NCC develops a reputation beyond its core markets
Nordic firm NCC Property Development has a history dating back to 1875 but the company is firmly focused on the future. Its forward-looking approach to development has helped to win it numerous admirers in the Nordic and Baltic regions. The company topped a number of Nordic region, Finland and Norway categories in Liquid Real Estate’s 2008 poll. NCC has even gained a strong reputation globally on the basis of its regional operations: readers voted the company number three in the best global developer category.
“We spend a lot of time thinking about how people will behave in the future,” explains Peter Wågström, president of NCC Property Development, which is based in Stockholm. “In the office market, that means working with our clients to consider how working patterns are changing. And similarly, we work with retailers to understand how shopping behaviour is evolving or with other clients to discover the future of leisure activities. Whatever the market, we always try to think ahead: we are focused on future, rather than current needs and try to anticipate, rather than react to, trends.”
While NCC Property Development’s progressive philosophy might go some way to explaining its success, Wågström says that one of the core differentiators of the company is somewhat more old-fashioned. “It comes down to local knowledge,” he says. “Many development companies just know Stockholm or Oslo, for example. We are experts in those markets. But we also have a detailed knowledge of a number of smaller centres across the region. That knowledge enhances our usefulness to clients and means that we can provide them with a wider range of opportunities.”
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“The crucial point about the company is that our breadth gives us great flexibility”
Peter Wågström, NCC |
NCC Property Development does about 40% of its Nordic business in Sweden, 26% in Finland, 18% in Norway and the remainder in Denmark. The company also has a nascent operation in the Baltic states that purchased land three years ago and will begin building in 2009. Overall, around 70% of its development is in the office sector. “However, the crucial point about the company is that our breadth gives us great flexibility,” says Wågström. “We can focus on logistics, retail, offices (or, through our sister company, residential) depending on the market.” NCC Property Development works exclusively within the NCC group of construction companies – in a “wholly integrated way”, according to Wågström. Other companies in the group include construction operations in each of the Nordic countries, as well as NCC Roads, which produces aggregates and asphalt and offers paving and road services. Overall, the NCC group employs 21,000 people in the region. “We focus on function and meeting the demands of tenants and investors – the visionary and relationship end of the business,” he explains. “The other companies in the group provide the construction services.”
Historically, NCC Property Development has developed predominantly alongside clients but in the past three years the buoyancy of the market has enabled it to produce some speculative developments as well. “In Finland, we even have a dedicated speculative unit focused on small-scale tenants because demand is so great,” he says. However, generally, NCC is best characterized as cautious – and in tune with its regional market. “Although things have changed somewhat in recent years, the Nordic market is still notably less focused on speculative development than, for example, many European markets.”
Broadly positive outlook
The Nordic property development market has changed substantially in the past 10 years, according to Wågström. “It’s become more European – or global – in style,” he says. “In particular, in the past five years, the number of international investors entering the market has increased and, unsurprisingly, they have brought with them different ways of structuring deals. In the past, real estate companies in the Nordic region and funds set the agenda for property deals. The different market view of international funds, for example, with regard to risk, has resulted in a more professional market overall.”
In contrast, in terms of competition in the property development business, there is limited internalization. Most players are determinedly country-focused, and while a handful of other construction companies in the Nordic region operate cross-border, the vast majority of competitors are small-scale operators that range from individual property owners to traditional property companies. There are almost no international development companies operating in the region.
Despite the internationalization of the Nordic real estate investor base – and the worrying trends in the US and some European markets – Wågström says that the outlook for the Nordic region remains broadly positive. “The Nordic market will weaken a bit in the remainder of the year but we expect the commercial side of the business to remain strong,” he says, again emphasizing the benefits of NCC’s diversified model in the face of tougher conditions.
Wågström believes that the nature of Nordic real estate markets makes them a safer bet than many. “Certainly no collapse is envisaged,” he says. “The Nordic market has little of the speculative activity that has overheated markets in some countries. Even in retail, for example, supply has been strictly limited, so while there may be greater caution going forward, there are unlikely to be any shocks.” He adds: “The only market with any significant risk is probably residential property in Copenhagen.”
Steady performance
Certainly, NCC’s performance seems to be holding up fairly well in 2008. Profit after financial items for the first half of 2008 was Skr1 billion ($155 million) compared with Skr1.19 billion in the same period a year earlier. Second-quarter earnings were Skr883 million compared with Skr1.27 billion a year earlier – much of the decrease is attributable to lower earnings by NCC Property Development. For the full year, NCC continues to predict some growth in the Nordic construction market, although the rate will be lower than in 2007.
NCC’s broad spread of operations across residential and office properties, other buildings, industrial facilities, roads, civil-engineering structures and other types of infrastructure is proving beneficial to earnings. For example, although the company is adopting a cautious approach to the start-up of new projects – in particular in the housing market – the civil engineering market is expected to grow. The conditions for other building production (offices, industrial facilities and public premises), and for aggregates, asphalt and paving, are also expected to be favourable for the remainder of 2008.
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Falcon Business Park, Helsinki |
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For NCC Property Development, the leasing market for commercial properties remained healthy during the second quarter. In total, leases relating to 36,000 square metres of floorspace were concluded during the second quarter. Parts of the leasings had a positive impact on NCC’s earnings since they enabled reversals of provisions posted for rental guarantees and, in certain cases, generated supplementary purchases. However, demand is expected to slacken during the autumn, according to NCC’s interim report, published in August. The other aspect of NCC Property Development’s business – sales – demonstrated decent levels of demand for newly produced commercial properties in the first half of 2008, although the company sold fewer property projects during the second quarter, compared with the same period a year earlier. NCC Property Development expects conditions to weaken in the future. Nevertheless, Wågström remains broadly optimistic about the outlook. “Excluding the residential market, there continue to be attractive opportunities in retail, office and other types of development,” he says. “We believe that activity in these areas would only be affected if there is a significant decline in overall economic activity. And that looks unlikely in the foreseeable future.”
Economic trouble ahead?
However, clouds do appear to be on the horizon for the region’s economies. Regional bank Nordea predicted in April that the Nordic region would outperform the US and eurozone economies, with a forecast of real GDP growth of 2.3% – the same as 2007. However, since then other forecasters have been notably more cautious. SEB recently noted that the Swedish economy – which accounts for 40% of NCC’s business – is rapidly weakening and that GDP growth would be just 1.4% this year and 0.9% next year. Ominously, the bank predicts that 2008–10 will be Sweden’s weakest three-year period since the economic crisis of the 1990s.
Similarly, growth in the Baltic states is slowly dramatically. For example, Latvian GDP grew 0.4% in the second quarter of the year – the slowest pace since the fourth quarter of 1995 – compared with 3.3% in the first quarter, according to a survey of economists. Accelerating inflation and falling property sales are curbing consumption-driven growth in Latvia, Estonia and Lithuania, according to a report by Standard & Poor’s published in July, which expects that the Latvian and Estonian economies will contract in the second half of 2008. Lithuania, where first-quarter annual growth was 7%, could be headed for a similar slowdown, as its business cycle is 12 to 18 months behind Estonia and Latvia, according to the rating agency.
Wågström says that NCC Property Development has been deliberately circumspect about the Baltic region. “Given the level of land speculation in the Baltics, we have always treated the region cautiously,” he says. “But we also recognize the long-term possibilities of the Baltic countries, and that is why we have a presence in the market and are building knowledge there.”
Wågström believes that although NCC Property Development will not be able to buck any big slowdown in the Nordic and Baltic regions, it is well placed to handle one. “It comes back to the shape of NCC and the broad range of geographical and sector markets that we operate in,” he says. “Barring a recession – and no-one is predicting that – there will be sectors of the economies of some countries in the region that will continue to enjoy growth. And our local knowledge and geographical diversity puts us top of the list to take advantage of those opportunities.” LRE
