Skanska AB (publ) Q3 2022 Earnings Conference Call October 26, 2022 4:00 AM ET
Company Participants
Antonia Junelind – SVP, IR
Anders Danielsson – CEO
Magnus Persson – CFO
Conference Call Participants
Pam Liu – Morgan Stanley
Markus Henriksson – ABG
Gregor Kuglitsch – UBS
Graham Hunt – Jefferies
Antonia Junelind
Good morning, and welcome to the presentation of Skanska’s Third Quarter Report 2022. I am Antonia Junelind, Senior Vice President, Investor Relations. And here on stage in our studio, I have our CEO, Anders Danielsson; and our CFO, Magnus Persson. Shortly, they will take you through the third quarter results and financials, and they will guide you through some business and market highlights. And after their initial presentation, we will move over to questions. And you will be able to ask questions either by using the conference phone number or you can text us your question using the text field in the webcast page or you can ask your question in person if you are here in the room. And we will answer as many questions as we can.
So with that short introduction, let’s take a closer look at the third quarter results. I hand over to you, Anders.
Anders Danielsson
Thank you, Antonia. Before we jump into the figures, I want you to look at the picture here to the right. It’s Harry Nice Memorial Bridge that we’re building in Virginia, USA. Well run big project.
First, an overview over the third quarter. We have a solid performance in the third quarter again. We have a strong profitability in construction. We have a historically high order backlog. And we also have attractive property development portfolio. We’ll go into that later on. And we have a very robust and strong financial position. Operating margin in Construction, 3.3% on a rolling 12 month basis. Return on capital employed in product development is at our target 10% on a rolling 12. Return on equity, slightly below our target, 17%. Carbon reduction, we have managed to reduce the carbon reduction with 54% compared to our baseline year 2015.
So we go into each stream starting with Construction. Revenue goes up in the third quarter with 21%. The underlying — if you look at the local currency, the increase is 9%. Order booking is increasing to close to SEK44 billion. We have a book to build of 102% on a rolling 12 months basis, which is really strong. And again, historically high SEK228 billion in order backlog.
Operating income, SEK1.3 billion and the operating margin in the Construction is 3.4%, just shy our target as you know of 3.5%. So despite everything that’s going on in the market, in the world, we manage to keep up the profitability, which is a real strength. We grow the revenue, strong order intake and a solid level of profitability.
If I go into Residential Development, the revenue decreased to SEK1.5 billion. And also the number of homes — sold homes decrease and we have started less home in the quarter as well. But we do have a very strong position in the portfolio. We will come into the details later. But we had a high sales rate in the ongoing project and we have very few unsold completed. But the revenue is, of course, impacted by a lower activity in the market, but still we have an operating margin of 9% and our return on capital employed here on a rolling 12, 9.5%.
So I’m moving into Commercial Property Development. Here it’s hasn’t had happened too much in the quarter, no big and large divestments. So we have a gain on sale in the quarter for SEK152 million. Here you should look over time. In my view, if you look at the first nine months for the Commercial Development, we have divested commercial properties for close to SEK10 billion. And if you look at the rolling 12, it’s SEK16 billion. So we are sure that our portfolio, our products are really in-attractive for investors, which is good for the future, because we do have 36 ongoing projects, which corresponds to close to SEK33 billion in investment upon completion of those projects. 32% occupancy rate, 48% completion rate, it’s something we’re watching very carefully. We don’t want the gap to be too large, so it’s something we look into.
We have started one project in Q3. And what we can see now is that, the leasing market is slowly recovering. We can see that especially in Europe, in the Nordics, Central Europe that people are getting back to work, getting back to the offices in gradual incremental stages here and we can see it also slowly in US. And we can also see that the activity amongst potential tenant has increased. We have more potential tenant viewing our projects and we can also see that we have signed a bit more tenant deal in the quarter. And we can also see that we have a good mix in the portfolio when it comes to offices, life science, multifamily. So that is also increasing demand for those other segments in the market. And we also see — you can tell a polarization in the leasing market. With that, I mean, that projects offices in very good location, high quality, high environmental standards, they are more attractive than properties in not so good location and not so good environmental standards. And that is a benefit for us, of course.
Investment Properties that we — new business stream, as you know, from 2022. And here, we’re targeting high quality, high sustainable offices in Sweden predominantly and the ambition is to grow that portfolio to SEK12 billion to SEK18 billion in the next few years. And we have put our first transition here, EPIC building in Malmo in the first quarter and we are preparing for more very high-quality acquisitions going forward.
If I go back to Construction and go into the order bookings, here you can see what I’ve just been talking about, about the order backlog development over the years. So you can see here in the blue bars that it’s — the order backlog is on a record high level. And we can also see that order bookings per quarter is also quite stable. And the green line here in the picture is the revenue. We have been forecasting this increase for quite many quarters now due to strong order intake and now we can see it this quarter as well, even though part of it is FX impact.
And if I go into each geography, it’s also a good position here. We can see that basically all geographies have a book-to-build ratio of over 100%, overall 102%, slightly lower if you combine the Nordics, but I’m not concerned over that. We have 14 months of production in order backlog. And if we look at the total of 17 months of production, which is on a good level. And you can see, of course, a very strong order intake in US and also in Europe, that’s a — majority of that increase is in UK. So good position there.
With that, I’ll leave it to Magnus to go through the details.
Magnus Persson
Thank you. So let’s start with, as usual, income statement. In construction, as you can see the revenue over the topline grew quite a lot there, we’re up quarter over quarter around 20% as we have a lot of our activities in Construction in other currencies. Of course, there is — and the Swedish krona has depreciated quite a lot. We have a fairly large impact of the foreign exchange rate. And so if you strip that out, we had an underlying growth of 9%.
And I think on that, it also sounds like a lot to grow organically, if you will. But with the high inflation rates that we’ve had over — for quite some time now, a lot of our contracts are indexed to inflation. So, of course, then as costs go up, we all have the right to be reimbursed by clients for the movements in index. And that is, of course, also driving part of the revenue increase here. So, if we look at scope growth in the organization, you can say that’s sub 9%.
If we go down and look at the margins here, we had the gross margins of 7.2%, which is very respectable, not at least given that the sort of surrounding environment. S&A, quite steady. S&A margin at 3.9%, let’s say, that’s very good level that we have, down from 4.1% a year back then. Nominally speaking, you can see S&A goes up a bit, part of that is, of course, also FX that comes into play here. Takes us down to an EBIT margin of 3.4%. And as Anders said, 3.3% on a rolling 12 months, very respectable performance. And I think that measure is the right measure to look at when you want to sort of assess how well we are performing in the business rather than quarter-by-quarter performance, not at least a good quarter since we have no particular one-offs, really that is the star being the comparison of these numbers. It’s really the underlying business you have to look at there.
If we then look at the different geographies. In the Nordics, we delivered 3.5% margin, somewhat down then from last year. Sweden isolated 3.5%. As you know, we have said this before, we expect a bit higher margin from the Swedish business here than what we can deliver here in this quarter. So in Europe, 3.2%, that’s a solid level. The comparison number of that is considerably higher at 3.8%. That’s a very tough comparison to have, that quarter was a very well performing quarter.
US, 3.3%, continues on the pay — on sort of the trajectory to improved margins and improve profitability in this business. If you look at profit levels here, they’re essential up 40%. But you have to acknowledge the fact that we have this currency impacts here. But not only improving performance, but we can do this steadily over time. So I think it’s a — here a testament to sort of a good development trajectory of this business.
If we go into Residential Development, story is a bit different. As you know, the market has weakened in Residential Development. We see this, I’d say, across all different geographies we are operating in, even if the market has perhaps moved weak and quickest and most perhaps on the Swedish residential market where we have the most pronounced effect. Buyers are generally a bit hesitant today here and that’s not so strange, given where we are in the general economic climate. We see interest rates goes up, of course, we have the inflation and just the general uncertainty. And, of course, if you’re going to make a very large CapEx by private individuals that is delivered to you six months ahead of time or maybe a year out in time, you really don’t like that uncertainty. There is transaction levels, number of transactions on the market for new apartments here has come down than in the quarter.
We delivered 9% margin in the quarter, SEK132 million in EBIT. And due to the volume, we had a very high S&A margin as you can see over and above 12%. Obviously, sort of the volume is too low. We have an organization that is designed for higher volumes here. So that’s not a level that we should be at. I think it’s also fair to point out that with our method of recognizing revenue in Residential Development and we essentially do that at the point of contract. When we get the sign sales contracts, we recognize the revenue.
Looking at our third quarter results, it shows you a very sort of true picture of where the market has been trading in the third quarter. Had we employed other revenue recognition principles, I think the P&L would have looked a bit different perhaps, but — our P&L shows the market vary our loans, so you can see any changes in the market so to speak.
If we look at the different geographies, Nordics 11% margin, Sweden 19.8% margin. That’s a fantastic result, obviously, in a tough market. But here we have to be transparent and say that part of this result, the margin is heavily impacted I would argue by the release of past provisions from past projects that we now release in the third quarter and the impact on the margin becomes especially large since the volume in the quarter is so low. So just we’re not trading here underlying at close to 20% EBIT.
Then we have the European part of the business that unfortunately had [indiscernible] quarter. The reason to the SEK3 million profit in the third quarter, that is essentially because in the establishment of the BoKlok business in the UK, where we now have three projects, we have faced sort of start-up costs or learning costs, if you will, in that — in the isolated quarter. If we take that part out, that cost associated with that out, the other part of the European Residential Development business, which is then Poland and Czech Republic, are performing really well. You can see that in our numbers, which is why I thought it was fair to point it out then.
If we then move on to homes started and sold, sales were, obviously, down given what I just told you about the market, sold close to 340 units then and we do expect the market to remain slower, the number of transactions to remain fewer for some time here until we can get out of the most immediate uncertainty that we now have in parts of the market with clients then. And when that happens, transactions will come back and that will probably take some time then.
Also the quarter with slower or fewer started units, it is a bit more challenging these days to find the right business cases. We have had cost inflation, obviously, and right now we have more difficult time with the revenue visibility given that the level of transactions are fewer on the market. So business case becomes a bit more difficult to sort of get together, but our ambition here is clearly to continue to drive this business and start new projects. And now we have both the financial capacity and the risk tolerance to do so.
If you look at homes in production, we have close to 7,900 units that are in ongoing production at the end of the quarter. We had sold already 71% of those units. So it’s a very de-risked portfolio, if you will. And, of course, as happens when the market goes down a bit, sometimes the sales rate decrease a bit, so we have a very good starting point coming into this slower market here, with this high sales rate.
Completed unsold homes, 92 of them, very few. I think we added 20 completed unsold since last quarter. It is still a very, very low figure here. You have to relate that to the 7,900 units we have in ongoing production. So we really don’t have an issue with that at the moment. If sales becomes a bit slower, if we have a practice in the market when customers buy a bit slower, we saw in 2017, 2018 that this happened, unsold completed might come up a bit, that’s nothing alarming for us. It would more be, I would say, expected. And the important thing with that is that, we keep our eye on the churn of those units. So we don’t get unsold completed units that are old. We don’t have that problem today and we will work, so we don’t have that problem in the future either.
Commercial Property Development. As Anders already said, it was a very slow quarter in the CD. We made no material transaction. We handed over a major property in Poland and had good proceeds from that, but that’s obviously not in the P&L, it comes in the cash flow. So we can move on.
Unrealized and realized gains, I think where the market is now, it’s good to point out that we update our property valuations every quarter, with rent assumptions, yield assumptions, leasing space and so on and so forth. We see very little changes in the expected future gains from our portfolio here between the last quarter to this one. We are close to SEK10 billion in that. And when we value properties, we normally employ quite cautious sort of deal assumptions on that, because we value them out when they are completed, which can be two to three years ahead. So when we start a project, we of course, are very cautious assumptions in that. So very difficult to anticipate where the transaction market will be two to three years out. So no major changes on that and we still see a good interest from investors in the properties that we have.
If you look at the completion profile, we had about SEK6.5 billion in properties that were completed in the portfolio. These were leased around 72% and then we moved one property in the quarter between ongoing to completed. There was a Swedish property that was moved from the southern part of Sweden. We expect to complete another six properties during the fourth quarter. And going forward, you can actually see on the chart here, how we expect to complete them. So then we will increase the amount of properties expected to be completed throughout each quarter over the coming year here then.
Leasing, we had in the portfolio 30% — 32% of the space available was leased at the end of the quarter and we had a 48% completion rate. And we usually track this on a rolling 12-month basis and now we leased 175,000 square meters over the last 12 months. In the third quarter, isolated, we leased 44,000 square meters. That’s actually quite respectable leasing actually. And as Anders has already alluded to, what we have been saying for some time is that, we have a good underlying dialog with a lot of potential tenants. So at the end of the third quarter, we actually started to see a little bit higher pace in the signed lease agreements as well. And I think that is a very good development. So let’s work for that this development continues, but right now, these are early, but very positive signals.
On the tenant market, we observed the same trends as we have talked about before. Flexibility is important for tenants these days. It can be both sort of physical flexibility, expansion and contraction options and more contractual flexibility in terms of rate, resets and little bit shorter lease terms and so on. And also that we do see a higher focus on these modern, well-equipped properties with the right locations that are energy efficient and so on. So we feel that our portfolio is very well strategically positioned actually to take advantage of this development in the market.
Investment Properties, we had very little movements in this business stream in the isolated quarter. As you know, we have only one property there with 12,000 square meters, it’s fully leased and it is performing very well.
If we go to the Group, if you add together the business streams, we had around SEK1.5 billion in EBIT and then we have central costs, which this quarter actually is a central profit of SEK112 million. Reason for that is that we divested very successfully the final remaining PPP asset in the UK part of the infrastructure development structure that we have put us a legacy business and that we are dismantling. Gave a very good profit on that and the profit essentially consists of two parts. One is the gain on sale and the other reason is that, because this is the last remaining asset of this type we have in the UK, we can essentially roll back all accumulated exchange differences to the equity position. So, it’s a fairly big impact in the profit in the isolated quarter from that. The other part of the central line in the P&L that is our headquarter costs and also roughly the same.
We move down to net financials. You can see we made approximately SEK70 million net interest here. And the reason for that is our big net cash position and the fact that our internal bank has been very successful in managing deposits and short-term investments to make use of the changes in the interest rate curve. At the same time, we have a very low amount of external debt in the Company. So that’s a good balance.
Taxes, we have SEK300 million in taxes, 19%, which is higher than last year at 16%. And the chief reason to that is that, last year we were able to utilize past losses in three European countries for tax deductibility reasons. We will not have that opportunity this year. So we are moving more towards our nominal tax rate this year than we did last year.
If we go into the cash flow, we had a good cash flow, not at least because we handed over these big properties I alluded to in Poland, SEK2.8 billion inflow. Apart from that, we had obviously no dividend or strategic divestments. So total cash flow here in the isolated quarter SEK3.1 billion. That’s a good number.
If we then look at working capital, the bar here represents the negative working capital of over SEK30 billion and this is the highest position we have ever had in that. I think the reader, if you’re an analyst or whatever investor, you should sort of understand that these are balance sheet items and balance sheets move with currency. So part of the increase we have seen lately in the net working capital position, nominally speaking, that is due to currency changes. To neutralize that, you should look at the green line, which hovers around 19%. That is also very high and very respectable figure obviously. And we do not see any real structural reasons that this will change. But, of course, we’re very respectful for this, because it’s a very strong position and we are cautious in extrapolating it too far out into the future.
If you look on the investments, the divestments, and capital employed, we’re still in net investment territory in the Group, which is the green line below zero and that’s exactly where we would like to be. We have a lot of free financial assets that we would like to employ. So that’s good. We have a small uptick as you can see in the last quarter and that is chiefly due to this big transaction that we had in — handover that we had in CD in the Central European business then.
Capital employed increases to SEK54 billion, a respectable sum. It really shows that we are sticking to the strategy of long-term growing, also Property Development here. In the RD part, it’s SEK16.5 billion. Of that, there’s, of course, underlying assets, this is capital employed. Of the assets, SEK15 billion of the assets are ongoing projects right now. Of that, we have sold units or sales rate of 72%, that is roughly worth SEK9 billion. So it’s a very derisked, you can say, exposure we have in the capital employed there. Similarly in Commercial Property Development, we have ongoing properties in the balance sheet worth SEK15 billion and then we have completed properties in the balance sheet of SEK6 billion. These are then leased to 30% and 72%, respectively. So also that shows a high degree of sort of derisking of the capital employed that we have put into property development in the Group.
If you look at the funding situation, there is no change in this one. We have still the same maturities. We have a couple of maturities next year and a little bit larger one in 2024. SEK20 billion in available funds, of which, SEK7 billion is, thanks to committed credit facilities that are undrawn. And our financial position remains very strong. Equity SEK52 billion. We have an adjusted net cash position of SEK14 billion. And given where we are in the market with somewhat higher market uncertainty, I think we have the staying power to continue to see through development projects in a good way and run this business, and also, this gives us the firepower, actually, to act on opportunities that may come out in a weaker market. So we are very well served by having this solid financial position in this momentum.
With that, I hand back to you, Anders.
Anders Danielsson
Yes, I will go through the market outlook, starting with the Construction stream. If we start with the sale market, it’s stable — basically stable in all countries in Europe and strong — continue to be strong market outlook in the US. The reason is that, we can see federal money coming out in the system together with the states. They invest a lot to the infrastructure and we expect that to continue and the need is very high for that in the US. But it’s also good that we can see stable market outlook when it comes to non-residential construction in our important market, Sweden, Norway, US market is stable. So we are — the predominant part of our business are in the right segments. Of course, the residential market, construction market is weak, continue to be weak depending on the interest rates that goes up and the hesitance we can see amongst buyer, people who are about to buy apartments.
Going into Residential, our outlook continue to be slow. We expect that to continue for the next 12 months, but the underlying need for apartment are really, really strong. We are in the right places here as well. And I expect that to be — I strongly believe in the market in the more long-term.
Commercial development, property development, leasing market continued to be slow. Even that we have seen — both Magnus and I talked about it earlier. We have seen higher activity and we also actually signed more tenants agreement this quarter compared to the same quarter last year. And again, polarization, definitely, that has happened in every downturn in the market that high quality, the right location of the offices, they are attractive in more difficult market this time as well, we expect that.
So, to summarize this, solid performance in the third quarter. We had a strong profitability in Construction, historically high order backlog, very attractive property development portfolio again, very robust financial position, strong net cash of SEK14 billion and the strategic direction remains for the company. We are going to keep the discipline, continue to improve the profitability in construction and grow some part of the profitable business in a responsible way.
Leading residential developer, that’s absolutely our strategy and ambition and we, on the long term, want to grow the Commercial Property Development in a market. I can see the largest opportunity for growth in the Commercial Development is in the US. And here, again, life science is strong demand in certain part of the operation we have there. And we, of course, going to continue to build up the investment portfolio and that is really — strategically, really good for the company. Now we can work in the whole value chain and we can get a lot of synergies with that strategy.
With that, I’ll leave it to Antonia to start the Q&A.
Antonia Junelind
Thank you. Yes. So now it’s time for your question. And as I mentioned before, you can ask your question on the conference call, then just please follow the instructions by the operator. Or you can send in the question in writing, use then the text field on the webcast page. Or if you are here in the room and want to ask a question, then just please raise your hand and we will bring a microphone. And may I also please ask you to start by stating your name and organization. But we will start with questions from the conference call. So operator, do we have someone calling in?
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question from the telephone comes from the line of Pam Liu with Morgan Stanley. Please go ahead.
Pam Liu
Thank you very much. This is Pam Liu from Morgan Stanley. I have questions on the Property Development business, please. The first one is regarding Residential Development. I’d like to know how you think about the potential cancellation risk. So should we expect that the contract signed so far may be canceled when it comes to full payment at completion because of higher interest rate, difficulty in getting good mortgage? And what sort of historical cancellation you have seen in previous housing market downturn, please?
The next questions are related to Commercial Property Development. I’d like to understand how you see rental yield developing in the Commercial Segment in Sweden? And how do you reflect that in the valuation of your own commercial property portfolio? And the second question there is, you obviously have a very strong balance sheet with little external debt. This is actually quite different from many of the other property developers in Sweden that may have a more leverage position. So, are you seeing any forward sale by competitors in the market yet? And how does that impact your — valuation of your properties and how do you see the opportunities there?
And the last question. So on page 20 of the Q3 report, I can see quite a big difference between segment reporting and IFRS for Commercial Development revenue recognition. Could you please just remind us what is the difference and why this is a speak this quarter? Thank you.
Anders Danielsson
Thank you, Pam Liu. I will start with the first question on the share and Magnus will address the other one. On the order side, you asked about the cancellation. We have not seen a large number of cancellation. And it’s a fair question. But in the past, our sales — our agreement, they are binding. And so — which means that the people cannot sign up for the binding agreement if they don’t have the financial — financing in place. So that makes it secure for us. And the client, the buyer to be able to fulfill their — the agreement. So the short answer is, we have not seen a lot of cancellation. I don’t expect that to happen in a large scale going forward.
Magnus Persson
Hi, Pam. This is Magnus. I will continue with your other three questions. And this is a bit of a memory test. So if I fail miserably, you can remind me perhaps. But I think your second question related to commercial development in our yield sort of outlook, if I’m not mistaken. And — on the Swedish market. And first of all, there is not a very large amount of transactions that are happening. So as everyone else, you sort of look at the market, that’s the transaction that happens and then you see what people are buying and selling to say the underlying fact to that is very difficult. So it leaves everyone in a bit more, maybe a bit more darkness than in a strong market.
What we have noticed in Sweden is that, the transactions that have been made have been made at very attractive yields, maybe surprisingly so given what is going on around and also given where the interest rate is going and so on. And we can also see a slightly more, if you will, aggressive take from equity buyers than from leveraged buyers which doesn’t surprise me actually. So that — on that, then you had a question regarding the balance sheet and have we seen any fire sales from competitions, et cetera? Not really. We have done that. When the market goes — sort of weakens, it’s not unusual that that happens. For instance, land, pieces, et cetera, you need to — if you don’t have our balance sheet, you might need to free up capital. And to use that in other places, maybe you’re stuck with loan covenants and so on. Maybe this happens this time around. If it does, we will certainly be prepared to look at such opportunities.
And your final question regarding the segment versus IFRS accounting. And the answer is very simple. In the segment accounting, we recognize revenue at the point of contract. Meaning, when we have a binding sales contract. In the IFRS accounting, we recognize revenue when we hand over the property to buyer. So the reason that you see a big difference in the third quarter in Commercial Development is that, the property that we handed over for SEK2.8 billion in the third quarter to buyer that was — that contract was written in another quarter bet we handed over it now. So we had segment recognition of that revenue earlier and IFRS recognition of that revenue in this quarter.
Pam Liu
That’s very clear. Thank you so much.
Magnus Persson
Thank you.
Operator
The next question comes from the line of Markus Henriksson with ABG. Please go ahead.
Markus Henriksson
Thank you very much. Do you hear me everyone?
Anders Danielsson
We do. Yes.
Markus Henriksson
Perfect. First off, you highlighted positive one-offs in Residential Development Sweden and a negative one-off in Europe with EBIT margins of around, what was it, 20%, then around 1%. Could you highlight how large these one-offs were?
Magnus Persson
We don’t do that change. And we have sort of don’t speak about these things, because it’s very difficult to assess how much is a normal level of provisions that you let out with our way of recognizing revenue which is done then as I just described at the point-of-contract. We are always cautious in recognizing revenue in the early stages of a contract. If things change, if we’re not able to handle the risks, we would like to have that caution to sort of protect the financial position of that project. And that means that in a successful delivered project, we will be able to release these reserves at the end of the project, which in turn means that every quarter you look at Skanska, you will have a positive impact, hopefully then by the release of some provisions. And that can be larger in some quarters and smaller in other quarters, depending on what projects we happen to complete.
So it’s very difficult, not really meaningful to sort of go into that differential. But I think in this case, given the lower volume we had in Sweden, the impact of the release of these provisions and the — to our favor settled claim, we’re very big on the margin. And we don’t want to sort of send you off in the wrong direction of our trading results. So it’s a big impact on the margin.
Markus Henriksson
Very clear answer. Thank you for that. Then also you intend to continue to keep production starts high in RD, I guess, preferably sales ratios would be 40% to 50%, maybe 20% to 30% in the current market. But at what time the sales ratio in new projects become too low. If it’s 0% to 10%, for example, would you wait with construction starts and focus on SG&A.
Anders Danielsson
Hi, Anders here. We decide that sales rate requirement for each and every project. And as we said, we have a very good position now in the portfolio since we have a high sales rate, we have very few unsold completed and we have the financial strength to start new projects. So we can’t take that decision on our own. And also I can say, we have very good pipeline. So if we believe that the project is in the right location, we strongly believe in the future of the order business. We can’t start it with a very low sales rate, because we have the financial strength to do that.
And I can also see that the trend here in the market, which is similar to other downturns of the market is similar that people tend to buy — they want to buy and sell in same market, which means that they want to buy closer to completion. And that actually is a benefit for us because we have a competitive advantage. We can start projects with a lower sales rate. But it’s again decided project by project.
Markus Henriksson
Thank you for that. Last question, could you highlight where you’ve seen the most increase in land prices in your different regions and where you think you’ll be able to find opportunities to add to your landbank?
Anders Danielsson
We have a very, very strong landbank. It’s something we go through on a regular basis. The strategic land, you have to work with the landbank for five, seven, even 10 years ahead, then that’s exactly what we’re doing. So we are well fit for the future when it comes to landbank. Having said that, of course, we are looking into opportunities that will probably show up in the market, so that’s the way we address our approach.
Magnus Persson
Can I add to that, Mark, is that on the landbank, we of course review the valuations regularly to make sure that we’re in line with the market or below the market value in our books. And on that, normally speaking with the market sort of drops off, it takes quite a long time for it to hit the land values. So which is — why the earlier answer to that we would be prepared to look at things, but we don’t obviously see any sort of land fire sales at the moment.
Markus Henriksson
Thank you for taking my questions.
Magnus Persson
Thank you.
Operator
Your next question comes from the line of Gregor Kuglitsch with UBS. Please go ahead.
Gregor Kuglitsch
Hi, good morning. Thanks for taking my questions. The first question is on — you flagged it, but the mix of commercial development, you sort of talked about life science [indiscernible]. Can you just remind us what that mix actually is in your portfolio? I think capital employed or whichever way your ongoing projects — whichever way you want to quantify that would be helpful to give us a sense.
The second question is just on Commercial Property sales. Obviously, it was a low quarter in Q3. That’s not unusual. I guess, can you give us a sense whether that’s kind of ongoing discussions? I mean, there’s obviously SEK6 billion or SEK7 billion or so that’s I think we’re ready to go. So what are the conversations like with potential buyers? Maybe a similar question, maybe it applies to both Development segments, but roughly speaking, what kind of pricing trends have you seen? I mean, I’m guessing in Residential in Sweden, you’re kind of tracking the market which I think is down high single-digit, but correct me if I’m wrong? And similarly in Commercial, I guess more difficult because you haven’t actually transacted. But if you could just give us a sense what you think pricing is doing? Thank you.
Magnus Persson
Hi, Greg. This is Magnus. Thank you for your question. On your first one, you were asking about the business mix in Commercial Development and that question is a bit tricky to answer, because it depends completely to look at. If you look at leased space, capital employed, ongoing projects, et cetera, et cetera. But in terms of life science and what we alluded to in the report, that’s obviously not a major part of our portfolio at the moment, which is why — but we see strength in the market segment, which is why we look at these market segments more closely now. So to give you an indication, it would be definitely sub 10%, not even close to that. I don’t actually have a number for you, but it gives you an idea at least. Your second question, alluded me a bit. Maybe you can clarify what you were after?
Gregor Kuglitsch
Well, I’m trying to figure out whether — you’re at a point where you’re coming close to some disposals kind of at your — to validate your SEK10 billion unrealized gains or whether —
Magnus Persson
Okay.
Gregor Kuglitsch
Obviously we don’t know what you’re doing in the background in terms of talking to people or whether there’s just nothing going on?
Magnus Persson
No, that’s a really good question, not at least given where we have the transaction market. We don’t pre-communicate our transactions for obvious reasons. But with that said, the completion profile that you look at or that we show you rather in this quarter earning calls, that is a fairly good overtime representation of when we put a project on the market essentially. We do that in conjunction with the quarter or two, before a quarter or two after the completion of that. Now, these days, leasing have been a bit slower. And we don’t want to sell properties too early before they are leased enough, because the downside of that is that you often have to give away some of the value to another buyer than that leases up the remaining part of the property.
Since we have the financial capacity, the risk appetite and the long-term strategy to remain in Project Development, we decide to see our properties through to the end so to speak to lease them up to what we believe is the right level of value creation for the shareholders before we divest them. So these days it has been a bit slower divestments done. But of the ones we have done, we have definitely been able to protect market values that you see in our report. And just to be very clear, we do not market value the ongoing development projects in our books. This is just extra information for any reader of our quarterly report on how we view these market values.
Gregor Kuglitsch
Okay. And pricing trends sort of in general in the two Development segments? How easy that it’s to answer?
Magnus Persson
It’s very difficult to answer at the moment, as I already alluded to when Pam Liu asked the question, we have few transactions to look at, at the moment. Those we see are at very attractive yield levels, almost sometimes a bit surprisingly attractive, which is very positive. We have a good interest from investors in the dialogs we have on our upcoming transactions. So that makes us feel sort of comfortable that these assets are very attractive. And on the Residential Development, there it is obviously a bit difficult given that the transaction volumes at least on the Swedish market has been a lot lower lately and buyers are so uncertain. So the sort of pricing visibility into the future is lower in Residential Development.
Gregor Kuglitsch
Okay, thank you very much.
Operator
The next question from the telephone comes from the line of Graham Hunt with Jefferies. Please go ahead.
Graham Hunt
Good morning. It’s Graham Hunt from Jefferies. Just maybe three quick questions from me. First on your returns on capital employed, you placed deal while you are at the target there. And just in the context of investment continuing to be up and potentially activity slowing, are you expecting to see that fall below target during the near to medium term?
Second question on US construction, just wondered what you’re seeing there in terms of the labor market and weather availability is having an impact on your business or you expect it to. And then third question, if you could provide any more color on your start-up/learning costs for BoKlok in the UK that would be helpful? And when you might expect these to roll off? Thank you.
Magnus Persson
Hi, Graham. I can start. This is Magnus. I think your first question related to capital employed and what target we have for that. I can say we don’t have a target for capital employed build up. We have a general ambition to grow project development over time in the different — in RD and CD, which are our two development business streams. And then the investment properties, where we quite clearly have communicated, reasonable size within a few years that that portfolio should have in order to validate the values based on which we decided to make this strategic shift then. In capital employed, in the Residential and Commercial Development, we have a target of — return on capital and target of 10% that we think remains very valid.
Anders Danielsson
And on the second question, the US construction market, which is strong right now on the infrastructure, as I said. We don’t have any problem to get the right people in place in the project we have ongoing or we bid for. We are very careful before we bid the project that we have the right team in place, that we have the resources, the subcontractors in place before we even sign up for it. So that has been. And also we are strong — strongest market now in West Coast, New York area, metropolitan area there, and also on the West Coast and there we have a good availability of resources. So that’s not an issue. And just a comment on the BoKlok, as Magnus pointed out earlier in the presentation that we have three ongoing projects in BoKlok in the UK where we have start-up issues, start-up costs that we take in the third quarter. And if you take that out, Europe is — the profitability in RD Europe is on a normal level.
Graham Hunt
Thank you very much.
Anders Danielsson
Thank you.
Operator
No more questions over the telephone.
Antonia Junelind
No more questions. Okay. Thank you very much. This means that we have now answered all your questions and it’s time for us to conclude this press conference. So first of all, thank you, Anders and Magnus for your presentation here today. And thank you for joining us here at our studio in Stockholm.
And lastly, thank you for watching. A recorded version of this broadcast will be available on our website shortly. And then, we will be back in this setting to present our year-end results in February. Thank you.
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