Skanska Annual Report 2003

Business UnitsSkanska Project Development SwedenSEK M Change 2003 2002Net sales 327% 7,922 1,855Operating income 159% 2,814 1,087Capital employed -30% 7,434 10,581Return oncapital employed, % 16.6 28.2 11.6The business unit’s operations specialize ininitiating, developing, leasing and divestingcommercial real estate projects, with a focuson office space, shopping centers and logisticsproperties in Stockholm, Gothenburgand the Öresund region.In 2003, international investments inSwedish properties reached historically highlevels. The business unit sold 30 propertiesin 19 transactions. International investorsaccounted for 90 percent of divestment volume,which totaled SEK 6.8 billion with again of SEK 2.2 billion.Among the year’s transactions was thesale of a portfolio of ten both new and olderproperties in the Stockholm and Öresundregions and elsewhere. The buyer was theU.S.-based Blackstone, and the capital gaintotaled SEK 490 M. Divestment of CityCronanin central Stockholm was completed ata gain of SEK 1.1 billion. Late in the year, theHagaporten office property in Solna was alsosold to a German fund manager. Skanska isthe largest tenant, and in conjunction withthe sale the Group signed a 10-year lease.Leasing work was also successful, despitea continued weak market with rising vacanciesand falling rent levels, especially in theStockholm area. The five projects completedduring 2003, aside from CityCronan, contain61,000 sq. m (656,000 sq. ft.) of space, ofwhich 90 percent was leased. At year-end,five projects totaling 64,000 sq. m wereunder construction, of which 85 percent waspre-leased.In 2004, the rental market is projectedto bottom out, but rents are not expectedto rise before vacancies drop. The recoverywill be slow and begin in the spring at theearliest.In the investor market, interest frominternational investors is expected to bestable. However, there are not yet clear signsof increased interest among Swedish institutionalinvestors.Skanska Project Development EuropeSEK M Change 2003 2002Net sales, 161% 939 360Operating income n.a. 247 -37Capital employed -18% 2,025 2,458Return oncapital employed, % n.a. 10.8 -2.4Operations focus on initiating, developing,operating and divesting commercial realestate projects, especially office and retailspace. The emphasis is on three growthmarkets: Budapest, Prague and Warsaw.After a few years of falling office rents,this trend slowed in Budapest and Pragueduring 2003 and the two markets showedsigns of a better balance between supplyand demand. The office market in Warsawremained weak in 2003, with falling rents asa result.The investment market in all threecities remained strong, with heavy interestfrom investors in acquiring completedproperties with good occupancy levels. Thebuyers of Skanska’s products are primarilyinstitutional real estate investors.During 2003, SEK 0.8 billion worth ofproperties was divested, with a gain of SEK0.2 billion. The largest transaction was thesale of a portfolio of four newly developedretail facilities in Prague and Budapest.Two new office building projects wereinitiated during the year: one project inBudapest to be completed in 2004 and onein Prague for completion in 2005.The rental market is expected to stabilizein Budapest and Prague during 2004. TheWarsaw market is considered to remainweak, with a risk of continued falling officerents. The investment market is projected toremain strong.Skanska Project Development - Book value and market valueBook Book value Leasable Economic Yield Yield Projected Averagevalue upon Market value, Surplus space, occupancy Operating on book on market rental value, maturity,SEK billion Dec 31, 2003 completion Dec 31, 2003 value 000 sq m level net value value fully leased yearsCompleted projects 5.7 5.7 8.8 1 3.1 780 87% 567 4 10.0% 6.7% 1,022 6 3.8Projects completed in 2003 0.5 0.5 0.6 0.1 61 90% 47 5 9.6% 8.2% 56 6 9.0Ongoing projects 0.4 1.1 1.4 2 0.3 89 55% 117 5 10.5% 8.1% 123 7 15.1Total 6.6 7.3 10.8 3.5 930 731Development properties 3 2.6TOTAL 9.21 Including SEK 0.3 billion share in properties in partly owned companies.2 Internal appraissal on each respective completion date.3 ”Development properties” refers to land with building rights for commercial use, totaling about 1,513,000 sq m. described below.4 Estimated operating net before central company and business area overhead in 2003 on annual basis assuming current occupancy rate.5 Estimated operating net before central company and business area overhead fully leased in Year 1 when the properties are completed.6 Total of contracted rents and estimated rent for unoccupied space.7 Estimated rental value fully leased in year 1 when the property is completed.Science Park, BudapestIn Budapest, the second phase of the Science Park was initiated in 2003. Itscentral location in dynamic southern Buda, close to the Danube River, as wellas the modern design of its premises, are attracting international companies.A telecom company is the anchor tenant in the fully leased first portion, completedin 2002. The new phase, consisting of 15,000 sq. m (161,000 sq. ft.), willbe completed during 2004. By early in the year, one third was already preleased.The Science Park includes 30,000 sq. m in all. The investment totalsSEK 360 M. In the Central European markets of Budapest, Prague and Warsaw,Skanska has ongoing projects with aggregate volume of 27,000 sq. m (290,000sq. ft.), representing a total investment of about SEK 475 M.Skanska Annual Report 2003 – Commercial Project Development17