Factor Change
Profit before tax, SEKm
Rental income +/-1 per cent +/–15
Economic occupancy rate +/–1 percentage unit +/–16
Interest-rate level of interest-bearing
liabilities +1 percentage unit –19
Property costs +/-1 per cent –/+5
Changes in value of properties +/-5 per cent +/–878
Rental income, rental development and occupancy rate
45 per cent of Balder’s contracted rental income comes from residential properties and 55 per cent from premises. Balder’s income is affected by the occupancy rate of the properties, the possibility of charging market-related rents as well as customers’ payment capacity. If the occupancy rate or rental levels change, irrespective of reason, Balder’s results are affected. Naturally, the risk of large fluctuations in vacancies and loss of rental income increases the more large individual tenants a property company has. Balder’s 10 largest leases represent 7.4 per cent of the total rental income and the average lease term amounts to 11.0 years. No individual lease accounts for more than 1.9 per cent of Balder’s total rental income and no individual customer accounts for more than 3.3 per cent of the total rental income. There are no guarantees that Balder’s major tenants will renew or extend their leases when they expire, which in the longer term can lead to altered rental income and vacan- cies. The dependence on individual tenants decreases in line with Balder’s continued growth through acquisitions. In order to limit the risk of falling rental income and a weakened occupancy rate, Balder strives to develop long-term relationships with the company’s existing customers. Balder’s leases are normally wholly or partly linked to the consumer price index, in other words, wholly or partly adjusted for inflation.
Balder is dependent on tenants paying agreed rents in time. In some leases, the tenant’s obligations are guaranteed by the Parent Company or through bank gua- rantees. Risk still remains that tenants suspend their payments or in other respects do not fulfil their obligations. If this happens, Balder’s results could be affected negatively.
Unlike commercial properties, residential properties are covered by regulations which among other things mean that the so-called utility value principle determines
By actively working with diversification of risks as regards type of property,
geographical location and customer composition, Balder limits the company’s
risks. All business activities are associated with risks that may affect the com-
pany but also may generate opportunities.
FASTIGHETS AB BAldEr AnnuAl rEporT 2011 43
opporTunITIES And rISKS
the setting of the rent.
At year-end, Balder had an economic occupancy rate of 94 percent, which means that the vacancy at year-end amounted to SEK 107m and represents an opportunity for potential new lettings. The table on page 42 shows how profit before tax would be affected by a change of +/– 1 per cent in the rental level and +/– 1 per cent in the economic occupancy rate.
Operating and maintenance costs
Operating costs mainly consist of costs that are based on usage such as electricity, cleaning, water and heating costs. Several of these goods and services can only be purchased from one actor, which can affect the price. To the extent that possible cost increases are not compensated by adjustment in leases or increase in rent through renegotiation of leases, Balder’s results can be affected negatively. Mainte- nance expenses include measures aimed at maintaining the standard of the proper- ties in the long term. These costs are expensed to the extent they constitute repairs and replacement of smaller areas. Other additional expenses of a maintenance cha- racter are capitalised in connection with the expense arising. Unforeseen and exten- sive repair needs may also affect the results negatively.
Change in value of the properties
More than 80 per cent of the value of Balder’s real estate portfolio is found in the three metropolitan regions Stockholm, Gothenburg/West and Öresund. Balder’s investment properties are recognised at fair value in the balance sheet and changes in value are recognised in the income statement. Unrealised changes in value do not affect the cash flow. Balder carries out an internal valuation of the real estate port- folio in connection with quarterly reports. Parts of the real estate portfolio are also externally valued and compared to the internal valuation.
The value of the properties is affected by a number of factors including property- specific factors such as occupancy rate, rental level and operating costs as well as market-specific factors such as yield requirements and cost of capital.
Property-specific changes such as rental levels and vacancy rates and market-spe- cific changes such as yields, affect the value of investment properties which in turn impacts on the Group’s financial position and results.
Dependent on key people
Balder’s future growth is dependent on the knowledge, experience and commit- ment of the management group and other key people. The company could be affec- ted negatively if one of more of these people would leave the Group.
Operational risks
Balder can incur losses within the framework of its operating activities due to defec- tive routines and/or irregularities. Good internal control, appropriate administrative systems, skills development and good access to reliable valuation and risk models provide a good basis for reducing the operational risks. Balder continually works on monitoring the company’s administrative security and control.
Taxes and changed legislation
Changes in corporate and property taxes, as well as other government levies, rent allowance and interest allowance can affect the basis for Balder’s operations. It cannot be ruled out that tax rates will change in the future or that other changes will occur in the state system that affect real estate ownership. However, in the majority of leases for rent of premises, the tenant is responsible for the property tax
250 200 150 100 50 0 SEKm
Maturity structure of commercial leases
2021 − 2020 2019 2018 2017 2016 2015 2014 2013 2012 1,200 900 600 300 0 Number
Number of commercial leases per rental value
–250 251– 500
3,001– 501–
FASTIGHETS AB BAldEr AnnuAl rEporT 2011 45 that falls due in each period. Changes in corporate taxation and other governmental
levies, may affect Balder’s results. A change in tax legislation or practice which imp- lies changes in possibilities of making tax write-offs or utilising loss carry-forwards, for example, can mean a change in Balder’s future tax situation and can thereby also impact results.
Financial risks
Balder’s operations are mainly financed by equity and loans from external lenders. The relationship between equity and liabilities is managed on the basis of the chosen level of financial risk and the amount of equity to meet the lenders’ requirements for securing loans at market-related conditions. The financing via loans means that Balder is exposed to financing, interest and credit risks. Financing conditions include requirements as regards the equity/assets ratio, loan-to-value ratio and interest coverage ratio.
Refinancing risk
Refinancing risk refers to the risk that financing cannot be secured at all, or only at a significantly increased cost. Balder conducts continual discussions with banks and credit institutions aimed at securing the long-term financing. Balder cooperates clo- sely with a handful of lenders in order to secure the company’s long-term capital requirements.
Interest risk
Interest risk is defined as the risk that changes in the level of interest rates will affect Balder’s financing expense. The interest expense is Balder’s single largest cost item. Interest expenses are mainly affected by the current level of the market rate of interest and the credit institutions’ margins and by what strategy Balder chooses for interest rate refixing periods. The market rates of interest are mainly affected by the expected inflation rate. In times of rising inflation expectations, the level of interest rate can be expected to rise, which immediately increases the interest expenses on loans with short maturities.
Balder has a large proportion of loans which run according to short interest rate refixing periods. Balder deploys interest rate derivatives as part of its interest risk management, in order to achieve preferred interest rate refixing periods.
Credit risk
Credit risk is defined as the risk that Balder’s counterparties cannot fulfil their finan- cial obligations towards Balder. Credit risk in the financial operations arises during investment of excess liquidity, on entering into interest rate swap contracts and in connection with issued credit agreements. As regards Balder’s trade receivables, customary credit checks are carried out before a new lease is entered into. Environmental risk
Property management and property development have an environmental impact. Balder has established an environmental policy and works with environmental issues. Under the Environmental Code, those conducting an activity which has contributed to pollution are also responsible for after-treatment. If those conducting the activity cannot carry out or pay for the after-treatment of a property, those acquiring the pro- perty and on the acquisition date were aware of or should have discovered the pollu- tion are responsible. Since Balder mainly owns residential, office and commercial pro- perties, this risk is considered limited.