A year of upheaval for the property industry
2022 was an intense and eventful year for Castellum. The Nordic property market was heavily impacted by geopolitical unrest as a result of the war in Ukraine, high inflation, and an economic slowdown. At the same time, despite all this, the market situation and demand for offices and warehouse/logistics properties were strong. The combination with Kungsleden was completed, which increased income from property management by 28 per cent. The prospects for 2023, however, are divided, and we will face the challenges ahead with humility. Operationally speaking, Castellum’s properties and projects are moving along at a good pace while the finance market is marked by continued uncertainty.
The combination with Kungsleden meant that Castellum added just over 200 new properties and around 100 new employees. In 2022, the organisation put a great deal of effort into the integration of systems and working methods, as well as into identifying operational synergy effects of around SEK 100 M. The combination has also involved a new organisation with a new region: Region Mälardalen, which includes Västerås and Uppsala. In 2022, Castellum worked further to secure the Nordic office and logistics platform. The geographic refinement in the portfolio continued, where Castellum took measures that included exiting Gävle, Halmstad and Alingsås. At the same time, ten high-quality office and warehouse spaces were completed in 2022 that generate a rental value of around SEK 220 M per year.
Castellum posted strong earnings for the year, with an asset portfolio of SEK 181 Bn including the holdings in the Norwegian company Entra, and positive net lettings (SEK 161 M) for the twelfth consecutive quarter. Demand for offices and warehouse/logistics was favourable, and many workers returned to the office after a long period of working remotely under the restrictions of the coronavirus pandemic.
Castellum achieved a historically high occupancy rate of 93.4 per cent in the second quarter of 2022, and rental levels either were stable or increased throughout the year. At the same time, customer satisfaction increased in the annual CSI survey, where the rating rose to 75 (74).
Economic slowdown and uncertainty in the capital market
The Nordic property market was adversely impacted after the first quarter by rapidly rising inflation, geopolitical uncertainty and the ensuing energy crisis as a result of the war in Ukraine. Interest-rate levels rose steeply with a drastic slowdown in access to capital as a result, primarily in the bond market, which is a key market for the property industry. This resulted in sharp downturns in share prices for Castellum and other property companies during the summer and autumn, even if we noted a certain amount of recovery from low levels in the final quarter of the year.
For most of 2022, Castellum increased it focus on strengthening its financial position and safeguarding its credit rating. As a link in this process, the company slowed its investment volume going forward and even divested properties for around SEK 4 Bn, of which sales of around SEK 2.2 Bn occurred late in the year, and signed letters of intent for a further SEK 1.8 Bn that are expected to be implemented in the first half of 2023. In the autumn, the Board of Directors proposed a pause in the dividend tradition in 2023, which also contributes to strengthening the financial position.
Projects yield growth and increase the quality of the portfolio
In 2022, ten major projects with a total rental value of SEK 220 M per year were completed. Two examples are the NollCO2-certified police station in the Korsningen district of Örebro and the Miljöbyggnad-certified, fully let GreenHaus office building in Helsingborg.
Castellum will complete the majority of its ongoing projects in 2023, and these will generate around SEK 310 M in rental value annually. The new E.ON head office and the court building in Malmö, with an annual rental value of around SEK 170 M, will be completed in the first quarter of 2023. Under the prevailing market conditions, Castellum project volume has slowed down but the company is prepared, with an attractive development portfolio to start up when market conditions are more favourable once again.
Rising interest rates and uncertainty in the finance market are driving up interest in the values of the property companies. In the fourth quarter, Castellum impaired its property values by 4 per cent. Since the lease indexing and completed projects have resulted in higher values, the net effect for 2022 was –2 per cent.
“Now that the robust growth seems to be slowing somewhat, there are opportunities to develop the business and become even better equipped for the future. Castellum has attractive assets in the right locations and a strong underlying business with a low vacancy rate, a high-quality portfolio and an efficient administrative organisation.”
Acting Chief Executive Officer, Castellum AB
Stable leasing base and increases in income
Castellum has been actively engaged in costs during the year, prioritising energy-saving measures in particular as a result of rising energy prices. High energy prices, and inflation in general, have certainly increased costs while the rate of inflation will yield significant increases in income owing to the index components in our leases.
Even though times are tough for many tenants, with generally rising costs, the assessment is that Castellum’s various customer segments – with a large proportion of public-sector tenants, numerous well-capitalised office customers and logistics operators – can withstand these cost increases. In the well-diversified and stable asset portfolio that Castellum possesses, nearly one quarter of the rental income comes from public-sector tenants. Only a very small portion of rental income – 6 per cent – now comes from the hard-pressed retail sector.
Castellum’s geographical positioning in strong sub-markets in stable economies in the Nordic region constitutes a well-diversified and stable leasing base. The experiences from the pandemic, when many tenants were also exposed to significant challenges, show that Castellum successfully changed course and managed new situations quickly, without rental losses during the period.
Continued focus on energy efficiency
Energy efficiency in the property portfolio continued to improve, and consumption decreased by 4 per cent in the like-for-like portfolio. Energy consumption per square metre was 41 per cent better compared with the industry average. During the year, 21 new solar panel systems were installed, and all together Castellum now has 76 installations with an area of 83,500 square metres that produce 7,339 MWh – corresponding to 7 per cent of the company’s annual energy consumption. With the 2022 electricity prices, the investments Castellum has made in renewable energy in recent years have proven to be far more profitable than estimated.
Additional focus during the year has been on certifying more properties in the portfolio for sustainability, where late in the year the company reached 249 certified properties – 45 per cent of the area in the portfolio – and is thereby a step closer to the target of certifying 50 per cent of the property space by 2025 at the latest.
Top marks for Castellum in sustainability
During the year, Nasdaq approved Castellum’s application for listing as a green share, and Castellum thus became the first major property company in the Nordic region to receive a Green Equity designation. In December, Castellum received a top ranking in the Dow Jones Sustainability Indices for the seventh year in a row – the only Nordic property company to do so. The company also ranked as a global sector leader in GRESB, under the Office/Industry category.
Economic slowdown and continued uncertainty in 2023
Now that Castellum’s robust growth over the past few years seems to be slowing somewhat, there are opportunities to develop the business and become even better equipped for the future. As one of the foremost and largest commercial property company in the Nordic region, Castellum has attractive assets in the right locations and a strong underlying business with a low vacancy rate, a high-quality portfolio and an efficient administrative organisation. The strategy of growing in the Nordic region, in offices and logistics, with the target of 10 per cent growth annually in income from property management per share, remains in place.
In conclusion, I would like to thank all our tenants, partners, creditors, shareholders, employees, and other stakeholders for their continued strong commitment during a challenging year.
Acting Chief Executive Officer, Castellum AB