Rutger Arnhult om den skakiga konjunkturen och gröna satsningar (Shaky economy and green investment)

Rutger Arnhult om den skakiga konjunkturen och gröna satsningar (Shaky economy and green investment)

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The whole stock market indicates that we are heading towards a tough winter. And we probably are. I've read that they've stopped having hot showers in Germany. Maybe we should do that as well. But we are so used to having warm tap water and clean air.

We take for granted that electricity is cheap as well. We will notice in the winter that it'll be very expensive. Hello and welcome to Rejlers Play! The real estate industry may be the industry affected most by this troublesome year. Insecurity surrounding high loans, interest rates going up- -and the record-high inflation may be some reasons behind this.

However, there are also major challenges and huge opportunities- -for a green transition within the real estate industry. We have a prominent figure in Swedish real estate- -Rutger Arnhult, CEO for Castellum in the studio today. -Nice to see you again, Rutger. -Thank you! I'm glad you could come.

Before we delve deeper into opportunities, crises and more- -I should say it's been a quite dramatic year for you. You left Klövern, where you had been for a long time, to join Castellum. First, as chairman of the board, and now as CEO.

How would you describe the past year's drama and changes in your life? My life hasn't changed much, I just keep working. The chairman and CEO role are almost the same amount of work- -if you are involved and you don't have too many companies to handle. I was the CEO for one company- -and a very operative and involved chairman.

So, it wasn't a big difference, work-wise. But what a year. There has been a lot of drama. We went from a... We are still in a phase of economic expansion- -and we're all talking about when the recession might happen. It's on its way, surely with high interest rates, falling housing costs, and other effects. But it will mean a change in context for many, for PE firms, real estate and tech companies.

These have basically had an unlimited ATM- -always spoon-feeding everyone with easy money. This is a result of negative interest rates- -and central banks that keep on buying all the time. It has been an artificially created capital market. Companies and institutions with money that have wanted to make investments- -haven't been able to do so through the bank. That hasn't led to returns. Instead, they have gone into funds that invest in bonds, leading to some returns- -as a result of not being able to have them with the bank and get returns.

Now we're past that, which means that we are going through a kind of a readjustment- -in the capital market to where we were maybe 5-6 years ago. There has been a lot of money withdrawn, so bonds cannot be issued. So that money is currently gone, leading to a lot of readjustment.

During this year, we have also acquired... I joined Castellum, and we made an acquisition of Kungsleden- -which was a major acquisition for us. 100 billion kronor became 150 billion, so to speak. It is quite significant, when one two big companies become one- -and trying to make all of that work as one big machine. In my world, it's quite significant.

-Yes, it's not easy to merge companies. -Different cultures, it all has to fit together. Now, if we look at your industry... We have Castellum, SBB, GE, Vasakronan and so on.

There has been a lot of turbulence for these companies when it comes to stock prices. If the real estate industry is shaky, it can easily spread to others. Yes, the real estate industry is massive. It's the biggest asset type in most countries, so naturally it affects other things.

The real estate industry makes up a lot of investments. When a company needs to move to a new office- -they just move in and pay the rent, but someone has financed the whole building. It's all big money.

For the rent, you may pay 5% return on the investment that has been made. So, it's a lot of money and a lot of assets. When such a big industry has a hard time with financing- -it naturally affects projects and how much gets built. How much housing gets built? How many offices get built? How easily can you finance them? And who's going to do that? And we are all different in that respect. There is a big difference between SBB, JM and Castellum, for example.

They are completely different types of company. We've talked about Castellum now, let's broaden our scope a bit. How responsible is the real estate sector for how things are today? A lot of loans have been made with low interest rates, and so on.

Do you know what I mean? I mean, "responsible"... The loans have been done, so... So, you have to keep the loans going in some way, or pay them back. But when stocks go down and things get shaky...

Yeah, you can't really take responsibility for that... There's a lot of factors underlying that. Central banks, negative interest rates... And now we also have the war as well. So, everything plays a role and we have a very high inflation- -compared to what we are used to. That's not really the industry's fault. Have too many loans for too low interest rates been taken out? I might be so that certain companies have done that. I can only speak for us, and we haven't done so.

We know our financing well. We have covered the declines that we have for three years ahead. We always have 18 months of decline covered. It is part of our framework to have that. We have extended our preparation in these times- -as it is almost hopeless to issue bonds to the market.

Or no, it's not hopeless, but expensive. So, we are instead returning to the traditional financial sources- -namely, capital and the banks. We are always generating our own capital.

We have to self-finance some of our projects, or rather, we always do- -but that is the source we use in that case, as well as the bank to a larger extent. But what can be the consequences for your industry, so to speak? We might well be so that some companies with a lot of bonds spread out- -might have a hard time refinancing them with reasonable conditions on the bond market. So, if you are to get help from a bank, I can imagine the bank setting high demands. That can force issuing of own capital- -i.e., that you have to put more money into those companies.

We are definitely not at that point. We generate results, we maintain or at least aim to maintain our dividend. That is a big difference between the companies.

But it's a big difference if you have bought recently, or if you have an old portfolio. Or if you have bought expensively with a low required rate of return- -or if you have an older portfolio with higher returns. So, the average returns that your portfolio generates also makes a big difference- -on how resilient you are.

Castellum has an almost 5 % return in their portfolio. Not everyone has that power. We're in a good position with that. But we don't just live off of construction, financing and selling- -and that can be tough, selling new housing. If the housing prices go down, the market will likely become more harsh.

It's hard to get something going if you don't know if you can sell. -So you've pulled the brakes on construction? -Yes. We're also slowing down with new projects- -because if it gets tough to finance, we need to put higher demands on the projects. -But you already see that now? -Yes.

When we put high demands on our projects- -it get more expensive to finance them, and we account for higher interest rates. As a result, not all projects take off that could have before. So we can't earn that back, we have to readjust them and push them forward a bit. That's the first part. The other thing is that the cost of production has gone up. There are longer lead times and more bottlenecks in the whole system.

This means that construction prices have gone up with 100%. For beams, insulation, pipes, everything. Electrical components too. There is a shortage of many things, so they are hard to get a hold of.

And for us normal consumers, when the inflation goes up- -and we have less money to spend, we might not go into stores to buy things as often. A lot of your customers are retailers. Is there risk there, that your tenants have a tougher time- -and therefore don't want to expand, and instead rent less space? It fully depends on... We have over 8000 customers and tenants. They are mostly big companies.

A lot is rented by the state, municipalities and counties, 25%. We have large multinational companies as tenants. But not a lot of retail. 5-6% is retail and restaurant, which isn't a lot. So we have very little retail and restaurant. We have some restaurants in our work areas, where we want to have that type of service.

But we don't have any shopping malls. We have basically no retail boxes either. When the consumers stop spending as much, it's usually on shopping. You don't buy a greenhouse, you invest in heat pumps or solar cells instead to save money- -if it is worth the investment.

They might even just want to save up instead, because you don't know where things are heading. There is also less eating at restaurants and less travel, and so on. -And you have... -So we're aren't in danger in that way.

-But there may be risks in general. -Yes, it affects the economy in general. Now we haven't fully gotten through the pandemic- -but there was a lot of talk about: "Will the offices become smaller?" "Will we be leaving the offices fully?" What is your view on that? How did things turn out for your tenants? Have they left the offices or made them smaller? There has been some uncertainty there for us. We've gradually found out what the reality is and what we will get back to.

What we can say is that you usually worked from home one day at a time before the pandemic. We're getting back to that. Maybe one day of remote work, not necessarily from home. We see that many companies are implementing policies of four days at the office. One of the big retail companies, H&M, stated that they will four days at the office. It caused some controversy.

But this protesting also shows that we currently have a strong economy. When the economy is tougher, people will protest less. But what I think the companies are noticing is that have gather their staff- -so they get to know each other, know who can help them with what- -exchange opinions or ideas, and build a culture. Create some solidarity, which many people feel is hard to do remotely.

-Have you noticed that then? -Yes, we have seen that the customers are back. Some of them are cutting down. But just as many want to expand and create nicer offices.

They want to create nice environments to attract the staff. Our own company now has breakfast on Friday and Monday- -to attract people at the start and end of the week. We have the office as our base, but that's not fully rigid.

You can work remotely, but we have our office as the base. So you haven't seen this big shift that they are talking about? No, we haven't. There are only a few examples. At least as many people want to expand.

When you come in to the office one day less per week, the meetings become compressed. You can make that visit that you're supposed to work on, and then it is practical to work remotely. You can do that on a Monday or a Friday. You can plan for that. Then you have more people Tuesday to Thursday at the office. Then you don't have enough meeting rooms.

That is when you should use Teams meetings- -and your meetings with colleagues and customers. You won't have enough meeting rooms, so more are needed. It is the same in our office.

Some days, we don't have enough meeting rooms to go around, and we have many. And still, they are not enough. Because that is a new trend. Another thing that is positive for us now... We had a very hot real estate market in many ways.

But it was one sector that wasn't especially hot, which we didn't where it was headed. That was the office sector. Our main sector. That is 80 % of our facilities: offices. That has not been a hot sector the past few years, naturally. We haven't seen the required rate of return go down in that area. That's good now, when the required rate of return might have to go up- -because it was a bit too overheated. We weren't, though.

So we didn't see any immediate decline in the required rate of return earlier- -when it was still overheated. So, it won't bounce back either. So, that's good now, that we didn't buy any expensive office space. It wasn't very attractive during the COVID period.

No one jumped in to buy offices that would then be empty. We will now talk about two exciting trends in the real estate industry. Two green trends, the first one is sustainable buildings. About one third of all greenhouse gas emissions are caused by construction. That's counting the emissions during construction- -and all of the energy that is used to heat up and cool down.

What is Castellum's stance on sustainable buildings? How important is it to fix up existing buildings rather than build new ones? It's very important. That it makes up one third is quite natural. It's not some proof that we've been bad; it's the biggest asset type. There isn't much else out there except for buildings- -that makes up something. That is what is permanent, what is built. So, it's quite natural. One third might even be quite a low number. But you can still make a big impact if you do things better. So, we aim big, we build offices with wood.

We build solar cell facilities, we automatise buildings. We try to steer them after the weather the next day. If it's sunny, we make sure that the heat doesn't come on in the morning. The heating systems are shut off, it's quite nice and cool when you get to the office. The sun then warms up the building- -instead of having to open the window to cool down the room warmed by the sun since 4 a.m. You don't have to air out the heat. We're trying to be smart with that.

We are working with energy storage. We started that recently. We have built 70 solar cell facilities. We may have the most solar cell facilities in Sweden.

That's the other trend we will talk about, but continue! We investing a lot on that. So, it's storage, solar cells, and effective houses. Also, automated houses. I think it is strange that not everyone who builds a stand-alone house- -have to install a 5 or 10 cubic metre tank next to the house. The tank can gather rain water, which can be used for flushing and watering.

That can be utilised, instead of the water going down into the drain system- -which creates more work for treatment plants, which can lead to water shortages. There is a lot that can be done there, and we are looking into these things. Are your customer and tenants making demands like this? They are, slowly. We have discussed it over the last ten years. Ten years ago, they had no such demands. Even if you had a sustainability policy. We didn't see the demands, but there are much more today and there will be even more in the future. We are heading toward green facilities.

We rate and rank our buildings, according to different systems. Today, about 60 % of our portfolio is quality assured and green. So we have passed the 50 % threshold for being a regarded as a green company. Our goal is to have 50 kwH consumption per square metre.

Today, we are somewhere around 90 kwH, we went up a bit after acquiring Kungsleden. We are around 90, we need to go down to 50. Those 90 are still better than 40 % better than the industry in general. So, we have come far from those 90, but we are going down to 50. We have 70 solar cell facilities, we need to increase to 100.

That is number that is going to increase as well. But we haven't stated to what and when. But we are always working on these things. After that, we have another big step, energy storage.

First, install solar cells, and after that, you can store energy in the facility. That is talked about a lot in your industry as well, so to speak. Absolutely. We are different ways of storage, like batteries and recycled batteries. You can store in hydrogen and so on.

I think hydrogen will be a decisive factor. How fast will things develop? You said 10 years ago, barely anyone made any demands... Yes, it is going to go faster and faster. The current electricity prices are going to make it go faster as well.

All of the facilities that we have built have a long depreciation period. The returns are the same amount as when you buy a house, a bit more than when you buy property. Say the returns are around 1-2 % more than when you build a house with standard costs- -or at least the cost we calculated. Now, the returns come a lot faster.

So, now we are getting returns on the old facilities very quickly. You are also a well-known figure in the stock market. What do you think will happen this autumn and winter? You mentioned the record-high heating and electricity prices that will continue rising. Then we have the interest rate that will rise a bit more throughout the year. After that, we have the inflation, which we think will go down sometime next year.

And then the recession. There are not a lot of silver linings right now. So what are you thinking? How worried should we be? You're right, and we see it in the stocks. The whole stock market indicates that we are heading towards a tough winter. And we probably are. I've read that they've stopped having hot showers in Germany. Maybe we should do that as well.

But we are so used to having warm tap water and clean air. We take for granted that electricity is cheap as well. We will notice in the winter that it'll be very expensive.

It is already showing in people's savings. They have gone down 25-30%, generally. It's hard to ignore that. If you have invested in bonds, that has also gone down. You can't really get away from it. We have falling housing prices as well. It's all very negative.

So, both stock portfolios and saving for housing have taken a hit. It's only a matter of time until... Even used cars are as expensive as new ones, since you can't buy new ones anywhere. That will change a bit as well and the same probably goes for boats. All capital goods will surely be in higher demand.

Salad and peppers are also expensive. Two avocados cost 54 kronor. It's awful. You can't get used to it. Even a cup of coffee in town is expensive. We have less money in our wallets. And we have electricity and fuel bills... Of course, it shows up in other places. And interest on top of that. It's tough!

Your tenants want to spend as little on electricity as possible. Will they scale down because of that as well, to have less space to heat? No, I don't think so, not the big companies that we have as tenants. We, of course, optimise our buildings, so they don't get too hot. You might have to put on a sweater at work, not just wear a t-shirt, and so on.

That's a shared decision that we'll have to make with the tenant. They decide, and we optimise the building accordingly. We do not have private consumers.

But they will affect other parts of the economy, when they start buying less. Rather, we have major companies and authorities. Even our costs are higher, so we have to optimise as well.

We get higher interest costs and our customers have higher rental costs. We are compensated through higher rents via index. The inflation shines through there as well. When will it turn around? Well, I don't know... When will it? When the energy prices start calming down and interest rates start normalizing- -and people start feeling more secure.

Even if the interest rates are high, as long as it looks like they are not going up- -customers will gain trust back. But until then, there is more restraint. Both from the companies and the private consumers. But the companies start investing for the future a bit earlier.

We shouldn't assume the worst just yet, because it is not like we have a bad economy right now. Rather, it has been very strong. If it is weakening a bit, it is more like we are ending up with a normal economy. Now, it's not normal for housing prices to go up every quarter- -and that what you buy is more expensive the following quarter. It's not normal to be able to sell a used car or boat and make a profit- -because people can't buy them anywhere.

So we are heading toward a more normal economy. We are saving again, we are keeping in mind that taking loans are expensive, they aren't free. Negative interest rates have been a dangerous experiment- -which we have now left behind us. So, I think it's healthy that we have to pay for loans- -so we put ourselves in debt, because it seems to be free.

I don't think the interest rates will soar away. Because what we see now with the inflation- -with food, fuel, heating, electricity, and everything getting more expensive- -is that it will lead to interest rates increasing. So that in itself will affect everyone's wallet. If we imagined a certain amount of interest rate increases to slow down the economy- -to make sure it doesn't just soar away- -there will be at least a couple of interest rates increases fewer.

Our policy rate is 0,75%. Let's say it goes up to 2,25%. It will peak somewhere around there, in my opinion. That's about 5% for a normal consumer.

4,5% or 5%. It depends if you have consumer credit or a mortgage. That's right. Before I let you go, I'll ask you a question that I ask every guest. Reljers is an engineering consultancy firm. We are working on this transition within real estate, but also in many other ways. What should we consider to be a relevant factor in all of this? Do you have any ideas? Any tips for us? It's tricky when everyone is looking over their costs and real estate- -and want to hold back.

So, you get a bit hesitant when someone wants to sell you something. If you are going to sell solutions- -look at whole picture and find a way to streamline and save money. That'll be easier to sell in today, maybe that is what you should go hard on- -to find solutions that are sustainable and cost-effective. Invest a bit more on chasing money. Help companies and customers to readjust. For example, to use electricity when it is cheapest- -and make sure that the whole company does so, and that everyone working at the company does so.

Find all opportunities to save money. Do everything... except for lowering demand for facilities! Of course! Meetings are important, so have nice big meeting rooms. But electricity prices might become so extreme this winter- -that we need keep the heat down at home.

So you might be able to attract people back to the office with some heat on Mondays- -after freezing all weekend. -So breakfast isn't enough? -No, that is enough! Or maybe you can skip the breakfast and just offer heat, good enough! -Offer them a warm shower. -Exactly. Rutger, lovely to meet you. It's been interesting to hear your thoughts on the industry and society as a whole. Let's hope it doesn't get too tough and that it doesn't go on for too long.

Yes, let's hope so. We all want to move forward, so it usually goes faster than one predicts. Thank you for joining us. Rutger Arnhult, CEO at real estate company Castellum. Keep watching Reljers Play and our podcast Nytänkarna. We always have new and interesting guests. See you!

2022-09-06 22:28

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