PROPERTY SCANDINAVIA

At the same time housing sales improved during the course of the year, and the outlook is now positive.

Veidekke Eiendom is engaged mainly in the development of housing for its own account in Norway and to a certain extent in non-residential buildings and special-purpose buildings for the public sector in Norway, Sweden and Denmark. Its activities consist of the companies Veidekke Eiendom AS (residential and non-residential development in Norway), Veidekke Bostad AB (housing development in Sweden), Veidekke Fastighetsutvikling AB (property development in Sweden). There is limited activity in Denmark as a result of a weakened market. Together these companies employ about 100 people.

Veidekke is one of the leading house-builders in Scandinavia and will be a leading player in future as well. We will succeed in maintaining our leading role by developing rational housing concepts in partnership with our construction division. We place emphasis on knowing buyers' needs and providing solutions that are both physically and financially adapted to different buyer groups. Among our strengths are our decentralised management and proximity to market, as well as considerable expertise built up over many years. We have prioritised development of our land bank through the recession so that projects are ready for sale and construction when the market recovers, which it now seems to be.

We concentrate on the business of developing, building and selling blocks of flats, and increasingly detached and terraced houses. Geographically, activity is concentrated in and around the major cities. Throughout the entire process, from site acquisition and throughout the project development phase, we have close cooperation with the Group's construction division.

This makes for safe execution and cost-effective building, while allowing the property division to focus on its priority areas, which are; finding good project opportunities, obtaining the necessary public permits, and marketing and selling dwellings.

Focus areas:

Improved housing market in 2009

In the years from 2003 to 2007 the housing market grew sharply, and Veidekke Property generated very good results in this period. The economic downturn in recent years gave rise to considerable uncertainty, and we sold very few dwellings. The financial crisis exacerbated this situation, and the banks became very reluctant to finance residential and non-residential buildings. As a consequence of this, very few housing projects were started up in the last year. Conversely, lower interest rates increased the purchasing power for many, and in early 2009 we saw a clearly growing interest in home viewings. Developments through 2009 were positive, and sales increased significantly.

Weak results

After a record year in 2007, 2008 and 2009 proved difficult years for Veidekke Property. Earnings for 2009 ended in a deficit of MNOK – 73.9 compared with a profit of MNOK 19.4 the year before. The main reason for this was a decline in the housing market which gave a low contribution from the production and sale of housing. Moreover, the write downs on sites in Denmark, some non-residential projects in Norway, and a further devaluation of shareholdings in Hansa Property Group, reduced profit by MNOK 60.0. On the other hand, non-residential projects were sold at total gain of MNOK 20.

As a result of the downturn, hardly any new projects were initiated in 2008, and at the beginning of 2009 the number of dwellings under production was down to 638; a decline of over 60% from the year before. The market in 2009 showed gradual improvement, and sales picked up accordingly. Towards the end of the year therefore, some new projects were initiated, but fewer than the number that was handed over. Number of dwellings under production by the end of 2009 fell to 311 so production will commence on an additional 400 to 500 homes during the first half of 2010.

At year-end we had 108 completed, unsold homes. Of these, 78 were rented. The dwellings have been appraised, and even if the value is now lower than the price list set in 2006 or earlier, it is still well above book value.

Investment in land represents future opportunities

An important prerequisite for success is a portfolio of good development sites. We therefore spend considerable resources acquiring sites. As a result of the economic downturn and financial crisis, the competition for land has been significantly less, and prices have decreased somewhat. Nevertheless, low interest also rates made it possible for site owners to sit on their sites through the crisis resulting in a supply much lower than expected. Project possibilities in 2009 are equivalent to 800 homes; most of these were in the form of option agreements in Veidekke Bostad, Sweden.

At the end of the year, Veidekke's portfolio consisted of a total of 7 800 residential units with an average cost of approximately NOK 4 000 pr. m². This is considered to be favourable in view of the location and quality of the sites. Several of the sites we have acquired during the past year provide regular rental income from existing commercial premises reducing risk considerably. A thorough valuation of the sites was undertaken at year's end. As a result, in Denmark where the market is still very weak, there was a minor devaluation of two sites.

Most of the sites purchased are unregulated, and many are commercial premises that will be converted into housing. In conjunction with site purchases, we perform analyses to determine what can be built. We also analyse target groups, sales prices and building costs. When the site is ours, we draw up a development plan, carry out impact assessments and apply for approval of the development plan. Experience shows that it can take two to three years to receive approval and then at least six months before we are given permission to build. During that time, as contractor we make detailed estimates to ensure that we have costs under control when we get approval and sales can begin. Construction will not normally start until at least 50% of the units are sold, thereby significantly reducing income risk.

Property development is, therefore, a time consuming process, often taking three to five years from the decision to acquire a site until we are in the process of building; and much can change in housing prices, construction costs and the competitive situation. Capital and risk management are therefore essential parts of these operations, and considerable resources have been spent on developing good management systems to identify differences both within the Veidekke Group and between the Scandinavian countries.

Optimism on the rise

After two years of financial turmoil and economic downturn, optimism seems to be gradually returning. The financial market is functioning, stock exchanges have shown strong increases and parts of the housing market have significantly improved. The need to create profitability is now great, which means that we need to begin new housing projects for our own account. As a result of improvements in the housing market the last six months followed by increasing sales, the outlook now seems to be relatively good. Lower interest rates have led to increased interest in apartment viewings. Unemployment and interest rates are crucial factors for the housing market. We have noted that there is still some uncertainty among buyers concerning purchases with delivery two years ahead, and uncertainty around the value of the property they currently hold. The market for used homes is strong, and the market for new housing is relatively good, though still mainly in the capital regions. Our organisation is strongly commitment and very enthusiastic about contributing to recreating the profitability we had previously.