you have learned how to interpret it. On the left-hand side, the light blue bar, you have the completed unsold project, and it is the total investment that we have made into those projects that makes up the height of the bar. Projects for an investment value of approximately SEK 5.9 billion have been completed but are not yet sold. These are leased to 75%, so very solid level of leasing in them. If you back up one quarter, the bar was around SEK 8 billion. If you back up another quarter, it was up to close to SEK 11 billion. You can say it's difficult to sell these properties, but I would argue not at all.
It's a very commercial decision to not sell properties too early because value comes when we lease. We have both the balance sheet and the sort of risk appetite to see this project through to their commercial end. We much rather complete the property, get the right leases, and then we'll invest them so we don't compromise on the value created for our shareholders there. If you look forward, the dark blue bars, that represents those projects that are not yet completed but under development. Here you can see then the completion profile that we have fairly few completions expected in the second and third quarter this year. More in the fourth quarter and then through the next year also. The green line represents the average leasing rate for those properties. Leasing is slow.
This comes as no news. As Anders have said, it came back. Leasing came back. We had a decent leasing number in the fourth quarter, especially November, I would say. It shows that when the restrictions were taken away, potential tenants turned into signed tenants suddenly. That gave us some confidence that when there is real and underlying demand, as soon as the uncertainties that are playing the market at the moment, when they go away a bit, we get more ink on the paper, and we can recognize more leases. We have solid discussions in all our different markets. Do we note any super big difference? It's not really. I mean, flexibility is important for tenants today. You can have expansions, options, break options, et cetera.
Overall, no super big difference, I would say. We have a lot of good discussions and a long sort of list of leads and list of potential tenants here. The two lines you see, the green line and the orange line, that's the occupancy rate, average occupancy rate, and then the completion rate. The completion rate of the property is the green line. Occupancy rate is the other. Normally, we would say that in sort of normal market conditions, we would like to have these two more moving in tandem. Now, leasing is very slow. Obviously, we are big. We have a solid financial position, and we sort of closely monitor risk appetite. We allow there to be a gap between these two. Of course, we would also like to see more leasing.
We're working on that. We come to Investment Properties. Not large numbers here to talk about, but nevertheless it's the first time. We have now made our first investment in this stream. We bought, as already said, the property Epic from Commercial Development. The property is located in a cluster in Malmö in Sweden, the southern parts of Sweden. It's a very nice property, well certificated, LEED Platinum, multi-tenant building, very high quality and very nice finish on this one. Property value, SEK 766 million. The transaction was made for a value of SEK 748 million. What is the difference here? Because this is the first time we do a transaction, I think it makes sense to say a little bit about it.
The main difference is here the fact that we are trying to resemble a market transaction as far as possible when we sell the properties. That means that any deferred tax will come with a discount of 5.15%. That is the chief difference between the transaction value and the property value or the market value here, which of course then comes up as part, very small part, but nonetheless, a part of the P&L in the first quarter. We move on. Then we come to the group. If we add up the operating income from all the different business streams, we end up with a number of SEK 2,083 million in the first quarter.
Construction stream, SEK -135 million. It goes up and down a bit, but underlying it's essentially no change to the quarter last year. Eliminations, SEK 95 million, a bit higher, and that essentially is a reflection of the fact that we are now producing on bigger project development portfolios, both in Residential Development and in Commercial Development, which means that the eliminations becomes a bit higher. Net financial items, +SEK 8 million, which is also a reflection of a strong liquidity position. Thanks to the changes on the financial market, we can finally see the placements and deposits are starting to yield some sort of return for us. Together with the higher level of capitalized interest, this sort of ends up in a net financial position of +SEK 8 million for the quarter. Taxes uneventful.
Our tax rate is 19.6%. If we look at cash flow then, the main change to the cash flow this quarter compared to the same quarter last year is net working capital and construction, where we had an outflow of approximately SEK 1 billion. This is quite normal because also here you have the same type of seasonality as you do on the P&L, where it's not unusual that especially public customers sort of pay a little bit in advance towards the end of the year. In the first quarter, we have to sort of earn back that money by producing with a little bit less invoicing then. It's quite normal that you have some sort of outflow in the first quarter.
The other one is that, again, we are investing, net investing to a higher extent now in Residential Development and in Commercial Development. These are the two main changes. Also please note that the dividend of SEK 10 per share were not distributed during the first quarter. From a cash perspective, it will flow out during the second quarter, even if we have already separated it from the equity position, which I will come back to. Here you have the working capital position then. It is still very strong. We have around SEK 29 billion in net working capital, 20% of revenue. It's a very solid position to be in here. And as we are now starting to grow the construction portfolio somewhat, that also means that more projects are in the early phases.
In the early phases of a project, that's the time in a project's life where you normally have the bigger part of the advances. That will give some underlying support also to this position. Investments and Divestments, we continue to run into a net investment territory, illustrated by the green line being sub-zero, so to speak. We have capital employed at end of the quarter in Project Development and Investment Properties of SEK 50.4 billion, essentially growing this part by SEK 3 billion since year-end. Liquidity position, we have SEK 19 billion in available funds. Of that we have sort of the facilities with banks, et cetera, of SEK 6.7 billion that we can make use of. Only SEK 3.4 billion in external debt, and we have no maturities this year.
We have a very solid financial position, which takes me to this slide. Equity end of the quarter, SEK 44 billion. Here again, the dividend is already separated away from this equity position. Equity to assets, 31%. Overall, super solid financial position. Adjusted net cash of +SEK 15 billion. Of course, this is very reassuring for clients. With a balance sheet like this, clients can trust that we will stand there and we will deliver on the contracts that we have signed with them. That is very important for us. It's a commercial advantage. The other thing is that it gives us the opportunity to act on market opportunities should they arise when, perhaps when others can't in some cases. We don't have to chase volume, but we can focus on making the right sort of commercial decisions. Let's stop there. Over to you, Anders.
Yes. I will address the market outlook in our different stream, starting with construction. Due to the fact that we see some supply chain disruption, and we also see some positive news when it comes to federal funding, especially in the U.S., on the U.S. civil market, we have a sort of mixed picture here when it comes to market outlook. We see stable market outlook when it comes to non-residential building, especially in the Nordic operation and U.S. operation, which is the vast majority of our building operation. Somewhat slower in Europe going forward. When it comes to Residential Construction, we have a slower market outlook in construction, but we have a stable or even a strong market outlook in U.S. civil.
Stable in basically all other markets except for Finland, which is quite slow. The U.S. civil market, we can see that the federal money are coming out in the market, and we also can see that the different states, especially in the strong area where we are, have operation on the East Coast and West Coast, we can definitely see that the projects are started, and we have a good pipeline going forward. We have a strong market out there, important market. When it comes to Residential Development, we have reduced the outlook, and that is due to both cost escalation and inflation, but also that the interest rates are starting to pick up.
We haven't seen any large effect in Q1 on that, but we expect a slower outlook, slower market the next 12 months. Commercial Property Development unchanged, weak due to the fact that leasing is weak. Again, the investor appetite is continuing to be strong. We expect that to continue, but we have unchanged outlook there. To conclude the first quarter, Construction increasing volumes, increasing revenues, Residential Development, good performance on a good level. Commercial Property Development, attractive gains when we sell properties. Investment Properties, first acquisition, very encouraging. We have a robust financial position, a good position, and our strategic direction remains. We continue to focus on improving profitability and grow responsibly in the Construction stream.
We have the ambition and we'll want to be the leading residential developer, and we are that, in that position in several markets. We want to continue to grow the Commercial Property Development in different geographies. We also continue to build up the Investment Properties portfolios over time, perfectly in line with the strategy that we announced late last year. With that, I leave it to Antonia to open up for Q&A.
Yes. Thank you, Anders. Now it's time for your questions. May I please remind you that you can ask your questions on conference call, just follow the instructions by the operator, or you can send in your question by using the text field on the webcast page. You can ask your question in person here in the room. May I then please ask you to raise your hand so that we can bring a microphone, so that the online audience can hear your question as well. Also please start by stating your name and organization. We will start with questions from the audience in the room. Would you want to go first?
Thank you. Albin Sandberg from Kepler Cheuvreux. I have three questions. Starting off with the supply chain and cost inflation environment. I think it's another quarter now where you state that you have not really seen any real impact on your, let's say, current operations, but you keep you know mentioning the risks going forward. If we look at your current order backlog, do you feel confident both on the cost inflation side and also the supply chain issue? If there are any risks, which are the ones that you would like to highlight?
Yes. Thank you, Albin. The supply chain disruption and the cost escalation, we have seen that for some time, and we've been talking about it every quarter basically. So far we have been able to mitigate that. That has continued or expected to continue. Mitigation has been that we are very careful when we bid for projects or start new development project that we have secure as much as possible of the supply chain, including prices and also availability of material. That's critical for us. When it comes to external projects, we are also working with our clients to have negotiate inflation compensation clauses in the contracts or split the responsibility or the risk for cost escalation. We also have good negotiation because everybody understand what's going on.
The client wants also the execution to be in line with the schedule. We are also in quite many cases accelerated the procurement of different materials. We get them into the sites or another sites close by our project to mitigate the bottlenecks that we see in the market. Going forward, I expect I'm quite confident with our position in the current backlog. I think we have showed now over time that we are able to mitigate that, and we are disciplined when it comes to selecting projects. Also, we have a good processes in place to make sure that we don't take or speculate in the volatility that I expect to continue. I'm confident in that.
On the other hand, I expect also that the cost escalation will impact the ability to buy new homes, for example, in line with the interest rates going up as well. I expect some projects actually being postponed somewhat because the client might not get the business case together with the increased cost that we come up with. It's more forward-looking that I see the risk.
If you see that drop in demand because of you know clients not being able to basically pay for the projects or the unit the residential unit you made some comments about you know you keep your overhead in Europe and so on. I mean how quick are you in order to basically adjust for such a market demand?
Most of the overhead is related to personnel so that we can adjust if we see that our revenue will decrease in the next six or nine months. We have done that adjustment before, and we are looking very careful on that. We have not seen, as I said earlier, we have not seen that implication yet in the market. We haven't seen a lot of postponement of projects. I expect we can look at our own business cases in Residential Development. We have the ambition to start new projects. We still see a good demand. Underlying demand is really strong in our market, and we also see that the business cases work.
That like leads me into my final and third question, and that is on the residential because that's where you're lowering the market outlook basically, and still your comment now on being a quite strong market. How do we reconcile that? I mean, will you be more cautious in starting new projects Q2 going forward, or is it the sales rate that will determine it? What do you see in terms of potential organizational changes?
We have a high sales rate. I can easily expect a lower sales rate in the ongoing projects. We have a good position. We have almost no unsold completed, very low figures there. We have the financial strength to start new projects. I f I look at the other external market, it might be the case, and that's also why we're lowering the outlook on the residential construction, that external client might not be able to start new projects because the banks require high sales rate before they allow them to start. We are in another position. We can choose ourselves, which could be a competitive advantage.
Thank you.
We do have another question from here.
From Markus Henriksson, ABG. Also on the residential development theme, with the lowered outlook in Europe, do you think still that might be offset somewhat by the ramp-up in BoKlok in the U.K.?
I can take that. Well, essentially you're talking about two different market sectors in two different geographies. Whether or not that offset each other, that's very hard to say. I mean, if I say something about BoKlok in the U.K., we have just started this business. We started a few projects here. We expect to hand over some units. Very big underlying demand for that type of residential units in the U.K. I mean, U.K. housing was a big market obviously, but maybe that type of that level of affordability or quality housing, that's not what that industry have been trying to produce in sort of great numbers before. We are a very welcomed addition, I can say, to the housing or residential producers in the U.K. We have great hopes for that.
In our Europe, I think what you see here in the first quarter with the slightly lower volumes, I mean, it's really hard to speculate about the future obviously. We are cautious because we see overall tendencies. If we have inflation, we have interest rates that are coming up, and we have potential impacts on the labor market and so on. I am not going to sort of say they're gonna take each other out. It's very difficult, so.
All right. Also on the margins in rest of Europe, they were exceptionally high in RD last year.
Yep.
Now it's down to 12.1% here in Q1. You mentioned volume and that you have lower absorption rate. But what do you think for margins in that region going forward? Was it like exceptional 2021 and we should expect normalization of margins?
I think the market there, to be fair, has been exceptional for quite some time. We have been coming from a situation where prices or costs have been lower when you sort of start a project, and then you have the price increases on apartment and very large demand. Of course that puts us as a developer in a very favorable situation. If you can say that maybe that's a bit of a market imbalance that has been, and it's very difficult to say how long will that be around then. Clearly we've had a few quarters with, I mean, the comparison quarter with 21% and other quarters that is about 20% that I think is not something that should potentially be extrapolated far out into the future.
We expect a very decent profitability from the business. I need to add that. It's a very fine business we have, and there is a good demand there and t he willingness to pay, of course, is also very strong there.
Also on the cash flow, you highlight SEK 7 billion in from commercial development here in 2022, 2023. Is it quite tilted towards this year or evenly split for those two years?
I'd say it's normally more closer in time than that, sir, because it's seldom that we pre-divest so far out in time, so without giving a specific split.
Last question. Salary inflation in your different geographies?
Yes.
What do you see currently?
Yeah, there is definitely salary inflation going on. I think we see it in all our different countries to varying degrees. I think it's perhaps most challenging in Central Europe, is my view on that. Where we are working, we of course work with unions a lot, and we have union agreements and so on. They are normally renegotiated, of course, not every year, but every third or second or third year and so on.
In most of our markets, we think that the unions are very strong in sticking to the agreements, which is very good because it gives, of course, us an ability to train people and sort of make sure we get skilled people and a resource certainty also at the same time as you can sort of handle these swings in salary costs and that otherwise could go very much up and down. It's something that we're definitely looking after and we need to handle. But there's no, like, immediate concern, I will say, on that then. Maybe you want to add on, Anders.
No, I mean, to build on that, when we price the projects we have a predictability due to the fact that we have a long-term agreement with the union. It's, and we also get prices and quotes from our subcontractors. We are able to price that in when we estimate the projects.
Thank you.
Good. Thank you very much. We will move over to questions from the conference call. Operator, do we have someone calling in?
Yeah. The first question comes from the line of Pam Liu with Morgan Stanley. Please go ahead.
Thank you very much for taking my question. I have three, please. The first question is for Construction. In Construction Europe, you mentioned that the loss was a result of the slow start due to seasonality. Now, I know that in the usual times this could typically be recovered or caught up in the following quarters. However, given the location of these slow start projects and the ongoing war, and the fact that you already see early signs of postponed project in that region, what do you think is the probability of recovering or catching up later? Or, you know, what is the risk of not being able to do so? In the U.S. part, in Construction, I believe you have more exposure in building management or sorry, in building construction management rather than civil.
Do you see that balance shifting towards civil more significantly going forward? Second question is, what do you see in terms of the overall inventory of new homes in Sweden? The third question, if I think about the rising interest rates, and now obviously we haven't had rising rates for a very long time, and it is also something that is completely out of your control. In your opinion, you know, how long do you think it takes for rising rates to fully impact on things like housing price or buyers' appetite? What would you do during period of rising rates, particularly, let's say, on the commercial side? I would expect you to perhaps slow down new development. What would be the strategy during this period? Thank you.
Thank you for the question. I will start with the two first one, and then Magnus will comment on the other one. The first one, in Central Europe, as I said, we have a slow start. That's normal for the seasonal effect. We have a lot of civil operation, asphalt and concrete, which is, we have fixed costs, but we don't have the revenue. The normal thing that we do catch up during the rest of the year, and I expect us to do that, this year as well. The reason why I say it is, because we have the vast majority of revenue in hand. We have a good order backlog, and we don't need to fill up, much more for this year.
It's more a concern going forward if I look at the market. I do believe in that. When it comes to U.S., we have a split between building and civil. We don't declare how much or how that split looks like, but I don't expect it to be very different. We have a very healthy backlog and very healthy pipeline in U.S. building, and good performance, and our clients are really investing. We can see that, we are in the right places. The same thing with civil. We do see expected increase in market, strong market, and we are definitely in the right places.
Very strong in the New York area, up to Boston, Washington D.C., and on the West Coast, Los Angeles down to San Diego, up to San Francisco, Seattle. Those are the places where we can see really increasing investment in infrastructure, and the need is enormous there, I can tell you that. I have a good outlook there.
Hi, Pam. This is Magnus. I will try to answer your two questions on Residential Development. Let me start with your last one regarding interest rates and the time that sort of how long will it take from an interest rate hike, et cetera, until customers may be impacted, and what would we do about that? I think it's a good question, obviously. First of all, it's important to sort of understand that banks, if you take Sweden as example, they are not calculating with these low interest rates that have been on the market for the mortgages when they assess whether or not a customer will be able to get the mortgage to fund their apartment. They have been calculating with completely different rates.
I'd say on that end there's definitely upside, quite significant upwards room, so to speak, for even more rate hikes before the banks would start to think that this is too expensive for many individuals. Then the other thing is if it becomes more expensive to borrow money, even if the bank would allow a customer to borrow money, maybe they would not like to borrow money because it sort of crowds out other things they would like to do in their life. That's very difficult to speculate on. I think if and when we would have an interest rate and an impact on the labor market, that is a bit of a sort of cocktail you don't want on the Residential Development market.
That is what we have seen historically, that when you have a, sort of the wrong type of development on the labor market, that is what really impacts the residential development. I hope that was satisfactory for that question. Then you had a question regarding the Swedish, residential development operation and inventory. I did unfortunately not catch your actual question on that, so if you may repeat.
Yeah. It's just to see what you see as sort of the overall inventory of new homes in Sweden. Do you see quite a lot of inventory or a low inventory which could suggest that the demand can still drive? I suppose it's. Well, I think we always said that there's a structural shortage in housing in Sweden. I would like to understand the inventory position to see whether that is still the case or do you see there's a lot of inventory, therefore the start will be slower.
I think the situation still persists. There is definitely sort of an underlying demand for new homes. New homes at the right prices, in the right locations in Sweden. We don't see that situation have changed.
Okay. Thank you.
Good. Operator, do we have a final question from the conference call?
Yes. We have a question coming from Mr. Gregor Kuglitsch with UBS. Please go ahead, Mr. Kuglitsch.
Hi, good morning. Thanks for taking my questions. Maybe I can just start on the construction margin. I believe sort of in the previous conference call, your comment was along the lines of, you know, basically there's still sort of being in an upward trajectory. I wanna understand whether that view has changed at all, and you now don't expect further improvement from kind of the levels that you achieved, say over the last 12 months or 2021. I've got a few questions on commercial property. I think if I look at the detail, you kind of sold a bunch of all the assets in Houston at sort of very low margin or nearly no profit. I guess the question is that it?
I think you were alluding to the fact that that is it. In terms of the sort of margin dilutive, property sort of being essentially booked through the P&L. That's the first question. Second question is, again, you alluded to it. You sort of said, well, you wanna have those two lines, the pre-lease rate and completion rate kind of aligning. Obviously if ideally leasing goes up, but what if it doesn't? What would you do? Would you slow down essentially new launches? Yeah, those were the two questions on commercial. Thank you.
Thank you. I can start with the first one. If you look at the first quarter, as I said, it's usually slower quarter. We have not changed our ambition here. We have a 3.5% target on construction. That's definitely a target to be at or above that level. If you look at the rolling 12 months, we are at 3.7%. So we have not reduced our ambition in the construction profitability.
I will go on with your CD question. You said you sold Houston. Is that it? I assume you refer to sort of problematic assets. Then I can just-
Yeah, just low margin. Yeah.
I can just confirm that the two properties we had in Houston, that's definitely sort of the sizable problematic asset we have. That is now completed and, sorry, sold. We've dealt with the problem. The final question was what if leases don't increase? Well, I mean, that's a what if question. Let's see what happens then. But obviously we don't go into any type of speculative projects that we don't have the capacity to complete. We have a good risk tolerance, we have a solid balance sheet, and we constantly balance sort of our need to start new projects for future profit at the same time as we cannot take on too much risk in terms of sort of if leasing were to lag further. That's a constant evaluation. I can't say, "What would you do?" We will see if that happens. I don't think it will.
Okay. Sorry, I had one final question which I forgot to ask before. Your stock's obviously down quite a bit. You've got SEK 15 billion of firepower. What's your attitude or philosophy around share buybacks?
Well, we can't comment on, or I don't want to comment on the share price. Others will have to make up their assessment. What we do over here is that we try to manage a company to make as much long-term sustainable value for the shareholders as possible. Others will have to price that. In terms of share buybacks and other alternative corporate finance measures, we think the best value for our shareholders is to employ this capital in a very profitable, highly sustainable property development projects.
Thank you.
Thank you.
Thank you. Okay, we would want to answer as many questions as we can. Do we have any more questions on the conference call, operator?
We do. We have a question coming from Marcin Wojtal with Bank of America. Please go ahead.
Yes. Good morning. Thank you so much for taking my question. Firstly on Construction, just following up, I think at the previous quarterly call, you were indicating that in 2022, profitability should be higher in Construction than in 2021. Is that still the case? Obviously considering somewhat changed operating environment. My question number two, could you please clarify a little bit your outlook for Commercial Property? I mean, the comment that you made in your slide, you're basically saying that there is cost escalation and price uncertainty, and it might lead to postponed projects. Are you saying that you are perhaps slowing down your investment in Commercial Development or it relates more to the market situation?
I see that there was only one project that you started in Q1, but I don't know if we should extrapolate that for the rest of the year. Lastly, order intake in Construction. You have a strong backlog, but are you becoming more selective in Construction in terms of order intake, considering supply chain and some of the other issues that you mentioned? Thank you.
Okay, I will answer the first and third question. When it comes to, we don't give any forecast for the profitability. What I've said is that our ambition is to continue to focus on profit before volume, and our mission is to continue to increase profitability. We are on a good level now, 3.7% rolling 12 months, but we will not lower our ambition again. Order intake, we're going to be selective, continue to be selective. We're not changing really our ambition here, but we are careful when we go into project. We select a project where we can see we have a competitive advantage, where we can see that we have a history of profitability, and we have the right team in place. That's critical.
Otherwise, we are very careful with the processes of securing prices, supply chain, avoiding bottlenecks, and that's definitely going to continue.
Marcin, you had a question about the commercial development outlook, if I understood you correctly. Are we slowing down?
Yes.
Does that refer to the market in general?
Yes.
Like I say, all the market outlooks that we publish in our quarterly reports, they refer to the market outlook. We can be, in some cases, in a sort of a certain position in the market. For CD, what we see is that we still have today a very strong investor market. The leasing market is slow. We will sort of project by project deal with this situation. Our ambition is to continue to start more Commercial Development projects and to continue to grow this business.
We will not do any sort of rash start where we don't have full control over the costs or where we think it might be on the fringes in the city area, so there might be a sort of too big leasing risk or something like that, especially given where the market is today. In terms of being only one start in the first quarter, that is not to be extrapolated. I mean, these starts, they are a little bit depending on permits, et cetera, et cetera. Sometimes you do more, sometimes you do less. Thank you.
Okay, thank you.
Okay, thank you now for your questions. If there are any more questions, I need to refer you to come back to us in the Investor Relations function, and we will continue to answer any questions you might have, because it's time for us to wrap up this presentation. I want to say thank you for joining us here at our headquarters in Stockholm today. I also want to say thank you for participating on our webcast. A recorded version of this webcast will be available on our web page shortly. Thank you for today, and see you again for our second quarter report in July.