Kungsleden has a really distinct and transparent business model; can you talk us through the strategy behind that?
In 2013, Kungsleden launched a new strategy with a focus on long-term ownership, active management and development of commercial properties in the office, industrial/warehouse and retail segments in selected Swedish regions with good economic growth and demand for premises. Our vision is to create attractive places that enrich people´s working days by offering modern and functional premises in good locations at the right price. A very important part of our new strategy was to concentrate our property portfolio both geographically and segment wise in order to deliver on the new strategy.
The new strategy entailed significant recycling of capital as non-core assets were sold and the proceeds reinvested in properties with potential for value enhancement. In the three years 2013-2015, Kungsleden sold non-strategic properties for SEK3.1bn and acquired properties for SEK13.6bn. A successful rights issue for existing shareholders of SEK1.6bn facilitated the portfolio build-up. In the same period, unrealised value gains amounted to more than SEK1.9bn.
By the end of 2015, Kungsleden´s property holdings had been transformed to form a larger, more concentrated and higher quality portfolio with particular emphasis on vibrant office locations with good accessibility. Now, more than half of the property portfolio by value consists of modern office properties in the dynamic metropolitan areas of Greater Stockholm, Greater Gothenburg, Öresund and Västerås. In addition, Kungsleden reached its interim targets for portfolio size and profits two years ahead of schedule.
2015 was a hugely successful year for Kungsleden and you listed in the top five European performers in EPRA’s Global Real Estate Indices – what were the key milestones and highlights for you?
For me, there were six key success factors that stand out from last year. Firstly we created a major new cluster by Stockholm seaport with the acquisition four properties on Gärdet-Frihamnen and one in Hammarby Sjöstad, both Stockholm city districts, for SEK3bn in October. Then on top of that we bought additional properties for our existing three clusters Kista City, Västerås city, Högsbo in Gothenburg.
Then we continued our property portfolio optimisation by divesting non-core assets. During 2015, we acquired strategic properties at a value close to SEK6bn, and we divested approximately SEK4bn of those assets. By doing this we reached and exceeded our medium term portfolio volume target of SEK25bn two years ahead of the original plan. Over time we now have a more ambitious target to expand the portfolio to SEK30bn and establishing that will be the next step for us to do.
Next, looking at our property portfolio, all of the properties we acquired in 2013 have also shown major value increases in 2015, and all the new acquisitions have proved to be very good.
Finally we have worked a lot on our debt portfolio. We have refinanced our bank debt, we have restructured interest rates on the portfolio and we have taken on new financing for the new acquisitions. All in all we have reduced our funding costs significantly, so not the average costs of debt was 5% at the beginning of 2015 and now it’s 2.8%. I believe those are the main reasons for our strong performance.
The property portfolio of Kungsleden is really diverse but one distinct feature is the acquisition of properties in close proximity to eachother. Can you elaborate on this approach?
Another important part of our new strategy is to create clusters which mean that we own several properties within a defined area. By engaging in a close dialogue with our customers - our tenants, and with properties located close together, we can meet our customers’ requirements and changed needs. Often before they realize these themselves. At least this is our ambition. Gathering properties in clusters in carefully chosen locations with high availability and strong growth enables us to:
- have good insight in the local society and thus be able to improve our ability to conduct a successful and sustainable management process
- build and develop relations with both customers and society as a whole
- invest more time than before to improve our dialogue with our customers
- give our skilled Lease Managers and Property Managers the means to offer flexible premises solutions when the customer’s needs change
- attract service functions such as restaurants, cafés, laundry services, gyms and pharmacies
- achieve economies of scale in terms of property management as costs can be spread over several properties
The result is that our customers get a higher level of service and flexible premises solutions, while we achieve a more efficient management process. Today, half of our properties by value are located within one of our ten clusters, the largest being our office clusters in Kista City, Danderyd Office and Stockholm City East.
This quality enhancement notwithstanding, the overall portfolio still has an attractive valuation yield of above 6%. Our tenants represent a cross section of Swedish industry with companies and private organisations of varying size, as well as public sector institutions such as municipalities and government bodies.
What does 2016 hold for the business?
In 2016 and onwards, Kungsleden will enter the next stage of its strategic journey. The macro-economic and market backdrop is good in Sweden with strong GDP growth, good demand for commercial space, increasing rents and strong property investor demand. Kungsleden´s focus will be on creating value in the new property portfolio by being an active asset and property manager, by improving rent per square foot and reducing vacancies with a view towards increasing rental income. Improved tenant retention and tenant improvement investments will play an important part. At the same time, operating and administration cost control will continue to be key. All-in-all, the net operating income will be approaching SEK1.7bn.
The property portfolio will grow through development of existing properties in order to add leasable area, modernise and improve quality, all in all bringing forward the properties’ full potential. Our development pipeline consists of ten projects with an investment volume of more than SEK1bn. Capital recycling will proceed as legacy properties are sold and selective value-added acquisitions are made. In two years´ time, Kungsleden expects to arrive at a portfolio size of SEK30bn organically.
Kungsleden has set ambitious goals for customer and employee satisfaction and for our efforts in the field of Corporate Social Responsibility (CSR). As an example of our work within sustainability we perform continuous projects with the purpose to improve our energy saving efforts. Our goal is to decrease our energy consumption by 20% in seven years time or about 3% per year. Last two years we have managed to reach that goal.
Finally, through the dedicated work performed by our employees who actively manage, improve and develop our properties and customer offer, and also ensure we have an optimal portfolio, we create long-term value for both shareholders and customers. Our objective is to have satisfied customers – our tenants, satisfied employees and satisfied shareholders.
Kungsleden´s vision is to create attractive places that enrich people´s working days by offering modern and functional premises in good locations at the right price. Kungsleden aims to be Sweden´s most profitable and successful property company and deliver attractive total return on its properties and for its share-holders. The company´s property portfolio consisted of 291 properties and amounted to SEK 27.5 billion as of year-end 2015. Three quarters of the portfolio by value are in metropolitan areas and two thirds are offices. The stock is listed on OMX Nasdaq Stock Exchange since 1999.
By: Leon Goldwater