Hufvudstaden’s potential to influence profits in current operations in the short term is limited. Revenue is governed by relatively long leases – normally three to five years – and operating costs are difficult to change in the short term without sacrificing service and quality. Hufvudstaden’s profitability and operations are affected mainly by macroeconomic factors, such as the business climate, interest rates, regional development in Stockholm and Gothenburg, and political decisions. Long-term planning and clear strategies are vital if a property company is to handle opportunities and risks successfully. The Company has identified material risks and uncertainty factors as described below.
Changes in value of the property holdings
Changes in the fair value of the properties due to fluctuations in the economy and
other factors represent both a risk and an opportunity. However, the risk is limited by the concentration of the properties in the most attractive commercial locations.
The rent trend involves both risks and opportunities. The rent levels for vacant office premises are affected quickly in the event of a strengthening or weakening of the economy. Rents for central retail locations are more stable, although they are affected by the current transition taking place within the retail sector. However, the risk is limited by Hufvudstaden’s concentration on properties in the most
interesting commercial locations. The rent level for leased premises with lease terms of three years or more are linked to the consumer price index, and many agreements also have a minimum indexation level. Rent changes take place when the leases are renegotiated.
Property tax increases constitute a risk although this risk is limited as a significant proportion of the property tax is passed on to Hufvudstaden’s tenants.
Rent losses on vacant space
In the event of a slowdown in the economy, the risk of an increase in vacant space is greater. There should always be some vacant office space in order to offer the customers potential for expansion, to permit redevelopment to take place, and to test the market’s willingness to accept higher rent levels.
A long average lease term is an advantage when market rents are falling and a disadvantage when they are rising. Excessively frequent relocation and vacation of premises give rise to adaptation costs. These costs cannot always be compensated for by increased rents. Normally, Hufvudstaden seeks to sign leases with long lease terms.
Turnover-based rent is mainly applied at the NK department stores but also
in other retail premises located in other properties. Hufvudstaden is striving to have a high guaranteed minimum rent, which limits the risk of a fall in rents, supplemented by revenue potential from the turnover-based rent supplement.
Operation and maintenance
Hufvudstaden is working actively to optimize the properties’ energy use and doing so reduce operating costs. Electricity procurement takes place regularly through forward agreements to reduce sensitivity to fluctuations in energy prices. Hufvudstaden’s property holdings are well maintained. The Company is focused firmly on the way it works with follow-up and control of costs in each individual property, thus reducing the risk of unforeseen cost increases.
Concentration on central Stockholm and central Gothenburg
The concentration of a property portfolio in a geographical market area could involve a potential increase in risk because of reduced diversification. In Hufvudstaden’s case, however, the risk is limited as the assessment is that in time Stockholm and Gothenburg will be the country’s strongest market areas and the most interesting growth markets. Financial risks Apart from its own funds, the Company’s operations are also financed through loans. Consequently, the Group is exposed to financing, interest rate and credit risks. A presentation of the Company’s Finance Policy and the manner in which financial risks are handled, as well as credit risks attributable to accounts receivable and rent receivables, can be found in Note 2.
The effects on pre-tax profit on a fullyear basis – excluding changes in value – in the event of changes in a number of factors are reported in the table below. The reported impact on profit in conjunction with changes in the rent level, vacancy level, operating and maintenance costs, property tax, and interest rates, refers to the effects that would have occurred, calculated using current information at the end of the financial year. The reported effects on profit should only be seen as an indication and do not include any effect resulting from compensatory measures that could be taken by the Executive Management.
Change in pre-tax profit, excluding changes in value
Impact on profit,
|Rent level||SEK 100/sq m||+/- 38|
|Vacancy level1)||1 percentage point||-/+ 20|
|Operation and maintenance||10 per cent||-/+ 14|
|Property tax2)||1 percentage point||-/+ 18|
||1 percentage point||-17 +11|
1) Vacant floor space is estimated at SEK 5,100 per square metre.
2) Taking into account the fact that the costs are in part passed on to the tenants within the framework of the lease agreements.