The third quarter was characterized by the macroeconomic development with accelerating inflation, rising interest rates and a volatile market for bonds and commercial paper. At the same time, our core business property management is stable.
Demand for office premises continues to be good on most markets, despite the concerns in the world and on the financial market. At the same time, activity on the rental market for city logistics continues to be high. Net letting amounted to SEK –42 million during the third quarter. The negative figure is wholly attributable to a termination of a contract amounting to SEK –43 million in Kista in northern Stockholm. During the past 12-month period, net letting amounted to SEK 68 million, showing a good recovery after the pandemic. Among the lease contracts signed during the quarter may be mentioned two contracts in New York with an aggregate annual contract value of SEK 18 million.
During the period January–September, net operating income increased by 82 per cent to SEK 2,233 million at the same time as profit from property management improved by 66 per cent to SEK 1,346 million.
Due to the fast-changing geopolitical situation, we now have an extra focus on the macroeconomic effects that arise. Accelerating inflation and shortage of energy leading to high prices are creating uncertainty. Corem continuously hedges a large share of its electricity consumption, although, despite this, rising energy costs in the Swedish property portfolio accounted for around SEK 25 million of the increase in property costs during the third quarter. However, the net effect for Corem is lower given that a big part of Corem’s energy costs are passed on to the tenants. In general, we have a big focus on cost efficiency in all parts of the company and as a result of increasing energy costs, we see an increased interest on the part of tenants that we should do energy-saving investments, including installation of solar cells.
At the same time, rising inflation has a positive effect on Corem’s rental income, as 84 per cent of our Swedish leases, measured in contract value, are indexed in relation to the consumer price index (CPI). In 2022, this will entail a positive effect on rental income of approximately SEK 90 million, and if inflation in October 2022 amounts to 10 per cent, the positive effect in 2023 will be around SEK 340 million. We are aware that higher rent, combined with rising energy costs, is a challenge for some tenants but our assessment is that overall there will not be any major problems to implement this contract-based rent increase in 2023. In our dialogue with tenants, we regard it is as important to make clear that the inflation-indexed rent increase in 2023 is taking place at the same time as real estate companies’ costs are increasing, not least as regards electricity costs and interest expense.
Due to the sharp rise in inflation, leading to higher interest rates, the whole real estate sector is confronted by a period of increasingly high financial expenses. The financial market has become more and more volatile, which Corem, inter alia, could note at the end of September when we decided, due to prevailing market conditions, not to carry out a proposed issue of green senior unsecured bonds. For the same reason, a tender offer for outstanding bonds was withdrawn. Corem has no bond maturities during the rest of 2022. During the first and second quarter of 2023, maturities amount to SEK 484 million and SEK 700 million respectively.
We work continuously to secure stable long-term financing and limit the interest rate risk through both interest rate swaps and interest rate caps. At the end of the quarter, 70 per cent of Corem’s interest-bearing liabilities were interest rate hedged or at a fixed rate.
Corem has a high share of bank financing. On 30 September, bank credits amounted to 75 per cent of the interest-bearing liabiilties. This provides stability in periods of volatility in the capital market. During the third quarter, Corem has refinanced a number of bank loans on substantially unchanged margins over Stibor. To balance the volatile state of the market, in particular for bonds and commercial paper, we continuously evaluate the possibility of further increasing the proportion of bank financing as well as divesting properties of lower strategic value. We currently have a number of discussions underway regarding divestments of both individual properties and portfolios of properties.
As a step in the ongoing streamlining of the property portfolio, on 1 September, transfer of possession took place of six divested properties in Växjö and Jönköping for SEK 615 million. And during the third quarter, it was announced that an agreement had been signed to divest seven properties in Borås, Lerum and Gothenburg for SEK 200 million, with transfer of possession on 3 October. Taken as a whole, both these transactions took place in line with book value. We are planning to continue streamlining the portfolio and expect to be net-sellers of properties in 2023 as well.
In project development, our ambition through every single project is to improve the company’s cash flow which indirectly contributes to the value development of the property portfolio. Decisions on new investments are now taken in a context with higher construction costs and where the cost of capital for implementation has increased so that activity in project operations is reduced to the absolutely most profitable projects.
Our two largest ongoing new construction projects are two high-quality office buildings with high environmental classification in attractive locations in Manhattan, which have now been externally completed while interior tenant customizations will continue throughout 2022 and 2023. During the quarter, two additional lease contracts have been signed in the project 1245 Broadway. The media entertainment company 101 Studios will rent approximately 770 sq.m and the digital marketing company GumGum will rent around 555 sq.m. Moving-in is planned to take place in the spring and summer of 2023 respectively. The total annual contract value for all lease contracts signed so far in the USA amounts to around SEK 105 million. The average rent amounts to over SEK 12,000 per square metre. We are continuing to see a recovery after the pandemic for new office buildings in the premium segment in New York and look forward to signing more lease contracts during 2022 and 2023.
To sum up, I am pleased about the good profit from property management despite challenging macroeconomic times and a volatile financial market. Together, we are continuing at Corem to develop and optimize our operations and the property portfolio with an unchanged focus on local property management close to the customer.
Eva Landén, CEO
Stockholm 25 October 2022
