Skanska AB (OTCPK:SKSBF) Q2 2022 Earnings Conference Call July 21, 2022 4:00 AM ET
Company Participants
Antonia Junelind – SVP, IR
Anders Danielsson – CEO
Magnus Persson – CFO
Conference Call Participants
Pam Liu – Morgan Stanley
Gregor Kuglitsch – UBS
Marcin Wojtal – Bank of America
Stefan Andersson – SEB
Markus Henriksson – ABG
Antonia Junelind
Good morning, and welcome to the presentation of Skanska Second Quarter Report 2022. My name is Antonia Junelind, Senior Vice President, Investor Relations. And here with me today to present our second quarter results are our CEO, Anders Danielsson; and our CFO, Magnus Persson.
We will start the presentation today with an overview of the group and business stream performance, and provide you with some business and market outlooks together with the second quarter financials. After that, we will move over to the Q&A session, and you can ask your questions either by using the text field on our webcast page or you can dial in on the phone conference. Just follow the instructions by the operator.
So with no further ado, I will hand over to you, Anders, to take us through the second quarter result.
Anders Danielsson
Thank you, Antonia. Before we dig into the figures, I want you to look at the picture here on the first slide. It’s Nowy Rynek in Poznan, a Commercial Development project in Poland. Fantastic office building with a very high standards when it comes to environmental and well-being certifications. And it has been developed, constructed, and divested by Skanska, very successful project.
If we look at the overview of the second quarter, we have a good performance in the second quarter. Construction continued to deliver strong results. Residential development, maintaining the profitability level. Commercial property development, high level of activity and also good margins on the divestment that we have done in the second quarter. And on the Investment Properties, we have establishing that business and the pipeline looks good.
Operating margin in Construction 3.4% versus 4.7% in the last year. We’ll come back to that. Return on capital employed in project development above our target of 10% on a rolling 12 months basis. Return on equity slightly shy of our target of 18% and we continue to have a very strong financial position. We have SEK11 billion in net cash. And we have managed to reduce the carbon emission further, and we are now at 51% reduction compared to our baseline year 2015.
If I go into each stream, starting with Construction. We increased revenue to close to SEK40 billion in the quarter. We have order bookings of SEK37 billion. That is below our last year, but last year was also we had the exceptional order intake in the U.S. So this is more on the normal five-year average. Book-to-build 95% on a rolling 12 months basis and we have a record high order backlog of SEK215 billion.
Operating income SEK1.4 billion and gives us an operating margin of 3.4%. And if you compare it to last year, you should remember that we had the one-off divestment gain in U.K. We divested infrastructure services, which was a gain of SEK370 million. And if you take that out, we had margin of 3.5% last year same quarter. So we are growing revenue and we have a solid order backlog, and we have been able to managing the supply chain disruptions and other cost increases in a good way. So we have been able to keep the margin of 3.4%, the same as we have on the rolling 12 months basis. So overall, strong performance.
If we go into Residential Development, the revenue were down to SEK3 billion in the quarter and you can see that the homes sold was also reduced. Last year in the second quarter was extremely good year for Residential Development, so we sold a lot of homes in the second quarter and the slowdown that you usually see in the summer time didn’t happen last year, so that was exceptional good. We also had a rental residential divestment last year of 114 homes. If you take those out, the reduction is 30%. We have been able to start more homes compared to last year, so we started 957 homes in the quarter.
And the operating income SEK358 million, which corresponds to 12.1% operating margin, which is above our target. And we also are above our target when it comes to return on capital employed of 11%. So we have been able to bring new projects to the market and since we have a very strong financial position, good pipeline, good land bank, we can start project when we feel it’s right. We are not dependent on the credit market in that sense. So we have been able to delivering good profitability.
Commercial Property Development, operating income of SEK800 million, which our gain on sale from divestment is slightly above (ph) SEK1 billion. And in those divestments, we have two large projects in Sweden that are sold before construction start. So it’s, of course, natural for us to be a bit conservative when we recognize the profit in this quarter.
Return on capital employed above the target 10.8% on a rolling 12. And we have 37 ongoing projects, which corresponds to SEK30 billion in investments upon completion. And we have an estimated market value of those close to SEK38 billion. 33% occupancy rate versus 45% completion rate that is a gap that we follow very carefully. The gap should not be too big. But right now, we can see some higher activity in the leasing market, especially here in the Nordic operation, so we — but there is something we will follow very carefully.
Seven projects started in Q2 and we have continued to see a solid appetite from investors. So there’s a lot of capital out there in the market and our portfolio, our projects, they are really attractive, high quality high standards when it comes to environmental and other matters. Leasing market remains relatively slow. We have leased 47,000 square meters in the quarter. As I said, we could — we saw some higher activity in Q2. So that’s something we work hard with.
And finally, the last stream here, Investment Properties is a new business stream this year and we’re targeting high-quality sustainable office and to build up a portfolio over the years — coming years to SEK12 billion to SEK18 billion and that will give us a strong stable cash flow. And we also see potential to increase the value even further compared to when we divested the projects upon completion. And the first project is transferred, EPIC building in Malmo that was transferred in Q1, and we are preparing for more transactions in two Investment Properties. We have a good pipeline for that, so I look forward to that.
If I go back to Construction and looking more deeper into the order bookings. Here you can see over the years — over the last five years, the development on the order backlog, as I said, record high right now. And you can see on a rolling 12 months basis, the development on the order bookings. You can also see the orange line, order bookings per quarter and also revenue book-to-build ratio. As I mentioned record high and the order bookings in the quarter, as you can see is on an average level, if you look five years back.
And if I go into each geography when it comes to order bookings, strong overall — strong backlog and we have 17 months of production. You can see Sweden slightly above 101% book to build. Overall, we have 95% book to build ratio, somewhat lower in Europe and that is not surprise for me since we have, especially in Central Europe was been more impacted by the war in Ukraine. So we have been very careful and selective when we bid for new projects there. But overall, a good position. You can see U.S., 96% book the build, but the very healthy backlog 19 months of production. So this is something I’m quite comfortable with.
With that, I’ll leave it to Magnus to go deeper into the figures.
Magnus Persson
Thank you, Anders. We start with the Construction business stream. We had revenues so close to SEK40 billion in the isolated quarter, which is then up from the comparable quarter last year. If you look at this in local currencies, it’s up 14%, and it’s quite a large impact there of FX, in particular the dollar exchange rate that has moved a lot. And given that we have just shy of around 45% of the revenues in Construction comes from the U.S. market, that has a pretty big impact on the revenue as we report in Swedish krona. Slightly lower gross margin, 7.4% compared to 8.9%. But again, as Anders already pointed out, we divested the infrastructure services business in the UK in the comparison quarters. If you strip that out, we were at 7.7% last year.
Good S&A control. We are — nominally, we went up a couple of hundred million, but if you look on the S&A margin, 4% flat. I think that’s a very respectable number. Takes us down then to an EBIT of SEK1.4 billion, a 3.4% margin, which is also where we’re trading on a rolling 12 months. So for long term, we are now up, basically performing at our target level, shy on the basis point or so. No material non-recurring items of any materiality that you should be aware of in the second quarter.
If we move to the geographies. In the Nordics, we basically delivered a same level of profit, SEK549 million compared to last year; in Sweden, SEK310 million compared to SEK308 million last year. Slightly lower margins, though, which I’ll say it falls within normal quarter variation. And then in Europe, profits were lower. But again, if you take out the infrastructure services, we were actually growing profits in Europe and margins are, of course, in the comparable quarter also heavily affected by this divestment. U.S. continues to improve 3.3% margin in the quarter compared to 2.8%. So really sort of a strong performance here from the U.S. Construction businesses.
If we move then into Residential Development. We had revenue in the quarter isolated SEK3 billion down 30% approximately. Market really started to slow down, I would say, mid-May and then into June. So this has an impact on sales levels, of course, and as already been pointed out, we had an unusual active sales actually last — the second quarter last year. No rental divestments in the numbers here. We had one rental divestment in the second quarter of the last year.
Strong margins close to 20% on a gross level, very good. Of course, S&A margin is a bit on the high side. It’s 7.7% completely due to the fact that the volumes are coming down then, leaving us with a very respectable 12.1% EBIT margin for the quarter, which is basically where we are trading also long term, if you look at the rolling 12 months of 12.5%, so very strong performance on the Residential Development business.
Looking at the different geographies. All geographies essentially performed well. Market has perhaps softened the quickest in Sweden here, but profitability has definitely kept up very well in Europe. If you look at the margins, they are coming down, but this is also a very good performance in this business here. The margins here are in fact starting to get impacted by the newly established BoKlok business in the UK, which we are ramping up.
And, of course, when you establish a business in a new market, you need to invest both in organization, you need to invest in a land bank and so on, and that is often before you really start to get the positive benefits of a profit. So we have somewhat of a margin dilution due to that, but that’s for a positive reason then I should add. Homes started and sold, we started roughly the same amount as we did last year, slightly up 957 units, sales 680 units done, 140 units were rental residential divestment in the comparison quarter.
And overall, we continue to start around 4,000 units here on a rolling 12-months basis. It has increased a little bit up from say 3,500 up to now just north of 4,000 units on a rolling 12 months basis, which you can see in the graphics here if you look at the green line. So continue to build up the residential development portfolio.
Homes and production, we have around 8,200 units in ongoing production. A very solid sales rate of 72% and basically no issue at all with unsold completed homes. So super stable position in this portfolio, which essentially means that we can continue to start projects that are attractive to us, and we are not in a position today where the level of risk in our residential portfolio is really a limiting factor for us starting new projects. So if we find commercial attractive projects, we definitely have the capacity to start them.
If we go into Commercial Property Development, gains SEK1 billion. We made sort of two larger divestments also in the quarter, one in Stockholm and one in Poland, and on top of that a number of smaller transactions. I think it’s important, as Anders pointed out earlier, also, that in this quarter was a little bit special because we divested a couple of properties where we still sit with the full construction risk.
And, of course, in that situation, especially when you take into account market context, with the sort of cost escalations and commodity pricing, we are being quite cautious in profit recognition to make sure that we have adequate reserves and provisions to cover those risks for the future, which is the explanation to why the development margin looks a bit lower here.
If we look at the unrealized and realized gains, we — if you take the total investment value of the portfolio when all the ongoing projects are completed and you include land and you include all the completed properties, that’s approximately SEK50 billion. It’s a very large portfolio we have here. Out of this, we have sold, but not yet handed over properties for SEK7 billion approximately.
So the remaining SEK43 billion, that’s what you sort of look at on this chart, that is surplus value of the remaining SEK43 billion is approximately SEK10 billion, and you can see the distribution here. Of course, the majority of the surpluses and ongoing projects, SEK6.3 billion. And roughly unchanged since the first quarter, despite the fact that we realized gains over SEK1 billion in the isolated quarter. And as usually, you can look at the orange line. Rolling 12 months we’re still realizing approximately SEK4 billion in gains on an annual basis out of this portfolio. So we continue to generate strong values underlying here.
If you look at the completion profile, we have completed, but yet unsold properties to a value of SEK6.2 billion. End of the second quarter, these were leased to 73%. That’s roughly the same number as we had in the last quarter, even if there is sort of a churn of the properties here, we sell some and then we add some that are completed, of course. If you then look at the blue bars, that represents the 24 ongoing but yet unsold projects that we have in the portfolio.
And the bar shows the total investment value at completion for those properties. In the quarter, we expect them to be completed. And then the green dots represent the current leasing rate of the different properties. So what you can see here is that we expect very little completions in the third quarter this year and then towards the end of the year in the fourth quarter, quite a lot more. And overall, we have a forward-heavy, if you will, completion profile of this portfolio as it looks now.
Leasing remains quite slow. We leased 47,000 square meters in the quarter isolated and clients are still a bit unclear about their business need in terms of space here. And flexibility remains key, which can be break options, expansion options, contraction options, so all sorts of different parameters that you can introduce to sort of give flexibility for tenants. In awaiting that clarity, we see more clients rolling existing leases or renegotiating them for shorter maturities. In a way that makes them sort of keep their flexibility, but at the same time wait a little bit with making sort of a real decision to move into a new space. That’s basically the market dynamics are now.
If we go into Investment Properties, we had an operating net of SEK8 million in the quarter. Obviously, the comparison quarter we had nothing, very slim organization. So the S&A costs are rounded here to zero. We have made no change in the value of the only property we have in the portfolio so far. Takes us down to an operating income here of SEK8 million in the isolated quarter.
If we look at the group, central items minus SEK155 million, looks a bit higher than last year, but in reality, the underlying running costs are virtually unchanged and the changes you see here in the accounting is due to legacy and some accounting items. We have net financial items, with the changes that we see on the financial markets and the rates going up, we’re, of course, coming in a better situation in terms of how we can handle our net cash position, and we’re starting to be able to make more money out of deposits and short-term placements that we have here. So that’s, of course, very positive.
Taxes, we taxed out at 21%, which is higher than sort of what we’re used to. The reason for that is that we have a lesser degree of the profits in the quarter came from tax-exempt property divestments. And then we end up closer to our normal tax rate, of course. Comparison quarter, 16% tax. We were successful in utilizing past losses for tax deductions in 2021, which contributes to the low tax rate we had in the last year.
If we look at the cash flow, we had small negative cash flow in the isolated quarter, SEK0.5 billion. On top of that, of course, the dividend distribution that took place during the second quarter takes us down to the total cash flow then of minus SEK4.8 million. So this essentially means that we are reinvesting all our cash profits into new land and new development projects, building up the portfolio for the future.
Free working capital in Construction. By and large, unchanged compared to the what we reported in the first quarter. We have approximately SEK29 billion in net working capital, representing 19% of the revenue here. Cash flow from working capital in Construction was slightly negative, minus SEK0.9 million. So there is somewhat of currency effect in play here in the balance sheet items.
If we look at investments, we are continuing to move deeper into net investment territory and building up then portfolios for future divestments. This is through both for Residential and Commercial Development and very much in line also with what we have communicated as our ambitions for quite some time. You can see capital employed is growing in both business streams, RD and CD. I think we — for Investment Properties. Obviously, it grows SEK800 million due to the single property we have in that portfolio yet as well.
In terms of funding, we have SEK3.6 billion in external funding. No maturities coming up this year. Next year, we have one loan and one bond that will mature, SEK16.4 billion of available funds, so plenty of ammunition for us and very low level of reliance on the credit market in order to execute on our strategy and continue to build up our portfolio for creating the profits in the future quarters here.
Financial position super strong. We had an equity position end of the quarter EUR48 billion. Adjusted net cash of EUR11 billion. And of course, as already said, with the balance sheet like this, low reliance on the credit markets puts us in a position where we can act on opportunities when they come. We don’t have to sort of wait for others to agree on that opportunity, if you will, and we can start projects when we want to start projects.
We can judge whatever comes our way purely on its commercial benefit for Skanska, and then we have the ability to act on it. So I think given where we are in the market, we are in a very strong position to make the best out of that.
Anders Danielsson
Okay. I will continue with the market outlook. And it’s pretty much unchanged compared to the last quarter. And if I start with Construction, we can see stable non-residential market in Sweden, Norway, and U.S. And if I look at the rest of the Europe, Finland and Central Europe, it’s a bit more weaker market on the non-resi market. Building residential, weaker market in the Nordics, more stable in Europe. And the civil market is overall stable in Europe and strong in the U.S. And that was the same outlook as last year.
Residential development, more softer market. We have a weak market outlook in the Nordic, stable in Europe, and we can see that more uncertainty since the inflation and interest rates goes up. Having said that, the low employment levels and structural shortage of homes in our market, we expect that to stabilize over time. But we see that cost escalation might lead to projects being postponed in the market.
Commercial Property Development, the investor market remains strong, and we can see that leasing volumes are still not back on pre-pandemic levels, but we can see some higher activity in the second quarter, especially in the Nordics.
So to summarize this presentation, good performance in the second quarter. Construction delivering strong result. Residential Development maintaining the profitability level. Commercial Property Development, high levels of activity and good profitability levels on the divestments. Investment Properties, establishing business and we have a robust financial position.
So our strategic direction remains, we will continue to improve profitability and grow responsibly in Construction. We shall be the leading residential developer in our markets, and we have an ambition to continue to grow the Commercial Property Development and the plan to build up Investment Properties portfolio is solid, and we’re following that plan.
With that, I leave it back to Antonia to start up the Q&A.
Antonia Junelind
Yes. Thank you, Anders and Magnus for taking us through the second quarter result. And now it’s time for the questions. And as I mentioned at the start of this call, you can either send in your questions on the webcast page or you can ask your questions on the phone conference. So I will now start with asking the operator to provide further instructions and to introduce the first caller.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Pam Liu (ph) from Morgan Stanley. Please go ahead.
Pam Liu
Okay. Thank you very much. I have three questions please. And the first one is that if I look at construction in terms of the EBIT margin, in the Nordics, outside Sweden, that seems to have deteriorated more than the margin in Sweden. Could you please provide a bit more color on that?
The second question is with regards to residential. Yes, the number of homes started has increased overall in the quarter, but I think that is driven by a decrease in the Nordics and an increase in Europe. Is that all to do with BoKlok? If that’s the case, given that BoKlok is the more affordable housing units range, are we therefore expecting to see more margin anyway just because of the product mix?
The final question is Commercial Development. Can I please understand a bit more about how the market appraisal value is estimated? So for this quarter, the market appraisal value for commercial is SEK62 billion. That is a 24% premium to the investment value upon completion of SEK15 billion. So that seems to be quite high to me in today’s environment with rising interest rate and, of course, you have a negative outlook across geographies in commercial anyway. So am I missing something here?
Anders Danielsson
Thank you, Pam, for your question. I will start with the first one and then Magnus will answer the second and third one. When it comes to Construction and the EBIT margin in the Nordics, I’m not satisfied with the margin that we have. We can see now in Sweden. I expect them to deliver more in the construction stream. We have an action plan in place to continue to increase — to increase the margin there, and so that work is ongoing. And I expect them to come back in the future here. So that was a comment. And the second one was also on residential development Europe.
Magnus Persson
Yeah. Hi, Pam. Magnus here. Bit unsure if I fully understood your second question, but if I sort of think you were asking whether or not BoKlok has sort of, is the reason to why we are starting less units in Sweden. Was that correct?
Anders Danielsson
In Europe.
Magnus Persson
In Europe?
Pam Liu
No. So what I’m observing is you’re starting less in the Nordics, which I could understand because of the interest rate environment, et cetera. And what I’m also noting that you are starting up significantly more in Europe. I’m just wondering that is to do with BoKlok? And if that’s the case, does that have any margin impact because I assume that that is the more affordable housing options and I just want to understand how that impact the margin. Thank you.
Magnus Persson
Okay. Fully understood. Well, of course, part of the units that are started in the European segment is related to BoKlok definitely, and then it takes some time to move them from starts into sales, obviously. So as we grow this business, we will see an increasing share of the units that are started in the Europe and Nordics segment actually come from BoKlok in the UK, that’s absolutely correct. And the business model, as it is, is that the BoKlok business model is normally sort of a higher return, lower margin business model than what we have in our traditional residential development business.
Of course, depending on the pace of development, it should sort of alter the KPIs a little bit. But it’s not big enough to make any firm conclusions on that. And then in Sweden we reduced the starts a bit. I would say it’s a bit premature to connect that to rising interest rates during this quarter. It’s essentially during the quarter that we’ve seen biggest uptakes and the most impact on the financial markets when it comes to the rates here. And starts and the planning of starts is a little bit more long term than that. I hope this was a sufficient answer to your second question.
In terms of your question regarding CD, how the appraisal is done. Well, essentially what we do is that when we start a project we have an assessment of what a market is, both in terms of rents and in terms of yields to take sort of the most obvious parameters when we start a project. And based on — these are, of course, very cautious because we have a business case to protect always, and we only start projects when we’re quite comfortable that at the end of the day we can lead that business case into fruition. And then we don’t change these parameters until we have a market sounding in place, and we have completed a larger part of the property, start to talk to the market around that. So that’s the way this is done.
Then I’m not sure on your surplus values here. What you should look at is the surplus values and you need to relate that to the total value. So essentially the SEK10 billion in surplus value that we report or inform about, it is not in our books, obviously, used to be related to the SEK43 billion of total investments, which makes a surplus of, say, roughly 25% then. That is where we’re running the portfolio at the moment. Does that make sense?
Pam Liu
Okay. Cool. Thank you.
Magnus Persson
Thank you.
Pam Liu
Yes, it does. Thank you.
Operator
Next question is from the line of Gregor Kuglitsch from UBS. Please go ahead.
Gregor Kuglitsch
Good morning. I have one question perhaps for both — to apply to both the commercial and the residential business. Maybe starting residential. I think we’re seeing some price erosion in Sweden if you look at the macro data. I want to understand how you deal with that and whether you’re following the market when it comes to pricing, and if we’ve seen that already in the quarter, or if that’s more ahead. And then similarly on commercial, is there a point where you — I appreciate that you’re trying to lease first before you sell? But is there a point also where you decide on perhaps taking a price cut to shift or are you more inclined to hold out for the prices that you had in mind when you started a project? Thank you.
Anders Danielsson
Thank you, Gregor. Residential development, the price erosion, we have seen now more hesitant market. We can see that in the second-hand market, the buyers and sellers in Sweden, they’re not really meeting each other. They have different expectations. We expect that to continue for some time and that’s due to, of course, the interest rate has gone up and the buyers are more hesitant. What we have seen in our portfolio is that we have not reduced the prices/ We have a good position since we have — out of the 8,200 homes in production, 72% is already sold. So we don’t have any urgent need to reduce the prices. Having said that, of course, when we start new projects, we are very careful with the market analysis and the price level we can expect from those projects. So that is — and we price every project on individual level and look at the individual business case, so that remains to be seen. Magnus, the second question.
Magnus Persson
Yeah. Hi, Gregor. On commercial, you’re asking is there a point in time where we shift prices, et cetera. And, of course, there is if there’s a need to it. As I explained to Pam a couple of minutes ago, what we do normally is that we have a business case that we feel very certain on, and that business case is normally what guides our sort of the valuation that we report or inform in the quarterly report about. Of course, if we see major market shifts, then we’ll have to address that as well. But otherwise we do external valuations of all the properties once every year to sort of confirm that we are correct in that.
In terms of — but since our properties are completed and expected to be sold at very different points in time, which you can see also on the chart that illustrates the completion profile that I showed you earlier in the presentation here. For us, it’s very much to understand where is the market at that point in time, and that is a very difficult game to play. So essentially, we try to be very long term in those assessments. So it’s not like we go and shift yields every quarter, unless there’s a very strong indication that the value would be wrong. That’s not what we see at the moment.
In terms of rents then, which is the other components, very important to understand, we continuously lease and sort of track the market there. We have a good risk tolerance and a strong balance sheet, so we don’t have to do any fire sales of our properties in order to recoup cash or anything like that. That is very important for us. We try to use our financial strength to sort of get the most commercial benefit out of the portfolio we have as possible. So if that means waiting somewhat longer with leasing or with sales, if we think the market is coming back, then that is the right commercial decision for us. But, of course, we evaluate these things constantly to make sure we are not sort of standing on our heels when the market shifts. That’s not what we’re doing.
Gregor Kuglitsch
Thank you. That’s helpful.
Magnus Persson
Sure. Thank you.
Operator
Next question is from the line of Marcin Wojtal from Bank of America. Please go ahead.
Marcin Wojtal
Good morning. Thank you so much for taking my questions. Firstly, if I may, on the Residential. Can you remind us what percentage of your residential business is actually the BoKlok concept? And do you believe it will be materially more resilient than the rest of the housing market, in particular in Sweden? And then, perhaps on Construction, can you comment in a bit more detail on your U.S. construction business where you are improving margins? Would you say you are already fully satisfied with where you are, or can you improve even more? And also, how are you managing cost inflation in the U.S.? Because my understanding is that I think some of these projects in civil are at fixed prices, at least to some extent. Thank you.
Anders Danielsson
Okay. The first question, the BoKlok portfolio is — it’s overall if you compare the vast majority of the BoKlok is in the Swedish business. Magnus, you have look into the details.
Magnus Persson
Yeah. I mean, we obviously, we don’t report BoKlok separately externally, but you can say it’s somewhere 20% to 30%, say, of the overall portfolio, and that goes a little bit up and down. And obviously, in a market situation like this, we would expect BoKlok to be very resilient because they are in a market segment, and are always in a market segment, that’s more affordable, being a bit cautious with terms here, because the use of the term affordable varies a lot across different markets. But they’re aiming towards a different customer category. That is also what we’ve seen historically that’s the way the market plays out.
Anders Danielsson
Okay. When it comes to the U.S. construction margins, they are — as we reported earlier, they are back on track. They’re performing on a high level. So that is good, and we expect them to continue to deliver. When it comes to cost escalation in the U.S. when it comes to the building part, we’re not so hit by the increased cost because we have a low lower risk and low margin business model. On the civil side, though, we have some part of the business with fixed prices. What we have done — what we are doing there that we are very careful when we go into projects to secure prices in the supply chain.
We secure as much as possible when it comes to steel and other materials before we even bid for projects, and we have a process and risk assessment for that in place. And we’re also discussing, now we can see more contracts where we have inflation clauses in the contracts, so we get compensated for cost escalation. In some cases, we can take out some part of the material that has been very volatile in the past here. So we have been able to mitigate the cost escalation in the construction stream overall, including you U.S.
Marcin Wojtal
Okay. Thank you.
Operator
[Operator Instructions] Next question is from the line of Stefan Andersson from SEB. Please go ahead.
Stefan Andersson
Thank you. First, also a question on the development side I guess, or actually starting — connected to that with your property management business. You mentioned early there in the position that you said that the pipeline looks good and, in a way, you control that pipeline. So I’m a little bit curious on what you mean by that. If you can indicate to us when you think you will see further acquisitions between those two divisions.
Magnus Persson
Hi, Stefan, Magnus. Could you repeat the question? There’s a question about pipeline and how we look upon that, that we mentioned in the early part of the presentation, but what part of the business are you referring to?
Stefan Andersson
The property management division, the newly started where you have — you’re managing the properties, where you haven’t bought that many yet, and you said that the pipeline looks good to grow that, if I didn’t misunderstand you. So I was just curious on what you’re thinking on about moving over properties from CBD to — you don’t call it property management, you call it, sorry, you have another name. I hope you understand.
Magnus Persson
I fully understand your question. Sorry about that misunderstanding. You’re talking about Investment Properties and the pipeline there is good. This is a business where we acquire properties from Commercial Development in the Nordics. And we have said it pertains to Sweden. So what we’re really referring to there is that we have a good pipeline of projects in Commercial Development Nordics. And then, of course, we don’t decide if we’re going to sell these properties externally or internally to Investment Properties then until they are ready to be sold. But, of course, we see that there are plenty of opportunities given the strong portfolio we have in the Nordic development business. Does that make sense or some further explanation to you?
Stefan Andersson
Absolutely. Let me put it this way then. Do you expect any of those properties to be moved over or acquired already this year, or should we expect it later than 2022?
Magnus Persson
I mean, we don’t comment on future divestment plans, obviously. You have the completion profile that we show you. You can also see that we have EUR6.2 billion in properties that are already completed but yet unsold. So we’ll have to wait and see.
Stefan Andersson
That’s fine. Thank you Then on the CDs, on Commercial Development then, the transaction market for properties are holding up surprisingly well. I think you’ve seen the property management — the real estate companies have even increased the values of properties in this quarter, very few write-downs, while the stock market, of course, is focusing on raising financial costs on the bond market that’s collapsing. So I’m very curious just to hear what you see. In your discussions, are you still seeing a good interest for properties or are you seeing any hesitation or drop in interest?
Magnus Persson
Currently, we don’t see any hesitations or have any difficult discussions around that actually. Our investors are sort of willing to pay a very good price for our properties, so which from the 10,000 feet perspective, you can understand that on the market looks a bit different. But that’s in reality the discussions we have, which also informs our view when we look at new projects and also valuations.
Stefan Andersson
Okay. Thank you. And then on Residential, looking at your pre-sale level, booking levels, they are rather high. So I guess in a way you could have started more than you’ve done so there’s some — there should be some kind of bottleneck here. So I’m just little bit curious — and it differs in different markets, fully understand that. But is it building permits or that is the bottleneck at the moment, or is the price/cost for the project that you’re looking at or is it the demand, if you were to pick one of those three?
Anders Danielsson
Yeah. I would say I would pick permits. It takes a long time to get permits to build — construct residential now, especially in the market where we are operating. So that is definitely a bottleneck. And then we start project, because we have the ability we believe in the market in the more long term, and we see it as a competitive advantage since some actors in the market are more dependent on the credit market, and we’re not. So we can start projects with a lower sales rate and to be able to sell those closer to completion, because today it’s very hesitant and people are not willing to sign up for an apartment two years ahead of completion. That is not — so that’s why we can start more projects. But we need the permits, obviously.
Stefan Andersson
Okay. Good. And the final question really quickly on construction. We’ve seen some input costs — material costs coming down a little bit. Or you — how is your suppliers behaving here? Are you managing to follow down as well? It’s always easier to push everyone up I guess. But are you seeing the reversal as well to any extent?
Anders Danielsson
We can see now, especially in the end of the second quarter, that it’s easier for us to get fixed prices from the supply chain. And we see a less pressure upwards on the cost. So that is encouraging. So it’s easier for us to do what we should to secure as much as possible before we bid for projects.
Stefan Andersson
Okay. Thank you. That’s all my questions.
Operator
Next question is from the line of Markus Henriksson from ABG. Please go ahead.
Markus Henriksson
Thank you very much. I just have a follow up related to the transaction market [indiscernible] for building rights and land bank. Do you see any opportunities there already, or is it too early?
Magnus Persson
Hi, there. Magnus here. I think we see some opportunities, but I think it’s a little bit early for us, and we sort of think that if the market continues to develop in the current direction, we’re pretty convinced that there will be significant opportunities for us down the line there. So it might be a little bit early to get to the really, really good deals yet.
Markus Henriksson
Very clear answer. Thank you very much.
Operator
[Operator Instructions]
Antonia Junelind
Okay. So that means that we have no further questions now, so thank you for asking those questions. And Magnus and Anders, thanks for your answers. It’s been — it’s now time for us to close this earnings call. So thank you for listening, and a recorded version of this audiocast will be available on our webpage afterwards. Thank you for now. See you back here for the third quarter report. Have a nice summer.
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