Skanska

Having shed its non-core assets after deciding to redefine its strategy, the company is intent on improving its profitability in its existing markets When Skanska redefined its strategy three years ago it had two overriding goals: to broaden the geographic scope and to improve profitability in markets it already covered. In addition, the company wanted to expand into new growth fields exploiting its core expertise while streamlining its portfolio with non-core assets to be sold. Skanska has since shed non-core assets worth SKr31.5bn, and SKr28bn was ploughed back into the core business. This strategic realignment has paid off and last year Skanska earned its shareholders a net profit of SKr5.9bn, a 39% increase on 1999. The group benefited from the strong performance of the real estate business in Skanska’s core markets. The market capitalisation of the listed company has risen sharply in the last two years from SKr15bn to SKr40bn. Industrivärden, a Swedish investment company, and IKEA Investment are the main shareholders holding 29.3% and 10.1% respectively of the voting rights. With a total turnover of SKr108bn, the Swedish group ranks among the leading construction groups worldwide. Construction of real estate projects dominate Skanska’s operations and account for 72% of the net sales with the balance being contributed by work on infrastructure projects. The US is the most important market for Skanska accounting for nearly half of the net sales. The company takes the number three position in the sector, but this equates to less than 1% due to the fragmented state of the market. In addition to pursuing organic growth, Skanska has also acquired other construction companies. Skanska expects these companies to be able to make a profitable contribution to the group’s earnings within the first year of the deal. Among the acquisitions last year was Kvaerner Construction in the UK, now renamed Skanska UK Construction. This gave Skanska a foothold in Asia, as the company owns half of Gammon, Hong Kong’s largest construction company. By taking over Selmer of Norway, Skanska reinforced its position as leading construction group in Scandinavia. Returns from the construction side are complemented by earnings from its project development activities. Skanska Project Development is working on 23 projects, 17 of them located in Sweden. Projects in Stockholm make up nearly two thirds of expected investment value. On the property development side, Skanska aims for its projects to be completed and let over a three-year period achieving a target return on equity of 25%. So far this ambitious goal has been met. Last year Skanska sold buildings worth SKr4bn, pocketing a capital gain of SKr2bn. At the end of 2000 the group owned a portfolio of fully developed property with a book value of SKr6bn and an estimated market value of SKr12bn to SKr13bn. “It is very important for us that our projects are liquid. We prefer buildings which are not too big and which can be divided into several phases of say 10,000m2 each,” says Fredrik Wirdenius, head of Skanska Project Development Europe, excluding Sweden. Recently, Skanska sold properties in various parts of Sweden worth SKr2.4bn to Vasakronan, the state-owned property company. At the same time Skanska set up a joint venture with Vasakronan and invested SKr300m to acquire 50% of the building rights in Västerjärva, a development area in the northern part of Stockholm. The new company will first prepare a development plan for the area, which is projected to provide 350,000m2 of mixed premises. Construction is scheduled to start in 2004. While the Swedish market has shown a formidable performance in recent years, the tide may be turning as rental growth is taking a breather. But Tor Krusell, head of communications, is not worried: “We have not started our developments on a speculative basis, and almost 90% of the space under construction in Sweden is prelet. Also, we tend to have long term relationships with a number of international clients. This helps us to minimise the letting risk.” Though most of the activities have been highly profitable in Denmark, Skanska’s projects have hit a hard spot with some projects suffering losses. The Danish problems are being addressed including changes to the management team. Outside its domestic market, Skanska expects central Europe to offer the best project development potential. Driven by the construction business, the group started its first project in Poland in 1994. The Atrium Business Center has been developed in several phases with the City of Warsaw as its partner. The first phase, with the Atrium Tower, has been sold. Skanska still owns and manages the second phase, the Atrium Plaza. The construction of two more phases, the Atrium Centrum with 8,000m2 each, is under way. “We are in the process of letting the building,” says Wirdenius. The project includes a five-star hotel with 366 rooms on 25,000m2, which is to be operated by Starwood under the Westin brand. Skanska holds a 33% stake in the joint development company. The other partners in the hotel project are Portman Holdings, Starwood and the City of Warsaw. Skanska is in charge of the construction of the €55.4m turnkey project. Skanska has been active in Budapest since the early 1990s. Its first development, the 22,000m2 East West Center was completed 10 years ago and remains in Skanska’s portfolio. Skanska is putting the finishing touches on the West End Business Center. “We are now working on the fitting out of the third phase,” says Wirdenius. Located in the city centre the 30,000m2 of office space is almost fully let, mainly to international tenants such as Ernst & Young. The project is to be sold and Wirdenius is pleased with the interest he has received from potential investors. In Budapest, construction of the Science Park has begun. Ericsson signed a pre-lease for around two thirds of the 15,000m2 office building. In Prague, Skanska is completing its first scheme. Bredovky Dvur, in the prime location of Prague 1, comprises 12,000m2 of office space with some retail and residential accommodation. “We started this development on a speculative basis, as it is hard to find pre-lease arrangements in the Prague market,” says Wirdenius. Still in Prague, construction of two retail projects is underway in Cestlice and Cerny Most. Electronics retailer Dixon has signed a prelet as anchor tenant in both schemes taking 6,000m2 in each of the two 10,000m2 retail developments. Though there are no hard and fast rules as to when Skanska requires prelet arrangement on a particular building, Wirdenius emphasises that the company takes a conservative approach: “The most important thing for us is that we have a really good knowledge about the leasing market. We employ our own team and do not rely on agents.” One of the company’s new businesses is facilities management. By acquiring Ericsson Real Estate Management, Skanska established a larger base for its facility management business, which is so far focusing on the Swedish market. It is keen to extend these services into other markets, mainly those where Skanska has already established a sizeable operation. Recently, the company won a three-year contract for a portfolio of buildings used by telecoms company Ericsson. The contract is valued at SKr1bn. “These types of contracts are important for us as it allows us to get to know the needs of our customers. The insights we gain can be put straight back into other parts of the business like the development and the construction business,” says Krusell. It has strong relationships with clients such as IKEA and Ericsson, for which Skanska is currently carrying out a number of construction projects in different parts of the world. Portfolio highlights Skanska often sells on projects As at 31 Dec 2000 €m Completed developments 682 Developments under construction 314 Undeveloped land & developments 155 Total 1,151 Source: Skanska Developed properties Stockholm is the company’s largest market Figures in €m Book Value Market Value Stockholm 296.9 588.9 ¯resund 116.1 239.9 Gothenburg 116.4 261.7 Europe 153.1 239.9 Total 682.7 1,330.4 Source: Skanska Breakdown of sales Skanska is a major US player but only has 1% of this highly fragmented market SKrbn €m % USA 46.7 5,093 43.2 Sweden 24.8 2,704 23.0 UK 3.0 327 2.8 Norway 4.4 480 4.1 Finland 6.6 720 6.1 Czech Republic 3.4 371 3.1 Denmark 5.6 611 5.2 Poland 4.2 458 3.9 Hong Kong 1.0 109 0.9 Argentina 2.4 262 2.2 Others 5.9 643 5.5 Source: Skanska Skanska AB International Real Estate Department S-18225 Danderyd, Sweden Tel 46 8 753 8054 Tel 46 8 622 5803 e-mail: tor.krusell@skanska.se www.skanska.com