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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the presentation of Skanska's First Quarter Report for 2023. My name is Antonia Junelind, Senior Vice President, Investor Relations. And here today to give you a presentation with an update on our business performance and financials and a market outlook is our CEO, Anders Danielsson; and our CFO, Magnus Persson. Welcome.
Thank you.
After their initial presentation, we will open up for questions. [Operator Instructions] We will answer as many questions as we can, and we will cater to them in that order. So with that short introduction, I will hand over to you, Anders, to start.
Thank you, Antonia, and welcome, everybody. Before I jump into the figures, I want you to look at the picture here on the screen. It's one of the large construction company we have in the middle of London, and it's called Norton Folgate. If I summarize the first quarter, it's a mix performance in Q1. Construction delivering very strong results. We have high margin keeping up that, and we're able to continue to have a good order backlog. We'll come back to that in a moment. Residential Development, very few homes sold in the quarter, which impact the revenue, of course. And we also, as we talked about in the fourth quarter last year, have initiated a turnaround program in BoKlok, and that has significantly impacted the quarter in the Residential Development stream. Commercial Property Development, no transaction recorded in the quarter. We are in an investment mode when it comes to commercial development. So there's no surprise here as well. Investment Properties, no acquisition completed this quarter. We had a successful year last year, and we are following the plan here. Operating margin in Construction, 2.8% in the quarter, increased if you compare to the previous quarter last year, 2.3%. Return on capital employed and Project Development overall, 4.5%, which is below our target. This is a rolling 12 figure. We have a target here of 10%. Return on capital employed in Investment Properties, 7.7% above our target here, has the target 6%. Return on equity, 13% below our target of 18%, also here rolling 12. We have been able to keep a very financially strong position, which is a really good thing in a more tougher market going forward. So we are determined to keep that position. We managed to reduce the carbon emission further. So now we are at the 57% reduction compared to our baseline year 2015.
So if I go into the different stream and start with Construction. Revenue increased to 37.5%. That's a 12% increase in revenue. If you were to look at the local currencies, it's 6%. Order bookings was slightly below last year, SEK 25.8 billion, but we have a very good book-to-build, if you look at the rolling 12 figure here, 99%. And the order backlog is also historically high, close to SEK 218 billion. Operating income, over SEK 1 billion in the quarter, increased from last year, and operating margin 2.8%. We have a very solid performance in the Construction stream across the borders, which is really, really encouraging here. So our strategy that we have launched and worked with the last 5 years really pays off in the -- even in this tougher market. Revenue growth and strong operating margin and the order backlog, as I say, remains high and healthy. Going to Residential Development. Revenue here decreased a lot, as I started with, 132 homes sold in the quarter. We have started 288 home in the quarter. So we had a negative impact and negative operating income of minus SEK 314 million and also negative margin, of course. And the return on capital employed on a rolling 12 has decreased to 2%. It's a lower market activity, very few homes sold and that impacts the revenue immediately. And we also have this turnaround program in BoKlok that impact the quarter negatively with SEK 331 million. And some of the reason for that is significant volume drop. We also have some impact of cancellations in the quarter in BoKlok. And we also have a lower project income and higher cost in some projects and that there's also some charges we take in the first quarter. Commercial Property Development. Operating income negative here as well. And the gain on sale is on a very low level. We have not done any significant transaction in the quarter. And we have 39 ongoing projects, of which 10 is residential rental. We have transferred that in the reporting to the Commercial Property Development, and that corresponds to close to 2,400 homes. So in total, we have SEK 34 billion in total investment upon completion of these projects. And the leasing rate, or you can call it occupancy rate, is 34% compared to a 71% completion rate. This is something we track very carefully, and we don't want the gap to be too big. So very strong focus on leasing here. And the activity is slowly returning in the leasing market. We can see that especially in the Europe -- Central Europe. We can see it in the Nordics, a bit slower still in the U.S. due to the fact that back to office is slower in the U.S. compared to Europe. But here in Europe and Nordic, we have at least 43,000 square meters in the quarter, which is a strong recovery if you compare to the last year, only 13,000 in the same quarter. Investment Properties. As you know, we are targeting a high-quality, sustainable office to build up a portfolio of between SEK 12 billion to SEK 18 billion. That will give us a strong, stable cash flow, and we will take advantage of the value increase that we have seen in our high-quality real estate offices. No acquisitions completed in the first quarter, and encouraging here to see that the offices that we have transferred to this stream has actually continued to -- will continue to lease in those offices. So now the occupancy rate is 93%, which is on a high level. Going back to Construction and looking into the order bookings. Here, you can see the revenue, the green line, you can see the book-to-build ratio rolling 12, the yellow. You can see the order bookings rolling 12, the gray one and also the order bookings per quarter. And the bar sees the backlog, of course. So you can see that we historically are on a high level. So I'm confident in that, and I think that you can see that our order backlog is healthy right now.
And if I go into the different geographies here, Nordic, 96% book-to-build on a rolling 12. I think that's a healthy level. And Sweden, slightly lower, but overall, good position. I can see a good pipeline also in the Nordics, especially in the segment where we are operating. Europe, slightly below last year, but you should also remember that we had a really big project coming in the U.K. last year, development construction contract, which was SEK 2.9 billion. So that explains pretty much the big gap here. U.S. continues to be strong, and we have a book-to-build of 107%, which is strong. And also, if you look at the amounts of production, 17 in Europe, 19 in U.S., total 16. I'm very confident in the order backlog and the quality in it.
With that, I leave it to Magnus.
Thank you, Anders. So we go to the income statement then for Construction. You have it on the slide. As Anders already said, we grew revenues with 12%. Half of that is local and half is in Swedish kronas then. So lower organic or local growth, if you will, than what you can read in the numbers here. Gross margin, we have a portfolio that's performing really, really well. We recognized a margin of 7.2% in the quarter, up from 6.8%. And this really follows a trend that you have seen if you followed us for quite a few quarters by now, building up this good portfolio. And also with undershed, the remaining part of the backlog also looks really good there. So strong performance in construction.
S&A at 4.4%. It's slightly lower than last year. But on the other hand, we have some revenue growth. But overall, I'd say we have S&A under good control. Takes us down to an operating margin of 2.8% compared to 2.3% in the same period last year. And on a rolling 12-month basis, which we think is sort of right measure to use, if you are to evaluate the performance really in the construction operation, we are now at 3.8%, slightly up from what we had for the full year 2022 and a full 30 basis points and above our own financial target for the stream. So good performance. If we look on the different geographies, you can see all geographies actually improve the result in the isolated quarter here. And margin-wise, all geographies also improved there, except Sweden, who came in with sort of the same margin then, with a very good performance in the different parts here. U.S. stands out a bit, 3.7% versus 2.7%. And what we have said many times, we have big projects in the U.S. when we advance these projects to completion, and we sort of overcome the final remaining risks in these projects, not up until at that point do we recognize the revenue that is associated with that risk.
So when we step this over, we will have sort of positive impacts then. And this is very much normal operations, and it comes from our cautious way of recognizing revenue, which is also why we'll see effects like this coming in different quarters. So you need really to look at rolling 12 months to understand what is the underlying performance of the group here. So in totality, then 2.8% in the quarter. Residential Development. As you already heard and maybe even read, the story is a bit different. The market is weak across the residential development geographies where we are active. The revenue came down around 80% compared to last year. And in the isolated quarter, we have accounted for a loss here of SEK 314 million in isolated quarter on the EBIT line then. And as has been communicated by us also before, we see that the biggest impact of the current economic situation with high inflation, increasing funding costs and so on, it is in the affordable segment of the market. The product and the product concept that we have that is positioned and operating in the affordable segment is the BoKlok brand. And in this specific business, we have a loss here in the quarter of SEK 330 million, essentially explaining the full amount of the loss here. And the reason to this is, let's say, twofold, a bit simplified, but still one is volume with a very low level of sales. We really can't cover the fixed costs we have. And due to the sort of weakness in the market, as is shown by difficulty by customers to getting their hands on mortgages, we've also had continued cancellations in this business. So we have to reverse the revenue that we previously have recognized. So driven very much by the market. In this turnaround plan that we communicated in Q4, part of that has been to go through the whole business, obviously, the organization competence and the portfolio of projects. In this, we've also reassessed the expected income from the units, the pricing of the units that we have in the projects that are under construction and that are to be sold and decided that this is, given the current market circumstances too high. So we have taken down the expected revenue. At the same time, we have, in this business, maybe not been as successful as in other parts to deal with the inflation and cost escalation as we have in other parts of the business. So this taken together, creates a situation, we have taken a value adjustment on a number of projects then in the BoKlok business, totally summing up then to SEK 330 million negative in that part. If we move to the different geographies, we do have the BoKlok brand that business in all these different geographies. So you can see all the geographies are reporting a loss here. And if you then take out the BoKlok part, SEK 330 million, it's not that we would have come in with a very large profit anyhow, if you do the math, but we would have covered our cost, which we don't do here now. So negative margin in all different geographies. Homes started and sold. I mean we sold very few homes then during the quarter, 132. So we're down 85% essentially in number of homes sold. And again, given the market it is much more difficult now to find the business cases to start new projects, I'd say it has become easier over the last few months to assess costs in projects. But it's still very difficult to see through what prices can you underwrite when you start a new project, and we are very cautious with this. We don't want to take on sort of projects that are not performing, which is why then the number of starts becomes quite low for us. Homes in production. We had 6,700 homes in production end of the quarter. These were sold to 57%. So a little bit on the low side. We usually say that we would like to be around 60% to 70%. You can say here, we're close to 60%, perhaps. But this is then driven, of course, by the slowness of the sales at the moment. And it has been like that now for, say, maybe 6 months or so. Unsold completed homes, 210 of those end of the quarter. And we have, for a long time, been extremely low in this number. We've been low double digits in completed unsold. And given the size of the portfolio, that's, of course, a very strong position. Now this is increasing very much expected, given how the market is behaving. And the important thing with these units is that we have a churn in them, so that units that are completed, unsold do not grow old on our balance sheet. And on this, we have a very good sort of visibility into. So we're not concerned about this, but of course, we follow it closely.
Move to Commercial Property Development. As already said, very slow quarter. No material transactions, so the result here, minus SEK 142 million is essentially driven by S&A and the net operating income that we have from properties under management. And the transaction market is quite slow. So I think most of you know. There are very few comparison objects, comparison transactions out there to sort of inform us and others about where is the market? Where is the buyer meeting the seller in terms of price right now? And given this, we have, during the quarter, assessed the market values of all the properties that we have under construction. And then for those of you who have not followed Skanska very long in our balance sheet, we booked properties at acquisition cost. But we also report the market values more for information purposes because then the difference between these 2 becomes the surplus value. This is what you can see on the chart there, and that is essentially the profit that we expect to book once we sell these properties out in the future. Now when we have gone through this and made our own reassessment of the market value against the information available in the market, we have decided to take down the assessed market value of these properties with SEK 1.6 billion. It's essentially 4% value decrease, if you will, then of the portfolio of unsold ongoing and completed properties. This is the completion profile. And what you see are bars and that the bars represent the total investment of the properties that are expected to be completed in the individual quarter. And the green dots represent the average leasing rate of those properties then. And here, you can see we have now end of the first quarter, close to SEK 8 billion in properties that are completed, not yet sold, and they are leased to quite a good extent, 71%. And from there, you can see we have then a falling amount of properties expected to be completed up until the third quarter and a fairly large amount in nominal terms expected to be completed in the beginning of 2024. So that's how we expect these properties to be completed. Leasing. This is the rolling 12 months leasing in the bars that you can see. And we leased now 175,000 square meters in total over the last 12 months. In the isolated quarter, we signed, as Anders already said, 43,000 square meters of new leases. We should remember that this is to be compared to 13,000 square meters in the same quarter last year. So even if the values aren't really sky high here, it's a clear improvement, and it is definitely clearest in the Central European part of the operation, also the Nordics, U.S. remains more muted then. You can see the lines on this chart. The green line represents then the degree of completion of the projects. It's close to 60%, and we have the economic occupancy rate, also known as leasing, at around 45% then.
These numbers differs a bit from what you saw in an earlier slide there. The reason is that we have now included, starting this quarter, all the developments of residential rental projects in the Commercial Development business stream. Those projects are not included in this measurement for the very reason that when you develop residential rental projects, they essentially remain unleased until you sell them. We don't take on that leasing risk by ourselves. So it would essentially skew this measure and make it a little bit unuseful for those looking at it. So that's the reason to why you see somewhat different numbers. Investment Properties made no transactions, neither in, nor out. The properties are performing well. We booked a profit of SEK 31 million -- sorry, SEK 30 million in the isolated quarter and leased 2,000 square meters. We have 3 properties there with a market value of around SEK 3.9 -- 3.8 billion at the end of the quarter.
Looking at the group, we'll take the most interesting lines here, the central line containing all our legacy businesses and the headquarter organization. You see a little bit of a cost increase. Underlying this, we can say that the structural cost remains the same, but we will always have some sort of quarters becoming more or less expensive. So really no change there that you should take with yourself when you assess the group. Net financials, a very good result, SEK 146 million. And of course, here, we are greatly benefited by the increase in the interest rates on the market because the interest rate differential is what gives us this result where we have a longer interest rate maturity on our loans than we have on our deposits, making a fairly big swing factor in a positive sense for us now when interest rates go up. Very positive. Taxes. We taxed out the quarter at 19.6%, which is, by and large, the same as the comparison period.
Cash flow. We had a negative cash flow in the first quarter as we basically always do, minus SEK 2.3 billion, a little bit better than last year. And the chief reason to the cash flow being negative is that we have fairly high investment pace, and we have a fairly low divestment pace, not at least because of the situation in the transaction market in Commercial Development. So this explains then the minus SEK 2.3 billion. We decided -- or rather the AGM decided on the dividend at the end of March. This dividend will be distributed and accounted for in the second quarter if you were wondering why that was not in this table.
Free working capital. We had 18% free working capital of revenue, very solid number. For those of you who have tracked us for a long time, we say that maybe 15% or so something that seems normal. So we have been very blessed for quite some time with a very good net-negative working capital position. It's coming down slightly here now, but I think it's important to understand that the working capital position in the group is essentially a consequence of thousands and thousands of aggregated payment plans over a whole construction portfolio. So this is not something that changes very quickly. It only moves very, very slowly. And you can see here now that at the end of the quarter, we had SEK 28 billion in net negative working capital at our disposal, so to speak. Investments, divestments. If you look at the green line here, you can really find some evidence to what I just told you on the last slide. This is the net investments for the group at a rolling 12 months basis. And as you can see, we had a net investment rolling 12 months of minus SEK 7.5 billion. And I think that is actually the quickest net investments we have had for a very, very long time in the group. And you can also note if you look at the bars here, that is really a lot about a lower amount of divestment at the present. Capital employed. We closed the quarter with SEK 61 billion and capital employed, slightly up then from the SEK 58.6 billion that we had end of 2022.
We have plenty of funds. We can access SEK 16 billion, of which we have our own control SEK 10 billion and then SEK 6 billion with undrawn credit facilities that we can take. We have 2 maturities during the year of sort of they are not large, SEK 500 million each one loan and one bond. So very well positioned in terms of liquidity. And financial position. We remain with a super solid financial position, SEK 53 billion in equity. We have an equity to asset ratio of 35% and an adjusted net debt of 9.5%. And I think we always like to sort of good economic situation. But if the market turns out to be a bit weaker at some point in time, like perhaps the transaction market is now, you can't be in a better financial position than what we are. We have the sort of financial means available to own our own decisions in this situation. And not only important for the property business, but also for the construction business. Clients can rest assure that we will be around to deliver on their most complex, important and large projects.
All right. I will go into the market outlook. Starting with Construction. They can see a mixed picture. It's start with the Nordic operation. It's quite stable in the Nordics, both when it comes to building. If you take out the residential construction, it's stable on the social infrastructure and also stable on the civil market infrastructure in all basic global countries there. Europe. Rest of Europe is a bit weaker market outlook. We have a strong market outlook in the U.S. In the segment where we operate, we don't have any residential construction in the U.S. We have a large civil operation. We have a large social infrastructure, universities, schools, airports, hospitals and so on. And we can definitely see that the federal money, federal packages coming out in the system now, and we can also see that the different states, they are really pushing the button and starting new projects. Residential Development, very slow. We estimate a slow market outlook here, lower activity in the housing market. And that's due to the fact that cost of living has gone up. Interest rate has gone up. So there's a lot of hesitation amongst potential buyers. But we do see impact in the low-cost segment more than the other segments. But we can definitely see that in a more longer term, we have an underlying need for new homes in our market, where we operate. So I strongly believe in this segment in more long term. Same for Commercial Property Development, very hesitant investor market, very few transactions overall in the market. We can see good signs here in the leasing market, though. As we talked about, we have increased the leasing activity, and we can see that more -- since people are coming back, especially in Europe, coming back to offices, companies are looking for new, modern, high-quality, high environmental standard offices, and that's exactly what we can offer. So that's a good sign. Investment Properties. Stable market outlook, the ones we have. Now we are focusing on the 3 biggest cities in Sweden. We have 2 in Malmö today and 1 in Stockholm, very attractive, high leasing rate, well over 90%, and we have continued to lease in those facilities.
So concluding this presentation, summarizing. Mix performance in the first quarter. We had construction very strong. And really encouraging to see that we continue to increase the profitability, and it's across the borders. So very good there, high margin and also a healthy backlog.
Residential Development, few homes sold, turnaround in BoKlok is ongoing, impacting the quarter. Commercial Property Development, no transaction recorded, as we said. Same for Investment Properties. And we do have a robust financial position, which is a very good thing to have in this tougher market conditions. So the strategic direction remains. We will continue to focus on profitability and growing responsible way in construction. We can see growth now, especially in the U.S. operation. And then we have the -- definitely the ambition, we should be the leading residential developer where we operate today. We want to grow the Commercial Property Development in line with the market allows us to do so. We have definitely the capacity and the financing to be able to do that. And we will continue to build up the investment property portfolio. And so far, we are following our plan in a very good way. With that, I hand over to Antonia to start the Q&A.
Excellent. Thank you. So yes, now we will open up for your questions. [Operator Instructions]
Markus Henriksson from ABG. First off, a question on the property value changes, down 3.9%. Could you highlight property segments and geographies?
Yes. I'll take this. Geographies, it's -- the weakest transaction market we see and the highest uncertainty we see in the U.S., but we have reviewed this in all geographies. And it's offices, I'd say, [indiscernible] also some residential rentals.
And that's why you don't take down values in Investment Properties in your business there because you see the weakness in the U.S.
Yes. We have not changed the valuation of the Investment Properties because the Nordics is -- the way we see it is the Nordic market is more stable here than what we can see, for instance, in the U.S.
Then you highlighted that you are performing your margin within Construction a bit above your targets? Do you see any geographies where you are performing a bit too well given outlook for the coming quarters or years? Or are you still seeing improvements in certain geographies?
Yes. I can see, we are performing on a very high level. And, for example, the U.S. operation, they are performing very, very well. But I can see some potential improvement in some geographies. I can see some potential improvement in the European and also in the Nordics. So we are continuing. We are not getting complacent or anything. We will continue to focus on profitability and also continue to improve it where we can do it.
And last question. You mentioned you have adjusted prices within BoKlok. Could you highlight for us how much you have adjusted the prices to consumers?
I can take that. It's -- I mean, those price adjustments are done project by project, so it varies of course. So it's not meaningful to say a number because it will make no one any smarter, right. But more than that, we're also working with other type of incentives to make sure that we have an attractive product, and we have an attractive product in terms of physical and appearance and functionality and so on. But of course, the total offer needs to be adapted to the customer segment. And this customer segment are those with sort of lower income, perhaps and tighter economic situation on the private side. And therefore, the market is worse hit in that segment actually.
Thank you. And we will now move to questions on the phone conference. So operator, could you please introduce the first caller?
First question comes from Graham Hunt from Jefferies.
Maybe just coming back to the BoKlok business and the SEK 330 million loss you recorded there. Are you able to sort of just break that down a little bit more into how much of that was related to the lower volumes versus how much was one-off restructuring? And then I know you don't intend to give us a lot of financials around that division, but can you give any sense of where you expect that to land for the full year just based on the restructuring you're taking there? That's the first question.
I can take it. I mean we have, of course, recognized all the costs as we see them now. That's how you have to do it. So we don't guide generally when it comes to sort of full year results or anything like that. And in terms of the write-downs, it's very much market-driven here. It's more -- or sort of the loss. It's market-driven because we're stuck with fixed costs that we can't cover when we don't sell. We have also then had a number of cancellations, as I said, and we have to reverse that revenue out of our books. And we also have done sort of adjustment on the income side of the projects and also in some cases, on the cost side of projects.
And I'm not -- I don't want to give you the sort of split of that, but you can say the biggest ones in this is, of course, the lack of volume here and the difficulty to cover costs and also the adjustments at the project level. These are the biggest ones.
And then maybe just coming to working capital. I mean, that's been coming down, I think, for a few quarters now as a percentage of sales. Are you feeling any additional pressure there from your customers in terms of them holding on to cash a little bit longer? And is there a level where you'd expect that to stabilize?
I can comment on that. We don't see any change in the behavior amongst the client. This is more natural fluctuations, and it will change over time in a slow pace, but we are on a high -- historically high level here.
[Operator Instructions] The next question comes from Arnaud Lehmann from Bank of America.
My first questions are related to Commercial Development, please. Just coming back on the 4% value decrease in Commercial Development Properties in the first quarter? Could you give us some of the key assumptions that help you get to this 4%, especially as you highlighted, there's very few transactions available at the moment? And the other question on CD in terms of the pace of investment in CapEx, considering the slower pace of disposals in the last few quarters, have you considered -- and the leasing is also relatively slow. Have you considered slowing down the [indiscernible] to make sure you don't have too much of many properties completed, but not sold by the end of the year or the end of next year?
Thank you. Let me start with your first question that regarded valuation and how we've looked at that. Well, I mean, you sort of reassessed both the cost side and also how we think that the buyer will discount the expected cash flow from that property. And then you will have to make use of your best estimates of what the buyer would be willing to pay is actually. This is normally not super tricky because you have tons of transactions in the market that you can look at. It's more tricky now, but you have to use the information you have and make an educated guess, if you will. And we have been in this business for quite some time. So I would say we have a good idea about where the market is. But again, it's uncertain because we don't have these masses of transactions to make -- to have a comparison objects.
Then your second question concerned the pace of investment in Commercial Development. And once we start Commercial Development project, we do not want to stop it. We do want to complete it until we have a completed property because it's not up until that point, there's any value in the sort of construction in itself, which means that the investment pace we have at any given point in time sort of -- we're a bit stuck with that until we have completed these properties. The way that you manage the investment pace, that is, in reality, by managing the amount to start. You decide to do a new project starts. And of course, every project start, especially when the outlook is a bit more uncertain, is subject to intense scrutiny by us because we know that once we start the project, we're fully committed to see that through all the way to the end.
So with that said, we have no intention of sort of immediately addressing the investment levels in Commercial Development because this is about the absolute majority, this is about completing the work we have done. And then we will start new projects when we think the timing is right and when we have a good business case.
That's very clear. If I may squeeze a last question on order bookings in Construction. I guess you had a very strong Q4. Q1 was then a little bit slower. Are you seeing more orders coming into the second quarter? And now you confident that you can keep the book-to-bill ratio or above 100%?
We don't give any forecast number here on the bookings, but I can say that we have a strong outlook in our biggest market. And the U.S. market, we have a strong outlook, both when it comes to building activities, but also on the civil side. So we have a healthy pipeline. And also, the big -- one of the biggest markets in the Nordics. There, we have a stable outlook. So I definitely see opportunities out in the market. And Q1 is normally a slow quarter when it comes to order bookings. So you should really look at the rolling 12, and there we have pretty much on spot. We have increased revenue, but we still have close to 100% book-to-bill.
The next question comes from Erik Granström from Carnegie.
I had a few questions as well. Starting off with CD. What's your outlook for divestment? You mentioned that you're in a net investment situation right now, but I would assume that you're also looking into the transaction market for disposals. And how do you see that coming along? And do you feel that you do have properties ready for sale? Or is there any other situation that we should be aware of?
Thank you, Erik. I will take that outlook for divestments in Commercial Development. I mean, of course, we -- our aim is always to sort of develop and complete the property, we lease it up and then we sell it. And there are 2 factors there now that interjects with this strategy. One is that leasing has been slower for quite some time than what we have been used to. And of course, we don't want to sell properties too early because if we do that, we essentially give away value. So we would like to lease it up more. And by that, the number of objects that have been ready for sale for us have been, I would say, fewer for some time. And then in addition to this, we've had a slower transaction market then. And with a slower transaction market, you can always put something on the market, but the prices you get needs to reflect the actual value of the property. So we don't want to sell. We don't -- we're not in a position where we have to sell fire sale stuff in order to get the liquidity back. So we're much more comfortable, sort of staying with these properties and protecting the value and really extracting the value from these very nice properties for our shareholders than we are to expedite any sales on anything. So in terms of outlook, I mean, we, as everyone else, is tracking the market very close to where it's going and so on. So that's the way we handle it.
So you wouldn't consider divesting an asset with, say, 20%, 30% vacancy and then take on the leasing risk to a potential buyer at this point?
That's a hypothetical question. That's not our business model, so we don't do it like that. We can sometimes take on leasing guarantees, most lease guarantees for smaller portions of a project that we've done always as a way to top-up leasing before we sell something, but not to the extent that you describe, or we ask about.
Okay. And then my final question is regarding RD and BoKlok. When you look at the behavior of your buyers and your potential buyers, is there a difference whether or not you're in the early phases of production when you are trying to sell versus when you have completed a project, meaning that you have a completed project ready to sell? Is there a difference there? Or is this just the difficulty that consumers are facing is similar whether or not they're buying at an early stage or a completed apartment?
Yes, I can comment on that. We see the biggest impact in that segment is that clients really don't get the financing in place to be able to fulfill and buy the apartment. And that's pretty much the same if it's early stage or late stage. So that's what you see. The cost of living, the interest rates increasing has impacted that segment most in a higher impact then compared to other segments.
The next question comes from Gregor Kuglitsch.
Hopefully, you can hear me. I've got a few questions, please. So one is on sort of your discussions. I guess, you're having discussions with potential buyers in CD, and I want to understand if the discussions you're having around price or whether perhaps they would like to see more leasing rates? Or just give us some color what's kind of holding back from transactions actually clearing or materializing?
The second question is on coming back to BoKlok and the accounting. So obviously, you're not covering fixed costs. So therefore, you sort of took a loss. I want to understand, is that going to be a recurring loss assuming the current kind of run rate of sales? Or did you sort of take a one-off provision to account for sort of the project, not covering its fixed cost. So what I want to understand is, I guess, did you front-load the cost into the quarter basically? And then, the third question is on construction margins. So you sort of had some positive releases, I think you flagged in the U.S. I appreciate this is difficult to forecast, but sort of looking ahead, do you think that could recur? Or is it too difficult to predict?
Thank you, Greg. I will start regarding the discussions we have with potential buyers in Commercial Development, the standard answer here is, of course, that we would like to keep what we will discuss with buyers to ourselves, please. But I mean we are in discussions with quite a few buyers. So -- and these discussions are normal. But we have to remember that also buyers there have difficult time to see into the future. What type of office space do they need, really? And it's a conjunction of the economic outlook, generally speaking, in terms of what locations do they need to be and how can they protect costs and so on. And also, the issue or how you should call it around the work from home, how much people will be in the office. So I think these are the main things that stand between the buyer and transactions. And then of course, there is today because there's big uncertainty regarding price then.
And the second question was regarding BoKlok, and you asked this fixed cost, are they forever. Part of this, what we are doing now is to address the amount of fixed costs in this business to sort of lower the sensitivity of the business to market swings, that I think answers that one. The other one is regarding, do we see more things? I think it's important to point out that any -- since we are in project accounting, IFRS for this accounting, any expected future losses in the project are taken in the first quarter immediately as we see it. So we will not continue to run losses in projects in that sense.
I can comment on the last question regarding the construction margin. I think the reason why we see a healthy, high margin now is that we have been selective when we go for a project. We have been -- kept the discipline. We choose project where we can see we have a competitive advantage, and we have the team in place. And we also have been very good in executing projects, and we're having control over them. So that's the main underlying reason. Then, of course, when we are able to avoid loss makers, which we have done now for quite many quarters. Of course, we can see that when the project gets more mature, we can increase the profit take out. We are always a bit conservative in the profit take-out in the early days of the project because with the much show up, we don't have control of everything. So -- but when we complete or finalizing the project, we can take out the full profit, and that's what we've seen. That's what you see in some fluctuation, but that's a natural thing in this operation. And I expect my ambition is, of course, to keep up this level and going forward as well.
So I will just quickly interfere now. We have 10 minutes left of this conference. I can see that we have quite a few that it is queuing in the conference call. So I will now limit the questions to 2 per person. And as mentioned before, we will prioritize calling in before the written questions. So please go ahead, operator, introducing the next caller.
The next question comes from Peter Testa from One Investments.
I'll stick to 2. The first, just if you could give some sort of understanding on the leasing terms that are coming through in terms of rents per square meter and how you see that evolving in the different parts of your commercial real estate business in these discussions, do you see any change in rent per square meter?
The rent per square meters is quite stable or even increases in part of our geographies, but we -- as I said earlier, we see the highest activity definitely in Central Europe and also in the Nordics.
Okay. And is that tracking more or less the cost inflation, cost to build inflation and so on? And -- or is it similar?
We have -- in most of our contracts, we have inflation clauses, so it will be compensated for that.
And the other question, please, is just on the construction pipeline on the European side. You're highlighting that it's roughly stable. Do you see a particular change in mix in terms of category of pipeline in terms of type of buildings that you're pitching for?
We see a stable outlook in the Nordic. As we talked about, I see a slower market in Europe. In the U.K., we see a slower -- we expect slower market, both in infrastructure and in building side due to the government or drawing back some of the financing for those public finance projects. And we see also a slower market in Central Europe.
But is there a mix difference between, say, infrastructure and building in Central Europe and Scandinavia?
It's more stable in infrastructure.
The next question comes from Stefan Andersson from Danske Bank.
Yes. So first the question on opportunities in the -- I'll put them together, CD and RD. You're saying that in the U.S., it's a challenging market. And Sweden, I guess, or the Nordics, you have an RD challenging markets. So reverse that, are you seeing opportunities to acquire land for the future? And are prices down? And are you willing to allocate capital to actually take some offensive moves there?
Thank you, Stefan. I will take that. We are absolutely prepared to act on opportunities that come our way. We think there can be good opportunities. This is one of the reasons to why we carry the big balance sheet we have. If you're active in a cyclical business, you really should have that to cover the cycles, but you also need to be able to do good business when others can't. Then I think it's actually a bit early yet. We haven't really seen like prices on land coming down. We expect that will happen depending on how long the market is slower then. So it's a little bit too early, but we are prepared to act if the right thing comes along.
And the second question is New Karolinska. It's an unusual step-up in the contract there, of course, but I would have thought that you would have sold that contract by now with the low interest rates we had. But just hearing what you think about that one, given that the interest rates are up, is that impacting your opportunity to divest that setup? And connected to that, could you see a situation where you actually keep this until maturing? Is it 2040 or something like that?
Yes. NKS is a fantastic building and ranked as one of the world's best hospitals several times. And our business model in the former Infrastructure Development division was to develop and then sell after the ramp-up period was over. With this asset, we see no change to that, but we will come back and communicate when we have sold the asset. We don't want to talk about that before we have done anything.
We have a follow-up question from Graham Hunt from Jefferies.
Quickly come back on residential. Anders, you mentioned your commitment to the long-term future of that division given the structural shortage of supply in the residential market. But I wonder, does that extend to the low-cost segment, i.e., the BoKlok business, particularly in the context of rising cost of living, et cetera. Maybe you think this business might be performing a little bit better, but it seems to be going in the opposite direction for now. Is that a business you remain committed to within the Skanska portfolio?
Yes, it's definitely. That's a segment that has been very successful for many years, and we can see also that in a normal case, it's more less volatile, actually when the market goes up and down. But what we have seen now is quite unusual if you look at the last 15 years that the interest rate goes up, the inflation goes up and that has hit that segment more than other segments. I'm not surprised with that, but we still believe in the segment and the BoKlok for long term, yes.
Thank you. Okay. So then I will read out or summarize one of the questions that we've received in writing. And this will be the last question before we close this call. And there is, it's Nicolas Mora at Morgan Stanley that it is asking about U.S. building business and the outlook for both building and civil, and how we're positioned in the different market segments. And if you think that we're correctly positioned towards the sectors that are active or if we need to change something around.
Yes. Thank you. I can take that. We are very well positioned in the U.S. market. It's a strong market on the infrastructure. As I said, with a lot of money floating out in the system, different states starting projects, and it's the strongest market on the East Coast and West Coast, and it's exactly there where we have our largest operation in the New York area, the Boston down to D.C. We are very strong in the California area, Los Angeles down to San Diego and also up to Seattle. So we are very well positioned.
And the same for, when it comes to infrastructure. The same for building sector, we are in the right segment. We're not in the residential segment that is weaker right now, but we are in a more social infrastructure where we say public investments from the states and the government. And we see also that institution, they are investing a lot in, for example, schools, university, hospitals, airports and so on. So -- we, I'm very confident we're in the right places.
Excellent. So with that, we have answered, I think, most of the questions that we received today. Should there be any questions left unattended, please do not hesitate to reach out to the IR team and myself, and we will make sure that you receive an answer. And now it's time for us to wrap up.
So first of all, Anders and Magnus, thank you very much for your presentation here today. And thank you for joining us here in our studio in Stockholm. And lastly, thank you for watching. A recorded version of this broadcast will be available on our web page shortly. And we will be back with the audio webcast on the day of the release of our second quarter report in July. Until then, have a good day. Thank you.