Property valuation

Internal valuation

Castellum recognises its properties at fair value and has carried out an internal valuation of all properties as of December 31, 2020. The valuation was conducted in a uniform manner, and was based on a ten-year cash flow model, which is described below. The internal valuation was based on an individual assessment for each property of both its future earnings capacity and its required market yield. In addition to an assumed inflation level of 1.5%, the valuation of a property’s future earnings capacity took potential changes in rental levels, occupancy rates and property costs into consideration. Ongoing projects have been valued in accordance with the same principle, but with deductions for remaining investments. Building rights were valued on the basis of an estimated average market value of approximately SEK 1,750 per square metre (1,600). Further information about the valuation is provided in Note 13.

Example calculation of internal valuation

To illustrate the ten-year cash flow model, the example below is provided. It should be noted that assumptions regarding cash flow trends and other assumptions included in the model are for illustrative purposes only. Even though relevant figures are used, the example should not be regarded as a forecast of the company’s expected earnings.

Assumptions in the example:

  • The economic occupancy rate is assumed to increase in order to attain a long-term level of 96% in 2025.
  • Net operating income for 2020 is based on actual results for the investment properties, assuming a cost of SEK 30 per square metre for dedicated property administration.
  • Growth in rental value and property costs is assumed to be 1.5% per year during the calculation period.
  • The average economic life of the property portfolio is assumed to be 50 years.
  • The value of developments, land and building rights is assumed to be MSEK 4,089.
  • The required yield (i.e. the discount factor) is calculated as follows:

 

 

Required yield

 

Percentage of capital

 

Weighted required yield

Equity

 

9%

 

37%

 

3.3%

Borrowed capital

 

5%

 

63%

 

3.2%

Weighted required yield

 

 

 

100%

 

6.5%

Property value at different required yields and growth in rental value and property costs

MSEK

 

2020

 

2021

 

2022

 

2023

 

2024

 

2025

 

2026

 

2027

 

2028

 

2029

 

2030

Rental value

 

6,503

 

6,603

 

6,705

 

6,808

 

6,913

 

7,019

 

7,127

 

7,237

 

7,349

 

7,462

 

7,577

Rental income

 

5,952

 

6,141

 

6,303

 

6,400

 

6,567

 

6,719

 

6,835

 

7,020

 

7,128

 

7,238

 

7,349

Economic occupancy rate

 

93%

 

93%

 

94%

 

94%

 

95%

 

96%

 

96%

 

97%

 

97%

 

97%

 

97%

Property costs

 

–1,308

 

–1,328

 

–1,348

 

–1,368

 

–1,388

 

–1,409

 

–1,430

 

–1,452

 

–1,473

 

–1,496

 

–1,518

Net operating income = cash flow

 

4,644

 

4,813

 

4,955

 

5,032

 

5,179

 

5,310

 

5,405

 

5,568

 

5,655

 

5,742

 

5,831

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted cash flow, year 1–9

 

36,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted residual value

 

 

 

 

Discounted residual value year 10

 

59,267

 

 

 

 

104,025

 

 

 

Discounted cash flow

 

Assumed value for projects, land and building rights

 

4,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total property value

 

99,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required yield

The required yield on equity is individual to each property and based on assumptions regarding a real interest rate of 3.3%, inflation of 1.5% and a risk premium. The risk premium is individual to each property and consists of general risk and individual risk. General risk reflects the fact that property investment is not as liquid as bonds, and that it is dependent on the general economic trend. Individual risk is specific to each property and constitutes a balanced assessment of a number of factors such as property category, the town or city where the property is located, the location of the property within the town or city, the technical standard and so on. Properties owned by site leasehold rights, where Castellum has a land rehabilitation obligation under contractual agreement, are assigned an additional individual risk premium of 1.0%. On average, the risk premium totals 5.8% with a range of 2.5–11.3%.

The cost of borrowed capital is assumed to be 5.0% and to consist of a long-term view on the real interest rate, credit margin and inflation. The loan-to-value ratio is assumed to be between 55% and 65% depending on the property category. The required yield on total capital is used to discount the estimated ten-year future cash flow. The residual value is discounted by calculating the return on total capital minus growth equivalent to inflation, in order not to assume perpetual real growth.

Average valuation yield, MSEK

(excl. projects/land and building rights)

 

2020

 

2019

Net operating income, properties

 

4,771

 

4,455

+ Index adjustments 2020, 1%

 

294

 

94

+ Real occupancy rate, 94% at the lowest

 

17

 

228

– Property admin, SEK 30/sq. m.

 

–133

 

–128

Normalised net operating income

 

4,949

 

4,649

Valuation (excl. building rights of MSEK 608)

 

98,953

 

90,614

Average valuation yield

 

5.0%

 

5.1%

Valuation yield per category

 

2020

 

2019

Offices

 

4.9%

 

5.0%

Public sector properties

 

4.8%

 

4.8%

Warehouse/logistics

 

5.2%

 

5.6%

Retail

 

5.5%

 

5.8%

Light industry

 

5.9%

 

6.6%

Total

 

5.0%

 

5.1%

Valuation assumptions, year 1

 

2020

 

2019

Rental value, SEK/sq. m.

 

1,534

 

1,520

Vacancy rate

 

7%

 

8%

Direct property costs SEK/sq. m.

 

286

 

321

Indirect property costs SEK/sq. m.

 

31

 

32

Uncertainty range

Property valuations are calculations performed in accordance with accepted principles on the basis of certain assumptions. The value range indicated in property valuations, which in a functioning market most often lies within +/– 5–10%, should be regarded as a measurement of the uncertainty in the assumptions and calculations made. In a less liquid market, the range may be wider. For Castellum, an uncertainty range of +/– 5% means a range in value of the asset portfolio of MSEK 97,890–108,194, equivalent to +/– MSEK 5,152.

Changes in value

Both interest in property investments (which was rather uncertain in the first half-year) and access to capital strengthened during the second half-year, which has resulted in a stable and strong property market despite it still being impossible to fully overview the effects of the pandemic. A certain amount of differentiation is occurring among different property types, with secure cash flows remaining particularly attractive. Castellum recognised an unrealised change in value of MSEK 3,712 (4,276). Moreover, sales of MSEK 151 (–358) were recognised, which comprised an earnout from the sale of the Archimedes property in Stockholm in 2018 (the detailed development plan entered force during 2020 and the transaction has finally been settled) as well as the sale of five properties at a price that exceeded their value by approximately MSEK 30.

Castellum signed agreements in late 2020 on the sale of an asset portfolio to Blackstone for approximately SEK 18.1 billion, net, less costs for transaction and deferred tax of approximately MSEK 900, entailing an underlying property value of approximately SEK 19 billion. The sale was divided into two tranches:

  • Portfolio No. 1, with a net sale price of approximately SEK 5 billion and a valuation at year-end of approximately SEK 4.8 billion, with hand-over in early February. The transaction was contingent upon approval by the Swedish Competition Authority (granted in January 2021) and will thus be recognised as sold in the first quarter of 2021.
  • Portfolio No. 2, with a net sale price of approximately SEK 13.1 billion and a valuation at year-end of approximately SEK 12.7 billion, with hand-over in late March or early April. The transaction was contingent upon both approval by the Swedish Competition Authority (granted in January 2021) and the successful acquisition of Entra (offer withdrawn in February 2021).

The aforementioned portfolios showed unrealised changes in value of approximately SEK 1.6 billion in the last quarter. The portfolio premium, which totals approximately 3% of the net sale price or 20 basis points in yield requirement, has not been taken into account. The portfolio premium, totalling approximately MSEK 550, will only be realised as a change in value upon transfer.

The value of the derivatives changed by MSEK –120 (–111), mainly due to changes in long-term market interest rates.

Change in value

 

2020

 

2019

Cash flow

 

502

 

1,638

Project gains/building rights

 

780

 

532

Required yield

 

2,065

 

1,742

Acquisitions

 

365

 

364

Unrealised changes in value

 

3,712

 

4,276

As %

 

3.7%

 

4.7%

Sales

 

151

 

–358

Total

 

3,863

 

3,918

As %

 

3.9%

 

4.3%

Total return

As regards the total return from the properties (i.e. the total of investment yield and changes in value), the result for Castellum depends on when the measurement period commences.

Over the last ten years, Castellum has had a total yield of 8.7% (5.7% investment yield +3.0% change in value). In 2020, the total yield was 9.9% (5.0% investment yield +4.9% change in value). Calculations do not include project gains or acquisitions from the year the acquisition is completed.

 

 

 

 

3 yrs

 

10 yrs

 

 

1 yr

 

avg/yr

 

avg/yr

Total return

 

 

 

 

 

 

Properties

 

9.9%

 

10.2%

 

8.7%

The Castellum share

 

–1.6%

 

18.7%

 

14.4%

Nasdaq Stockholm (SIX Return)

 

14.8%

 

14.0%

 

11.4%

Real Estate Index Sweden (EPRA)

 

–4.3%

 

19.2%

 

16.0%

Real Estate Index Europe (EPRA)

 

–10.0%

 

2.5%

 

8.5%

Real Estate Index Eurozone (EPRA)

 

–7.4%

 

1.0%

 

8.0%

Real Estate Index Great Britain (EPRA)

 

–15.9%

 

–1.5%

 

7.1%

Change in value

 

 

 

 

 

 

Changes in values on properties, unweighted

 

3.9%

 

4.8%

 

3.3%

Inflation

 

0.5%

 

1.4%

 

0.9%

External valuation

In order to validate the valuation, 180 properties, equivalent in value to 54% of the portfolio, were valued externally by Forum Fastighetsekonomi AB in Sweden and CBRE in Denmark. The properties were selected on the basis of the largest properties in terms of value, but also to reflect the composition of the property portfolio as a whole in terms of category and geographical location. The external valuations of the selected properties totalled MSEK 54,920, within an uncertainty range of +/– 5–10% at the property level, depending on the category and location of the respective properties. Castellum’s valuation of the same properties totalled MSEK 55,666, i.e., a net deviation of MSEK 746 corresponding to 1.4%. The gross deviations were MSEK 1,130 and MSEK –1,876 respectively, with an average deviation of 5.4%.

It should be noted that Castellum’s deviation in relation to the external valuers falls well within the uncertainty range of +/– 5–10%.

Internal vs external valuation, MSEK

 

 

2020

 

2019

 

2018

 

2017

External valuer

 

54,920

 

51,790

 

48,345

 

43,147

Proportion external of internal

 

54%

 

55%

 

56%

 

53%

External vs internal

 

–746

 

–923

 

–1,322

 

–130

NOI %

 

–1.4%

 

–1.8%

 

–2.7%

 

–0.3%

Gross deviation positive

 

1,130

 

1,182

 

995

 

1,328

Gross deviation negative

 

–1,876

 

–2,104

 

–2,314

 

–1,458

Average deviation

 

5.4%

 

6.2%

 

6.7%

 

6.4%