Hufvudstaden: The Unrivaled Investment Opportunity in the Swedish Real Estate Market
When it comes to low leverage and an impossible-to-replicate portfolio, Hufvudstaden stands out from other real estate companies. This is one of the reasons why the stock has been featured in Placera’s list of recommended stocks since July.
Investor preferences for the type of real estate portfolio they favor tend to follow trends. Sometimes it’s about logistics, sometimes social properties, sometimes offices, and sometimes residential properties. Imagine owning the land where the next Rusta store could be built?
Regardless of the trend, Hufvudstaden has been clear since Fredrik Lundberg took over as the main owner in 1998; the portfolio should consist solely of office and retail spaces in the most central locations in Stockholm and Gothenburg.
Low Return on Equity
In 1999, when Fredrik Lundberg closed his first full year as the main owner, Hufvudstaden boasted a portfolio worth 7 billion SEK and a 17% return on equity. By the end of the second quarter this year, the value of the properties had risen to 46 billion SEK, with an adjusted return on equity of just over 3%.
Investors who avoid the stock often point to the company’s low return on equity. A weak share price performance compared to industry peers also suggests that fund managers prefer companies with higher leverage when increasing their real estate exposure.
A low return on equity is a result of high property valuations and low leverage. Conversely, in 2021, SBB had a return on equity of 38%, but that was little comfort when interest rates rose.
Impact of Discount on Asset Value
The financing environment in the real estate sector has previously caused sharp swings in the stock market. Discounts on asset values have now decreased, and several real estate companies are trading at or above their reported asset values.
Hufvudstaden is valued 24% below the asset value of 36 billion SEK at the mid-year point. However, a cautious approach to leverage not only results in a low return on equity but also has a significant impact on the asset value through the discount.
Analyzing the discount in relation to the market value of the assets reveals an estimated discount on the properties. At the mid-year point, the market value of the assets was estimated at 46 billion SEK. With a share price of 138 SEK, our calculation indicates an approximate 18% discount.
Apart from minor changes in property values, the second-quarter report shows a 5% growth in rental income compared to the same period last year. The net revenue for the first six months totaled just over 1 billion SEK, with operating cash flow around 500 million SEK.
Additionally, the period saw several major contracts with financially strong clients and approved detailed plans slowly expanding the portfolio. With half of the debt on short maturities, the average interest rate is likely to decrease in the coming quarters.
Over time, the stock market will reward high returns on equity. But regardless of what the market values, you can now access low-leverage properties in Sweden’s best locations at a 20% discount.
If you have doubts, take a stroll along Biblioteksgatan and consider if you would pass up the opportunity to buy properties at numbers 5, 7, 9, 10, 12, and 13 – at a 20% discount. Hufvudstaden certainly wouldn’t be interested in that deal.
Analysis:
Hufvudstaden offers a unique investment opportunity in the Swedish real estate market with its low leverage and exclusive portfolio of office and retail spaces in prime locations. Despite the company’s low return on equity, its cautious approach to leverage has resulted in a significant discount on its assets, making it an attractive option for investors looking for quality properties at a discounted price. With a track record of steady growth in rental income and strategic expansion plans, Hufvudstaden presents a compelling investment opportunity for those seeking long-term returns in the real estate sector.