Note 13 Investment properties

 

 

Group

Schedule of the changes during the year

 

2020

 

2019

Opening balance

 

95,168

 

89,168

New construction, extensions and reconstructions

 

2,512

 

2,762

of which capitalised interest costs

 

37

 

28

Acquisitions

 

2,646

 

3,350

Sales

 

–740

 

–4,496

Change in value

 

3,712

 

4,276

Currency translation

 

–256

 

108

Closing balance

 

103,042

 

95,168

 

 

 

 

 

Schedule of tax assessment value

 

 

 

 

Buildings

 

29,008

 

24,939

Land

 

13,142

 

10,181

Total tax assessment value

 

42,150

 

35,120

 

 

 

 

 

Income from investment properties

 

5,892

 

5,717

Property costs for investment properties

 

1,549

 

1,609

The year’s change per category is shown in the table below.

 

 

Offices

 

Public sector properties

 

Warehouse/Logistics

 

Retail

 

Light industry

 

Developments and land

Change for the year by category

 

2020

 

2019

 

2020

 

2019

 

2020

 

2019

 

2020

 

2019

 

2020

 

2019

 

2020

 

2019

Opening balance

 

44,667

 

41,744

 

21,716

 

20,255

 

15,390

 

13,635

 

7,242

 

7,115

 

2,119

 

2,029

 

4,034

 

4,390

Category adjustments

 

1,189

 

394

 

–4

 

531

 

692

 

305

 

14

 

668

 

 

42

 

–1,891

 

–1,939

New construction, extensions and reconstructions

 

835

 

862

 

217

 

257

 

389

 

302

 

158

 

343

 

12

 

41

 

901

 

957

Acquisitions

 

2,179

 

1,183

 

218

 

1,545

 

233

 

144

 

 

1

 

 

 

16

 

477

Sales

 

–74

 

–1,347

 

–612

 

–2,017

 

 

–19

 

 

–1,011

 

–20

 

–97

 

–34

 

–5

Change in value

 

767

 

1,734

 

364

 

1,136

 

1,747

 

1,021

 

138

 

126

 

241

 

105

 

455

 

154

Currency translation

 

–231

 

97

 

–20

 

9

 

–5

 

2

 

 

 

 

 

 

Closing balance

 

49,332

 

44,667

 

21,879

 

21,716

 

18,446

 

15,390

 

7,552

 

7,242

 

2,352

 

2,119

 

3,481

 

4,034

The Parent Company owns no properties.

Investments during the year

In 2020, Castellum invested a total of MSEK 5,158 (6,112), of which MSEK 2,646 (3,350) pertained to acquisitions and MSEK 2,512 (2,762) pertained to new construction, extensions and reconstructions.

Significant obligations

In addition, Castellum has commitments to complete initiated projects in which the remaining investment volume amounts to approx. SEK 3.2 billion above and beyond the amounts reported in the balance sheet.

Larger ongoing investments

Larger ongoing investments

Property

 

Investment, MSEK

 

Of which remaining, MSEK

 

To be completed

Sjustjärnan/E.ON, Malmö

 

1,296

 

947

 

Q1 2023

Godsfinkan, Malmö

 

1,270

 

799

 

Q1 2023

Dragarbrunn 21:1, Uppsala

 

493

 

224

 

Q4 2021

Götaland 5, Jönköping

 

325

 

292

 

Q3 2022

GreenHaus, Helsingborg

 

305

 

110

 

Q2 2022

Valuation model

According to accepted theory, the value of an asset is the net present value of future cash flows that the asset is expected to generate. This section aims to describe and illustrate Castellum’s cash-flow-based model for calculation of the value of the property portfolio.

The value of the property portfolio is calculated in this model as the total present value of net operating income minus remaining investments on ongoing projects, during the next nine years and the present value of the estimated residual value in year ten. The residual value in year ten consists of the total present value of net operating income during the remaining economic life span. The estimated market value of undeveloped land and building rights are added to this. Accordingly, valuation is conducted pursuant to IFRS 13, level 3.

The required yield and the assumption regarding future real growth are crucial for the calculated value of the property portfolio, as they are the most important value-driving factors in the valuation model. The required yield is the weighted cost of borrowed capital and equity. The cost of borrowed capital is based on the market interest rate for loans. The cost of equity is based on a risk-free interest rate equivalent to the long-term government bond rate plus a risk premium. The risk premium is unique to each investment and depends on the investor’s perception of future risk and potential.

Internal valuation

Castellum records its investment properties at fair value and has internally appraised all its properties as of 31 December 2020. The valuation was carried out in a uniform manner, and was based on a ten-year cash flow model, which is described in principle above. The internal valuation was based on an individual assessment for each property of both its future earnings capacity and its required market yield. Valuations are made locally in each subsidiary and are quality assured by Castellum AB, which also has overall responsibility for both the process and system as for determining the macroeconomic assumptions.

Assumptions of cash flow

In assessing a property’s future earnings capacity, we took into account an assumed level of inflation of 1.5% and potential changes in rental levels from each contract’s rent and expiry date compared with the estimated current market rent, as well as changes in occupancy rate and property costs. In the valuation, the economic occupancy rate gradually improves during the ten-year period and reaches 96%. Included in property costs are operating expenses, maintenance, site leasehold fee, property tax, and leasing and property administration.

 

 

2020

Valuation assumptions, year 1

 

Public sector properties

 

Offices

 

Retail

 

Logistics

 

Industry

 

Total

Rental value, SEK/sq. m.

 

1,912

 

1,925

 

1,444

 

934

 

974

 

1,534

Vacancy rate

 

6%

 

8%

 

3%

 

7%

 

6%

 

7%

Direct property costs, SEK/sq. m.

 

225

 

392

 

240

 

155

 

176

 

286

Indirect property costs, SEK/sq. m.

 

35

 

34

 

34

 

25

 

27

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

Valuation assumptions, year 1

 

Public sector properties

 

Offices

 

Retail

 

Logistics

 

Industry

 

Total

Rental value, SEK/sq. m.

 

1,894

 

1,861

 

1,372

 

929

 

969

 

1,520

Vacancy rate

 

4%

 

8%

 

6%

 

7%

 

5%

 

8%

Direct property costs, SEK/sq. m.

 

336

 

386

 

228

 

166

 

180

 

321

Indirect property costs, SEK/sq. m.

 

35

 

36

 

33

 

25

 

26

 

32

Assumptions of required yield

The required yield on equity is individual to each property and based on assumptions regarding a real interest rate of 3%, inflation of 1.5% and risk premium. The risk premium is different for each property and can be divided into two components: general risk and individual risk. The general risk makes up for the fact that a property investment is not as liquid as a bond, added to the fact that the asset is affected by the general economic situation. The individual risk is specific to each property and comprises a complex weighted assessment that includes property category; the town/city in which the property is located; the property location within the town/city with reference to the property category; and whether the property has the right design, is appropriate and makes efficient use of space. Further considerations: the property’s technical standard with regard to such criteria as choice of materials, the quality of public installations, furnishing and equipment on the premises and in apartments; as well as the nature of the lease agreements with regard to such issues as length, size and number of agreements. Properties owned through site leaseholds, 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%.

In order to calculate the required yield on total capital, an operating assumption of 5.0% has been made about the cost of borrowed capital. The cost of borrowed capital comprises a long-term view of the real interest rate, the 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 calculated by weighing the required yield on equity and the cost of borrowed capital, depending on the capital structure. 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 less growth equivalent to inflation, in order not to assume perpetual real growth. The average required yield per property category is shown in the table below.

Property type

 

31 Dec 2020

 

31 Dec 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%

The calculated required yield is then calibrated compared with the required market yield. To get an opinion about the required market yield, Castellum follows completed property transactions on the market. In an inactive market within a certain area or for a certain type of property, Castellum compares the data from transactions completed in a similar area or for a similar type of property. In the absence of completed transactions the opinion is based on existing macroeconomic factors.

The average valuation yield for Castellum’s property portfolio, excluding developments, land and building rights, can be estimated at 5.0% (5.1).

Average valuation yield, MSEK

 

2020

 

2019

Net operating income according to income statement

 

4,335

 

4,113

Add back lettings and property administration expenses

 

379

 

374

Reversed Co-working

 

8

 

–5

Net operating income, ongoing development projects

 

–20

 

–22

Properties acquired/completed as if owned the whole year

 

111

 

55

Properties sold

 

–42

 

–60

Net operating income excluding lettings and property administration expenses for properties as if owned during the whole year, excl. projects and land

 

4,771

 

4,455

Adjusted for:

 

 

 

 

Index adjustments 2020, 0.3% (1)

 

17

 

94

Real occupancy rate, 96% at the lowest

 

294

 

228

Property administration, SEK 30/sq. m.

 

–133

 

–128

Normalised net operating income

 

4,949

 

4,649

Valuation excluding building rights of MSEK 608 (520)

 

98,953

 

90,614

Average valuation yield

 

5.0%

 

5.1%

Projects and building rights

Ongoing projects are valued using the same principle, but with reduction for remaining investment. Building rights were valued on the basis of an estimated average market value of approximately SEK 1,750 per square metre (1,600).

The value of the property portfolio

The internal valuation indicates a fair value of MSEK 103,042 (95,168), corresponding to a change in value of 4% (5). Of this value, approximately 4% (i.e. MSEK 4,311) pertains to properties held via site leasehold agreements, with rental income of MSEK 287. Fair value distributed by property category and region is shown below.

Property value, MSEK, 31 Dec 2020

 

Offices

 

Public sector
properties

 

Warehouse/
Logistics

 

Retail

 

Light industry

 

Developments and land

 

Total

Central

 

11,166

 

8,707

 

1,661

 

1,880

 

404

 

498

 

24,316

Öresund

 

11,419

 

3,651

 

2,601

 

840

 

393

 

1,499

 

20,403

Stockholm

 

12,922

 

5,839

 

5,971

 

3,542

 

792

 

1,215

 

30,281

West

 

11,011

 

1,614

 

8,213

 

1,290

 

763

 

269

 

23,160

North

 

102

 

2,068

 

 

 

 

 

2,170

Finland

 

2,712

 

 

 

 

 

 

2,712

Total

 

49,332

 

21,879

 

18,446

 

7,552

 

2,352

 

3,481

 

103,042

Uncertainty range and sensitivity analysis

A property’s market value can only be confirmed when sold. Property valuations are calculations performed in accordance with accepted principles on the basis of certain assumptions. The value range of +/– 5–10%, often used in property valuations in a normal market, should therefore be seen as an indication of the uncertainty that exists in assumptions and calculations. In a less liquid market, the range may be wider. For Castellum, an uncertainty range of +/– 5% means a range in value of the property portfolio of MSEK 97,890–108,194, corresponding to +/– MSEK 5,512.

 

 

Effect on value, MSEK

Sensitivity analysis +/– 1% (point)

 

Offices

 

Public sector properties

 

Warehouse/Logistics

 

Retail

 

Light industry

Rental value

 

669

 

280

 

241

 

98

 

31

Economic occupancy rate

 

669

 

280

 

241

 

98

 

31

Property costs

 

141

 

51

 

45

 

18

 

6

Required yield +

 

–7,827

 

–3,258

 

–2,641

 

–1,090

 

348

Required yield

 

9,374

 

4,720

 

3,491

 

1,538

 

431

The sensitivity analysis shown above illustrates how a +/– 1 percentage-point change in growth assumptions in future cash flow and required yield affects the valuation. However, the sensitivity analysis is not realistic as one isolated parameter rarely changes; instead, the assumptions made are linked together regarding cash flow and required yield.

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%.