Ladies and gentlemen, thank you for standing by and welcome to the Charter Hall Group 2024 Half-Year Results Briefing. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session at which time, if you wish to cue for a question, you will need to press star 11 on your telephone keypad and wait for your name to be announced. Please note that this conference is being recorded today, Wednesday, the 21st of February, 2024. I would now like to hand the conference over to your host today, Mr. David Harrison, Managing Director and Group CEO. Sir, you may begin.
Good morning and welcome to the Charter Hall Group Half-Year FY24 Results. David Harrison speaking, Managing Director and Group CEO of Charter Hall. Presenting with me today is Sean McMahon, our Chief Investment Officer, and Anastasia Clarke, our Chief Financial Officer, whom we welcomed in 2024. I'd like to commence today with an Acknowledgment of Country. Charter Hall acknowledges the traditional custodians of the lands on which we work and gather. We pay our respects to elders past and present and recognize their continued care and contribution to Country. For today's call, we are going to address the results slightly differently. We will limit page turns until Anastasia's commentary on financials. Instead, I will make some opening remarks about the earnings result, FUM, equity flows, developments, valuations, and the current operating environment. Sean will discuss transaction markets and then Anastasia will discuss the financial highlights.
We will then move to outlook and Q&A. Turning now to the group's results. This half, we delivered in line with our expectations despite interest rate and valuation headwinds. The group delivered half-year OEPS of AUD 0.412 per security and we have reaffirmed our full-year guidance of approximately AUD 0.75 per security. Our annualized return on contributed equity still remains one of the highest in the sector, 21% plus, and our 6% annual growth in distributions, substantially franked, continues the resilience and consistency of our long-term DPU growth. We've delivered that result with group FUM reducing from AUD 87.4 billion to AUD 82.6 billion and property FUM reducing from AUD 71.9 billion to AUD 67.7 billion, driven primarily by cap rates softening-driven devaluations, while AUD 600 million of CapEx deployment has somewhat softened the impact on FUM for the half.
Securing acceptable planning conditions on some pre-leased developments within required timeframes under AFLs has been challenging, which has led to a reclassification of some committed CapEx to uncommitted until acceptable planning conditions and acceptable commerce can be secured. We own this development land in funds and expect progress on securing acceptable conditions in subsequent periods. However, major projects like the AUD 1.8 billion Chifley South Tower project is well advanced with over 55% of income pre-committed after executing a 9,000 square meter commitment from national law firm Gilbert and Tobin, which complements previously announced pre-commitments to UBS and Charter Hall Group, bringing total commitments beyond 60% of available office space for lease.
We've also signed the main works contract with national construction partner Built, who last year completed two similar-sized projects for Charter Hall, namely the premium 60 King William Street Adelaide CBD Precinct, which saw 95% of office space pre-leased prior to completion to corporate tenants such as NAB and Telstra and the Commonwealth Government, together with completion of 480 Swan Street in Melbourne, which is the new headquarters for Australia Post and McConnell Dowell. While transaction activity of AUD 1.5 billion was lower in the first half, we expect second-half transaction activity to accelerate as we continue to curate our fund portfolios. Importantly, we have remained disciplined. We've focused on building capacity in our funds where a total capacity of AUD 6 billion has been retained. This discipline has been evident in our focus on cost control.
This has seen our funds management margin remain at a healthy 70.5%. This is down slightly from 73% for FY23 but reflects a lower contribution from transaction and performance fees in this period. Excluding transaction performance fee, our PFM margin improved from 62.2% in FY23 to 68.2% for the current period. There are no accrued performance fees in the first half. The group's balance sheet remains in a strong position with 2.4% gearing, an interest cover ratio of in excess of 40 times, AUD 400 million of cash, and AUD 700 million of investment capacity. Our strategy of accessing multiple sources of capital continues to deliver growth in equity flows through the cycle, albeit not surprisingly slower than in prior periods.
However, given cap and discount rates have risen, the muted supply outlook in many sectors due to construction cost inflation and higher required development yields, we expect heightened investor interest in high-quality real estate as the denominator effect has lowered property allocation weightings for our wholesale investors and prospective IRRs to deploy capital look increasingly attractive across our sources of capital. As we outlined at the full-year results in August last year, we expect that wholesale partnerships will be the most active area of new equity growth this year, and the second half is expected to evidence this as the first half has shown AUD 550 million of new partnership inflows. Our direct funds had a quiet half as investors and advisors took advantage of higher interest rates to deploy equity into cash products.
We expect these flows will return once expectations of rate cuts increase the appeal of property versus term deposits. Importantly, rebased asset values, the denominator effect, and the evidence of central banks potentially having finished their rate-tightening cycle have all combined to make wholesale capital more constructive on deploying new equity. We have recently partnered with an existing wholesale partner to grow the RP6 Convenience Retail Partnership, committing to acquire the Eastgate Bondi Junction shopping centre in Sydney for AUD 125 million. We enjoy strong working partnerships with over 100 wholesale capital partners and expect these investor customers will continue to be active in the period ahead, particularly as we craft new strategies that meet their risk profile appetite from core through to opportunistic. Our ability to successfully deploy capital into attractive development opportunities also makes us an attractive investment partner.
Development completions were AUD 3 billion for calendar year 2023 with more than 10 new industrial and logistics facilities completed together with the aforementioned office completions. Tenant customers across sectors continue to have appetite for existing space and new developments, which will see us continue with a disciplined approach to development, ensuring planning conditions and required development yields are secured, which ultimately drive NTA growth for our investors. The tenant market continues to remain strong for new industrial developments as tenants look to reduce costs through greater supply chain efficiencies and expand their logistics footprints with more than 90% pre-leasing of our industrial committed projects. Transactional markets are evidencing broad appeal across industrial assets with what I call a reversion romance dominating investor interest from syndicators through to wholesale capital.
We will see whether some of the forecast rent reversions being underwritten eventuates for older stock when new supply challenges, older assets, and vacancies inevitably rise. We may well see a similar bifurcation take place as we are witnessing in office markets. However, across all sectors, the replacement cost of assets and the resultant economic rent required for new space will place upward pressure on rents for existing and new stock. In office, we continue to progress our Chifley Square South Tower development as well as 360 Queen Street in Brisbane as we see ongoing tenant demand for new modern premises that meet today's tenants' needs. The bifurcation in tenant demand shows no signs of slowing.
However, in many markets, we expect the economic rent required to meet required development yields will retard the volume of new office space being built, bringing about a pressure cooker impact on modern or prime modern vacancies, as highlighted by multiple research houses recently, which have illuminated the fact that nearly 80% of major market vacancies sit within non-prime located or older stock, which will be increasingly challenged. Corporates and governments need to provide modern, sustainable office accommodation to achieve their desired work-from-office strategies following the pandemic-induced work-from-home activities. Increasingly, we see employers requiring minimum periods of working-from-office locations in what will become a softer labor market in many industries. Productivity is high on most organizations' agendas, and we see this accelerating as a major accommodation strategy. A large part of our office portfolio is leased on attractive triple net leases with CPI-index rental growth.
Our convenience retail portfolios, both shopping centers and net lease convenience, are operating with strong metrics as outlined in CQR's results. Equally, social infrastructure will continue to be part of our growth agenda as will new economy expansion of our industrial platform. Our group platform retains the largest footprint of commercial property in Australia, providing intra- and new sector growth opportunities to prosecute at significantly higher prospective IRRs than available two years ago. Over the 19-year history as a listed property platform, we have seen the most exciting growth periods following correction events, and we see the coming period as no exception as we partner with a broad range of existing and new investors to capitalize on opportunities that we can exploit. I'll now hand over to Sean to discuss the transaction markets in more detail.
Thanks, David, and good morning to everyone on the call. Turning to the transactions market, and it's been a more subdued period of transactional activity for the group. Notwithstanding this, we have made considerable progress in divesting assets as we continue to curate our portfolios and provide fresh investment capacity for our funds and partnerships. Interestingly, despite the negativity towards office, office transactions have been a feature of this divestment activity with our funds recording sales in line with book value of a Brisbane CBD asset and a Sydney Fringe CBD office building totaling AUD 320 million. We have also divested smaller non-core industrial assets to recycle capital into higher return opportunities. Transactions of this kind have resulted in nearly AUD 1 billion of divestment activity across the platform for the half year.
There were annual commercial real estate transaction volumes in 2023 of circa AUD 15 billion, which is less than half the historical norm. At the end of calendar year 2023, we saw increased momentum and activity in the commercial real estate market and anticipate this trend to continue in 2024. In general terms, market sentiment and activity indicate that interest rates are peaking and the devaluation cycle is largely behind us. Notwithstanding this, conditions remain volatile and secondary asset values continue to be under pressure. If we consider the down cycle since 2000, it can be seen that in each case there were approximately two years of falling valuations before markets stabilized and recovered. We are now two years into a devaluation cycle and are beginning to see early signs that markets are unlocking.
The Australian industrial and logistics market has strong fundamentals, including a 1% vacancy rate, the lowest in the world. We have been very active in taking advantage of these conditions to divest older assets and, in particular, exploring what David refers to as the reversion romance permeating the market. While the current market has seen relatively strong pricing for industrial assets, we believe that similar to the office sector, when vacancy rates normalize, a bifurcation will occur in both tenant demand and investor preference between older stock and newer facilities. Longer leased assets should come back into vogue as rates stabilize and IRR spreads to bond yields exceed through the cycle averages. Maintenance CapEx, downtime, and incentives all become headwinds for older, short WALE stock across all sectors, so keeping abreast of changing investor appetite will be a key element of forecasting equity demand.
Given this, we have been capitalizing on opportunities to dispose of assets that we don't see producing long-term growth in earnings or where the future redevelopment potential is limited. The industrial market continues to see broad interest from a variety of buyers, with private, domestic, and foreign institutions all being active. Divestment volumes have accelerated, as reported by CQR and CLW, with even shorter WALE older office buildings securing book value pricing. Syndicators and wholesale capital continue to be active, while those that can source high net worth equity will also prosper as the high net worth sector is typically keen to take advantage of trough pricing in the property sector, as evident in price cycles. Not surprisingly, the most volume of sales has been in sub-AUD 100 million price bracket. However, there still continues to be appetite for selective larger transactions across the sectors, including industrial portfolio sales and recapitalizations.
Despite media reports around domestic super funds investing offshore, we have seen continued demand from local super funds to invest in Australian logistics. As David highlighted, we continue to see strong interest from foreign investors, particularly out of APAC, as it remains clear that Australia is still regarded as a global safe haven producing attractive risk-adjusted returns with lower volatility. Cap rates and discount rates have risen considerably across all sectors by at least 100 basis points, with industrial cap rates rising the most, albeit considerably offset by strong market rental growth. With significant cap rate expansion having now been reflected in valuations, the prospective IRRs for all sectors are now looking more appealing with spreads of circa 300 basis points against current bond yields and realigned with historical leverages. Also of note during the period was the success of our ongoing portfolio curation of our social infrastructure portfolio.
During the half, we sold a portfolio of childcare assets individually at an average of 4.6%, achieving an 8.8% premium to book value. We continue to see social infrastructure as a growing, resilient asset class characterized by high tenant retention, nearly 0% vacancy, and a low correlation in returns to other asset classes, and also underpinned by the growing impact investment thematic. Finally, we continue to be active in the sale leaseback sector, as evidenced by our recent Bega off-market transaction in Port Melbourne, and now have transacted over AUD 11 billion of sale leaseback assets in the last six years, of which 60% has been set in off-market transactions. We have a market-leading capability in the sale leaseback space and expect to see continued investment opportunities with major corporates and all levels of government looking to free up balance sheet capital of real estate assets.
In closing my comments, I would also like to highlight our progress in our journey to net-zero carbon emissions by 2025. Our long-term power purchase agreement to supply 100% renewable electricity commenced this year. We have 72.8 megawatts of solar installed across the platform, an uplift of 15% since FY23, of which 72% supplies directly to tenants. We also continue to focus on partnering with tenant customers to invest in clean energy to limit Scope 3 emissions. And importantly, we have also updated and lodged our second stage innovation reconciliation plan with Reconciliation Australia. I will now hand over to Anastasia to discuss the financial results in more detail.
Thank you, Sean, and good morning. It's my pleasure to address you all for the first time as the Charter Hall CFO. The earnings summary presents the EBITDA contribution of the three segments for the half year. Property investment segment income grew 7% on the prior comparative period, reflecting high levels of underlying fund portfolio occupancy and annual rental increases, a strong result in light of higher borrowing costs from increases in interest rates. Development income contributed additional earnings resulting from successful completions this half. The main funds management segment income reduced due to the contribution of performance fees and higher transaction volumes in the comparable prior first half, 2023. Depreciation and interest expense was mostly flat, while tax expense reduced from AUD 74 million to AUD 57 million in line with the lower funds management income.
The group's operating earnings were AUD 195.1 million for the first half, 2024, equating to AUD 0.412 per security. A distribution of AUD 0.221 per security was declared, growing at 6%, which reflects a payout ratio of 54% and retains close to AUD 90 million for reinvestment in the business. The decline in underlying portfolio valuations has resulted in statutory earnings of AUD -190 million. Turning now to more detail on the funds management segment. During the half, base funds management revenue grew a resilient 2%. Performance and transaction fees were elevated in the prior half, tapering down this period in line with the market valuation cycle and the significantly lower transaction volumes across the property sector.
In property services, all revenue streams grew half on half, with the exception of leasing fees, which reflects elevated levels of office leasing of 258,000 square meters achieved in first half 2023, compared with 97,000 square meters this half, which is also a strong result. It was a similar story in industrial, where leasing activity was half the level of the prior corresponding period. Operating expense cost control remains a focus, with expenses down 10%. However, there is going to be some uplift in the second half due to timing differences. The group's overall funds management EBITDA margin is down five percentage points but remains healthy at 70%, particularly given lower performance and transaction fees. Turning to the balance sheet and return metrics, total assets have reduced over the first half in line with underlying valuation declines.
Borrowings are flat and the group continues to maintain a strong financial position, with negligible balance sheet gearing and no look-through gearing covenants. The group continues to maintain an excellent liquidity position, which translates to headroom investment capacity of AUD 700 million. Importantly, the return on capital metrics continue to demonstrate strong financial performance and management's ability to invest capital effectively. Maintaining strong return metrics is fundamental to ensuring the business deploys our own and our partners' capital optimally. The group's disciplined focus on return on capital outcomes ultimately generates long-term earnings growth and value for our investors. Moving to slide 27 to provide an update on the overall platform's capital position. The group maintains approximately AUD 30 billion in loan facilities across domestic and international banks and debt capital markets, providing large-scale access to global markets, which is a critical and distinguishing strength of the business.
Our approach to financing our funds and partnership strategy is specific to particular investment vehicles, investor profiles, and to provide significant investment capacity of AUD 6 billion to deploy into value-creating opportunities. Leverage across the platform is predominantly maintained at investment-grade credit metric levels, with all existing external ratings reaffirmed with stable outlooks. The group completed AUD 9.2 billion of new and refinanced debt facilities during the half, which increased sustainable loans to 20% of all loan facilities, evidencing Charter Hall strengths in ESG, and lengthened the average debt maturity profile to over four years. Gearing across the funds and partnerships averages 35.7%, with fixed-rate hedging levels of 67%, resulting in an average cost of debt of 4.3%. In summary, the group maintains an enviable, large-scale liquidity and investment capacity position to continue to drive growth and financial performance.
I will now hand you back to David for final comments on operating earnings guidance.
Thank you, Anastasia. We are excited about the prospects that lay ahead for the group. Over the 19-year history of the group as a listed company, we have driven the most growth in earnings and fund from correction events. There have sprung up opportunities to invest alongside capital partners and capture mispriced assets in portfolios. We are diversified across multiple sectors in Australia and New Zealand, managing the largest property fund in Australia, the largest roster of tenant customers to partner with their growth aspirations, and the largest volume of external equity sources to partner with across high-quality portfolios that offer strong credit credentials and prospective returns. Now turning to slide 29 and our earnings guidance. Based on no material adverse change in current market conditions, Charter Hall reconfirms FY24 earnings guidance for post-tax operating earnings per security of approximately AUD 0.75 per security.
FY 2024 distribution per security guidance is for 6% growth over FY 2023. That now ends the prepared remarks, and I will now invite your questions.
Thank you. Ladies and gentlemen, as a reminder to ask the question, please press STAR 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press STAR 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of James Druce with CLSA. Your line is open.
Yeah, hi. Good morning, David. Just want to get a bit of color on a bit more detail on the reclassification of AUD 0.8 billion of development commitments that was coming out of the fund this half.
Look, there's been a number of industrial pre-lease developments that with the bottleneck with the planning system in some markets, the sunset dates under agreements have been triggered and we haven't achieved acceptable planning conditions. So, in some cases, we are in an extended period renegotiating planning conditions and agreements for lease. So, I guess the way we see it is it's a timing issue. Until we get back to an unconditional position and the planning permits are approved, we're not going to reclassify some of that stuff as committed until we've got acceptable planning conditions that allow us to move ahead with some of those projects.
All right. Is that mainly Sydney-focused or is that Melbourne-based?
Sydney and Melbourne.
Okay. You talked to, I think, around AUD 500 million of wholesale inflows for the half, and you might have touched on the style of the investment that they're seeking. But can you provide a bit more color about what they're after?
Well, if you look at our business, we've consistently had about a 50/50 split between pooled funds and wholesale partnerships. Combined, it's about AUD 45 billion. And typically, in the partnerships, they would include, for example, our Chifley Tower Precinct, which we've announced construction commencement and another pre-lease today, is a partnership between three of our largest customers. Then we have partnerships across industrial, logistics, office, and as we've recently mentioned and been mentioned on the CQR call, we've grown the Mercer partnership with the purchase of Eastgate Shopping Centre. So, I think my view is that the partnership capital will flow quicker than pooled funds. We have a lot of investors that are invested in both segments, both in our pooled funds and in our partnerships.
My sense is that the nature of a partnership with your investors sitting there shoulder to shoulder with your investment committees, ready to jump onto opportunities that we present to them, means that they're going to be quicker to take advantage of trough pricing and get into opportunities, which I mentioned, ranging from sort of core through to opportunistic. So, that's why I expect that they'll be the, if you like, the equity source segment that is faster to accelerate than pooled funds in both wholesale and direct.
Okay. That makes sense. One more, if I may. What are you expecting for second half asset sales? Is that going to be a similar run rate to the first half?
Look, we don't give any guidance on transactions, whether they're acquisitions or divestments. I think some of the REITs we manage have already given some guidance there. Obviously, CQR has announced some shopping center divestments. CLW has announced divestments with another AUD 500 million in DD. But I wouldn't get too fixated on divestments. The business is also going to be doing acquisitions, and that'll all get printed in the second half. So, that's the best color I'm going to give you.
All right. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Ben Brayshaw with Barrenjoey. Your line is open.
Oh, yeah. Hi. Thanks for the presentation, David. I heard your comments at the start just on, I guess, office and high economic rents, leasing at Chifley, including Gilbert and Tobin. I was wondering if you could talk about whether you are seeing face rent growth, and in particular in Sydney, and how you're thinking about face rents in the context of high incentives and whether that is translating into underlying net effective rent growth.
So, Ben, I think it's very different nationally by market, and it's not just homogeneous by city. So, if I look at Sydney, there's absolutely no doubt what I call top of the hill, core prime sector where Chifley is, which is still Australia's best commercial site, always has been. There is palpable difference between net effective rental growth for absolute prime locations in really good modernized precincts versus other locations. If I go around the country, Paris End, Melbourne has for 30 years and will continue to outpace in net effective rental growth the rest of Melbourne. Same with, of course, Sydney CBD, followed by, frankly, Midtown and then sort of Western Corridor and then Southern Western Corridor, I think, probably is going to be the laggard. And I think we need to be careful about all the published level of incentives.
There's a lot of noise in a lot of that data. So, all I would say is we are definitely seeing good net effective growth in good assets. But equally, I made the point on both office and industrial, we are now demanding a higher yield on cost, a higher margin to make developments work. Now, when we bought into Chifley and got an approval for another 55,000-meter tower, unlike any of our potential competitors, we virtually paid nothing for the land component. So, that's sort of Nirvana in development, if you can sort of produce an absolute high-quality, premium-grade product that tenants want without or having negligible land costs. So, that's sort of where I see the market going.
I think the net effective rental growth delta between the very best modern products in the right locations will be very big versus the sort of growth we're going to see in some poorer locations. And there's been a lot of, I think, noise around work-from-home and the future of office. What we're seeing is, finally, organizations are cracking the whip and expecting people to be in the office at least three or four days a week. Many companies are moving to five days a week. And as the labor market softens in many, many sectors, I think we're going to see a much greater densification and use of office space as sort of people value their jobs a little more.
Thanks, David. And just on the DI inventory of AUD 100 million for the period end, what stability do you have on the margin in that as we look forward?
Look, I won't quote margin because much of our DI inventory is land that we secure, get approvals, get pre-leased, and then onsell it prior to us even settling the land. Now, that was the case on 60 King William Street, where in Adelaide, we secured a site, got planning approval, got it to 70% pre-leased to the government, and then effectively brought in our partnership of funds. So, when you have those sort of deals, the margin IRR is infinity. So, it's not something that I would normally sort of be able to quote as an average margin. What I would say is that we continue to look to restock that inventory. There's some great trading opportunities. The buying for some of those assets is better than it was two years ago. So, I think we'll continue to do that.
The DI result is a function of projects finishing like Adelaide, some industrial projects that we packaged up and did exactly what I just talked about. We'll continue to sort of recycle invested capital there to drive attractive DI earnings. So, there's a bit of a first half skew with it. But next year, that might turn around and have a second half skew. So, it just depends on the timing of the inventory and the realization of the profits.
Thanks, David. Just final question. Are you able to provide an outline of the redemption requests across the unlisted platform as at the end of the period and just how you're positioned around meeting any of those in the next 6-12 months, please?
So, we only have a redemption queue in one direct fund called PFA. I'm not going to give the percentages, but there's been enough media publicity on that to date. What I would say is we're continuing to divest assets. And when those assets are sold, there'll be a sort of continued payment of redemptions. One thing that we've made very clear to all of our unlisted investors is that when you've got 90%+ of your equity as what I call remaining investors, we've got a fiduciary responsibility to all investors, not just those that are redeeming. So, we will do what we have been doing as an orderly disposal of assets to provide the redemption request cash when it's sensible for the respective fund to do that. And as I said, there are no other funds that have a redemption window or queue.
Thanks for your time, David.
No problem, Ben.
Thank you. Please stand by for our next question. Our next question comes from the line of Grant McCasker with UBS. Your line is open.
Good morning, David. You're sort of painting a positive outlook for where we are in the cycle. Does that change the way that Charter Hall thinks about your property investment? So, do you put more money out the door over the next 12 or 18 months if you see the right opportunity? The second point, can you elaborate on growth opportunities? You've done very well in the business through many cycles, sort of tilting the business. As we go to the next cycle, can you touch on any areas you want to pivot the business towards?
Yeah. Thanks, Grant. Look, first of all, we've negligible balance sheet gearing, 40x ICR, no look-through gearing covenants. I would say we have a very conservative balance sheet. We also have the ability to liquidate capital and realize cash through the sort of recycling of the development inventory I talked about and where appropriate, we'll sell down co-investment stakes in underlying funds. So, the answer is yes. I think where, in most sectors, I see asset pricing stabilising. And in many cases, I think cap rates have blown out too far, particularly in the triple net sector with uncapped CPI. I think there's been an almost irrational reaction in the valuation community without the lack of sales evidence. The other thing about many of those sort of triple net sectors that we're exposed to, the underlying individual asset sizes are small.
My experience is when interest rates peak and they start coming down and everyone, privates, high net worths, family offices, all of a sudden start looking at where term deposit rates are going, which are 100% taxable, they start turning to property with the depreciation benefits that they can get investing in property at where cap rates have got to. We see the sort of that smaller end of the market in most sectors probably rebounding very quickly. So, when we look at that and I'm quite proud of the fact that when you look at our near-AUD 70 billion property platform, we've got fantastic tenant covenants from sort of high government and blue-chip institutional tenant roster, yeah, I think there's going to be an opportunity for us to deploy judiciously. Our model is to typically co-invest alongside our capital partners on new ventures.
The other thing I would say is, to answer the second part of your question, there is a lot of hype in the market around alternative asset classes and a whole range of new potential growth corridors. Given our scale, we need to be careful not to play around in new sectors that really don't have scale potential. If you look at where we've taken the business over the last 20 years, we're one of the largest owners in industrial. We think the new economy provides great opportunities for us to continue to drive growth ranging from traditional warehousing and logistics through to data centres and a whole range of different opportunities when we have one of the largest footprints of land in the country. I also am a little sort of focused on those filters of really strong tenant quality.
So, when we start looking at alternative sectors, we need to be really careful around tenant quality and the lumpiness of some assets in particular sectors. So, when I look forward, yeah, I think the coming period is going to be one where we need to take advantage of opportunities. I think we've done a pretty good job over the last 20 years of avoiding some sectors that have had some real challenges and being prepared to sort of participate in the institutionalization of new sectors. And so, that's the sort of, if you like, the colour around how we see ourselves sort of moving forward. But I'm not going to do anything crazy, and I certainly won't be going offshore. I've seen too many movies to see how that ends. So, we'll stick to what we know and continue to diversify in Australia and New Zealand.
Okay. Thanks, David. So maybe just on the first point, could we see a higher level of sort of warehousing assets on the Charter Hall balance sheet as capital frees up from your co-investors?
I don't see a great need for us to be putting assets on our balance sheet unless it's, like I mentioned to the previous caller around development inventory that we can then sort of recycle. There's no point us being a developer just to tick and flick and then sell and not retain long-term funds under management. So, I think there's opportunities for us to do that. Yes, industrial will be. You only have to look at the last few reported periods. Industrial will be our largest sector. It'll overtake office, who knows? Could be five minutes. Could be five months. Could be another year or so.
But the reality is that if you add the volume of both committed and uncommitted development combined with, I think, a continued excess of demand for good-quality industrial versus the supply of good-quality institutional assets, I would suggest that that's going to have a pretty strong relative outperformance over the next five years in terms of asset pricing and total returns. So, yep, I think you'll find industrial will shoot past office as our largest segment. And as we have discussed for some time, there's a lot of sort of elements of industrial. It's not just what we would traditionally see as warehousing or manufacturing. So, there's a whole range of opportunities for us to grow that industrial pipeline, develop what we already own, continue to raise new equity, and grow those strategies.
So, yeah, that's, and if I sort of think about future equity flows, the reality is you don't have to be Einstein to work out that global capital's still going to be very keen to deploy in logistics.
Thanks, David.
No problem, Grant.
Thank you. Please stand by for our next question. Our next question comes from the line of Simon Chan with Morgan Stanley. Your line is open.
Hi. Good morning, everyone. David, in your prepared remarks, actually, I forgot if it was yours or Sean's. You mentioned that you're beginning to see early signs that the markets are unlocking. Can you elaborate on that? Are you meaning that there are more people looking to buy now, or you reckon the sale process will happen much quicker? Yeah, what are signs of markets unlocking me?
Look, I'll start. Sean might add a little more color. But it's pretty simple. When you see an acceleration in transaction volumes, you're seeing an unlocking of what we saw during most of 2023. The great irony is, even though everyone's negative about office, office volumes have actually been very strong nationally. And as CLW reported, it's sold a B-grade short WALE office asset in Brisbane, Tank Street. We're seeing a plethora of off-market approaches on a lot of our assets at premiums to December valuations. We're running a few off-market auction processes because people keep trying to gazump each other. It feels like I'm selling residential apartments again.
So, yeah, I think there's going to be we're not back to boom conditions, but I think there's a general feeling out there that people realize that they just can't keep waiting and thinking that asset pricing's going to keep falling. So, there's going to be a bit of FOMO. And what'll happen is the poorer-quality stuff, everyone will try to sell that. The really good kit in most sectors just won't be available. So, you're going to start seeing bidding up of assets that people really want, and they're not going to be able to get them at yesterday's pricing or, sorry, yesterday's offers. And we've all heard about the bid-ask spread. It's narrowed. It's not completely closed in some sectors.
As conditions improve, particularly, as I said, as I think the expectation of rates peaking and then coming down, which will be the story of 2024 if you look at most consensus forecasts on central banks dropping rates around the world, we're going to have a very interesting period of what I call pricing enlightenment. Why I call it that is it's the buyers out there that want to buy assets that need the enlightening, probably more so than the vendors. It's going to be a pretty interesting sort of 12 months. Sean, do you want to add what you're seeing?
Yeah. Look, David, I think you've covered most of it. And the only thing I'd say is, as I stated in my presentation, there's been about AUD 15 billion of transactions in calendar year 2023. Typically, there's about AUD 35 billion. A lot of that activity was actually set in calendar year 2022. So, for most of calendar year 2023, we've been in a market that's been on pause. But what David, myself, and the team have seen in the last quarter of last year is that unlocking of interest in real estate. And we've done about 30 transactions across the sectors. So, it's not one sector. It's all sectors we operate in. And what we're finding is renewed global interest, particularly out of APAC, particularly out of Japan. Australia is seen as a preferred destination globally from a risk-adjusted return perspective.
So, I think what you're going to see is a market that's controlled by big groups like ourselves that control scale and the stock. And we're going to go back into a market where scale matters. And I think what we're finding is, particularly from the 100 institutions that are wholesale institutions in our platform, they will want to run with scale partners to build platforms. So, we're seeing all that gradually unlocking. I think, as David touched on, we're not in a V-shaped recovery, but we think we're in a different cycle already, which is sort of the stabilization that occurs post the down cycle. So, yeah, renewed activity on the ground, there is no doubt.
That's great. Thanks, David and Sean. Putting all your comments together on this call then, I mean, you guys were a net seller of assets in the last 6 months, which is quite rare. If I were to ask you, over the next 6-12 months, do you think you'll actually be a net acquirer or a net seller of assets? Taking into account, right, you have a little bit of PFA, redemptions, some of your listed REIT selling assets, yet there could be a bit of FOMO in the market, and you don't want to miss out. How do you see the landscape for Charter Hall Group over the next 6-12 months?
Look, I'm not going to give a prediction, Simon, but I would expect us to be a net acquirer. So, we would be expecting to be adding more transactions through acquisitions than divestments. I sort of also get a sense that the appetite from our funds to be divesting asset has diminished. There's a couple of examples. You're well aware of CLW. We've made it very clear sort of where we're going there. But what happens in the wholesale world, people don't panic. And yes, there'll be an orderly process if it makes sense to sell some assets. We sold an asset for AUD 230.4 million in Brisbane last year in one of our wholesale office partnerships. But we're keeping our super-prime assets. So, I think there'll be a slowdown in the volume of divestments and a pickup in the volume of acquisitions.
It's probably the best way I'd characterize the coming calendar year.
No, that's a clear answer. Just one more from me. FY margins expected to moderate in funds management. I think you did about 68% in the first half. How much moderation will there be in the second half? And it's assuming FY margin of about 62% in line with last year, a fair assumption?
I might hand that one to Anastasia.
Sure. Thanks, Simon. So, we should expect to see full year 2024 slightly exceed on margins to full year 2023. What it reflects really is some costs in the second half that weren't in the first half as we just have some reduction in recoveries associated with some of the asset divestments that happened in the first half. So, only small, though, in moderation.
The other thing I'd say, generally, is that by global standards, we look at asset manager margins globally. I think we have been able to maintain pretty healthy margins, even excluding performance fees. And I don't see that changing. And I don't see a natural ceiling on margins either. So, I think as we continue to grow, as Anastasia made in her remarks, we've also reflected the slowdown in activity. We've reduced our total costs. That's what you'd expect from a high-margin business. So, what I would say is, as things pick up and as I just alluded to, we start seeing both net acquisition growth, valuation growth in line with rental income, which is how real estate generally works. And you're going to start seeing margin expansion again because we're going to be able to grow our revenue faster than our costs.
That's very clear. Thanks very much, David, Anastasia, and Sean.
Thank you. Please stand by for our next question. Our next question comes from the line of Richard Jones with JP Morgan. Your line is open.
Thanks, David. Just further to the question earlier about alternate asset classes, just wondering if you can touch on your level of interest in sort of healthcare, storage, data centers, build-to-rent land lease. Just quickly around the grounds, whether those asset classes are of interest.
I might as well just privatize the whole REIT sector and wrap them all up. Look, Richard, we're already in the healthcare sector. We do it judiciously. I've always been a bit nervous about really lumpy assets in the alternative space because your reuse, your reliability, your market reversion, negative market reversions if the tenants don't renew leases or worse, if they go broke. It gets very scary when you get into sort of alternative assets that are very lumpy. So, we obviously like the social infrastructure space. We like childcare. They're virtually long-term residential land banks with average value of AUD 4 million or AUD 5 million with 15-year triple net leases. So, we like that space. We will continue to sort of grow selectively assets in health precincts.
We've obviously got a great asset, stage one of our Westmead project, opposite Westmead Hospital, which is sort of co-owned by a couple of our funds and was developed by us in partnership with Western Sydney Uni. We've got two stages of that precinct, and so, I wouldn't necessarily say I'm going to go hard in one particular sector within what we all generally call the alternatives thematics. But we are keen on all things that meet our investment filters in social infrastructure. Also, as I said, we're already an owner of data centers generally under lease on land we own. We've done a lot of work on power capacity, and some of our estates that we will be developing will, surprise, surprise, continue to attract interest from data center operators.
So, I think it'll be a continuation of the growth of broadly our industrial sector, as I mentioned in the last call. And it'll continue to be a, if you like, a growth driver of our industrial funds under management. And there are some other interesting things that sit within what I call social infrastructure that'll continue to be very attractive to us. We bought the Geosciences asset in Canberra. We've got bus depots leased to Brisbane City Council. If I can buy any sort of real estate which is just long-term land banks, and I'm getting blue-chip tenants paying me effectively land rents, that's sort of Nirvana in real estate. So, we'll continue to seek those out. When I look at our sort of pubs and service station portfolios and Bunnings assets, they're virtually all major arterial locations, and they're long-term land banks.
In many cases, land exceeds the investment value assessed by our judicious valuers. So, if we can continue to see that, I think we're going to continue to see pretty strong opportunities emerge for us to continue to grow in all of those sectors, some of which might be sort of put in that alternative thematic you're talking about, some of which may be more traditional.
Okay. Any comment? Thanks for those thoughts, David. Any comment on resi, either build-to-rent land lease or student housing?
I'll hand over to Sean. Once again, I would just say all things living are on our radar, subject to it making sense for us, our capital partners. Ultimately, we would prefer to be playing that space where I'm not buying land and having it eat its head off until we get planning permits. We're busily looking at other opportunities where we can get planning permits on income-producing assets and play that sort of BTR sector that way.
Yeah, I totally agree with David. We're pretty fortunate to have 1,700 assets. And clearly, some of those assets, particularly the transport-oriented assets in metropolitan cities, Sydney, Melbourne, Brisbane in particular, have higher and better use, particularly some of our shopping centers. And we have the ability to incubate multifamily transactions on surplus land in some locations that we're busy getting planning approvals for. We have a small team that's focused on that space. We don't have to go out and buy assets or land that's overvalued. So, we're unlocking opportunities within our own platform. There's about half a dozen that are prime. And in the multifamily space, you've got to develop to grow. And as David said, we're judiciously working through what makes sense. And that would include some of our mixed-use precincts like Westmead, David touched on. We already have a life sciences building.
You may see us do some multifamily out in that precinct as well. So, it's really just unlocking our existing platform and our current book.
Okay. Thanks, guys. And just very quickly, David, you flagged that your development hurdles have moved. Can you clarify how significant that uplift on required yield and cost and margins has been?
It depends, as you'd imagine, Richard, on the risk, the nature of the pre-commitment. Is it a blue-chip tenant? What sort of rental profile, etc.? But as a general rule, I would say 1.5%-2% increase in yield on cost is probably an indicative range across the whole sector. If you asked anyone that has got land, particularly in the industrial sector where you can be somewhat choosy, that's sort of where the world's going. And so, it'll be a bit different by sector. But that would be sort of my sort of view on sort of yield on cost. And what it effectively means is people are wanting to retain a decent profit margin over above the cap rates that have risen. Our cap rates have. It's all pretty public how much they've risen from sort of peak cap rates in June 2022 to now.
A bit counterintuitive that one of the sectors with the greatest cap rate expansion's been industrial. But I think part of that's value is just trying to offset valuation growth by blowing out cap rates as fast as market rents have grown. But we'll see whether my cynicism pans out over the next 12 months when transactions provide evidence that they can't refute. So, look, I think there's the other thing I would say is when you look at development, everything's gone wrong. Construction costs have gone up. Development yield expectations have gone up. Appetite for doing development's gone down despite some commentary I saw the other day that the whole market should magically turn from fixed-price contracts for builders to cost-plus just because the builders can't make any money. I think it's a bit hilarious. No one was complaining when builders were making more margins than they forecast.
So, and because there's a shallowing out of the pool of really good-quality builders that can take on projects, I think all of that means the economic rent on development, particularly in industrial, is going up quite considerably. And if people want new buildings in that sector, they're going to have to pay up for it. Now, I think the same thing's going to happen in office. I think there'll be very little new supply built in major office markets for all the reasons I just outlined. And unless people have subsidized development by using a big balance sheet to sort of pretend that it all makes sense, I'm not sure we're going to see too much in the way of sort of new prime office space, which ultimately helps sort of create a bit of a pressure cooker on rents.
Great. Thanks, David.
Right up.
Thank you. Please stand by for our next question. Our next question comes from the line of David Polubiec with Macquarie Group. Your line is open.
Good morning, David, Sean, and Anastasia. Thanks for taking my questions. I just wanted to go back to DI, please. If you could just give a bit more color around this year's first half, second half earnings Q. Do you expect almost all the full year contribution to have fallen in the first half? And then in terms of go-forward opportunities, should we expect broadly similar earnings outcomes as has been achieved over the past few years?
Well, first of all, I've already said there's a first half skew. I'm not going to give you any more compositional guidance than that on DI. The second part of your question is, yes, I expect us to continue to realize DI earnings for many years to come. It's an important element of our business. Yes, it's not a huge proportion of our total after-tax earnings, but it's an important delivery machine in terms of creating a product that our partners actually want in our sort of core funds. And there'll be opportunities where we can incubate something ourselves. We might incubate with one of our funds in a partnership structure. There's a whole range of different ways that we're going to continue to do that. And it's not all just going to be I know we call it DI, but it may not always be greenfields development.
It might be buying income-producing assets, extending leases, making a profit that way. I'm not sure I want to go out and buy old boiler office buildings and refurb them and release them and think I'm going to make a profit. So, I'll leave that to other well-credentialed people playing in that space. But we have always seen mispricing in markets. So, I think that's the best way I would sort of categorize that segment. Others call them trading profits. Others call them development earnings. We, for whatever it's worth, we call it DI. And I think we'll continue to be able to sort of prosecute high return on invested capital, cash realizations out of that segment.
Thank you. Just the second question on operating expenses. Expected to increase in the second half as a result of timing, as you mentioned. Would the second half be a good indicator of the level of expenses going into FY2025, or do you expect more cost control to be had?
Are you asking me to give you an FY25 expense forecast? I think the reality is that we are rolling down our cost base on a sustainable basis. I think we're going to have sort of modest growth in operating expenses going forward. But the reality is a lot of it's going to depend on whether the growth in revenue, A, justifies any increase in expenses, and B, whether we actually need it. We've always been pretty focused on what I call low FTE, intensive funds under management. So, if we can continue to grow our farm and do it in a cost-efficient way, then hopefully, our operating jaws open up. But by the same token, you can't run a portfolio of our scale and have high-quality people without paying the market.
Given that employee expenses have always been the majority of our operating expenses, that's sort of what's going to drive it.
All right. Thanks for the color.
Thank you. Will you stand by for our next question? Our next question comes from the line of Alexander Prineas with Morningstar. Your line is open.
Thank you. Good morning. Just wondering if you can comment on where you've signed any new fee deals, for example, on new partnerships or incoming clients into funds on a new fee arrangement. Can you just comment at all on how sort of more recently signed fee arrangements compare to the existing book, both in terms of the quantum and the structure around whether performance fees still have similar hurdles? Yeah, any kind of comments that you can give there.
Mate, nothing's changed. We're not in the fee discounting game. If clients want us to and there are some people out there doing it, want to pay peanuts and get monkeys, well, that's their choice. We're not playing that game. So, we're not seeing any change to our fee regime. It'll always be different depending on whether it's a pooled fund, a partnership. In partnerships, it depends on how much work's involved, how intensive the portfolio management is. But as a general rule, we're not seeing any change, and I'm not prepared to lower the standards of the business by getting into a price war on fees.
Okay. Thanks for that. And then also, just second question, appreciate the discussion around acquisitions and divestments and one fund in particular doing some divestments due to redemption requests. I was wondering if in the unlisted space, are there any other funds where redemptions are planned, perhaps to reduce gearing or just have a more kind of prudent level of gearing? Or are you pretty comfortable in that regard across the suite of funds?
Well, first of all, redemptions don't lower gearing. They increase gearing.
No, sorry. Not redemptions, divestments.
Okay. Right. Okay. So, as I've said, I quoted the Brisbane example in Charter. Yes, we have sold some assets in the sort of wholesale space. I think you're well aware of what CLW and CQR's reported. My sense is that if I look at our major sort of wholesale funds, if there are divestments, quite often, that will be to recycle and fund new development. That'll definitely be the case in some of our industrial partnerships and funds. And if there are a desire for office funds, for example, to delever through divestments, we'll go through that sort of orderly process. But as I said before, the PFA thing got a lot of airplay, and it's a tiny sort of fund in the overall scheme of the group. And there are no other redemption windows across the rest of the wholesale business.
Okay. Thank you. That's it from me.
Great. Thank you.
Will you stand by for our next question? Our next question comes from the line of Suraj Nebhani with Citig roup. Your line is open.
Thank you. Just two quick ones. Firstly, David, can you talk to your expectations on cap rate movements from here for all the asset classes, I guess?
Mate, I've been doing this for 35 years, and I've given up trying to guess what values are going to do. What I'll tell you, my view on market cap rates, and I'll probably follow, is that in virtually all sectors, we've probably hit the peak of cap rates. There'll be exceptions. There'll be some risky, crappy office that might, we don't own any of that, but might continue to see some pain as that bid-ask spread on secondary assets occurs. And particularly, some of the larger owners have made it clear they're going to recycle and downweight office. And guess what? They're not going to sell their good kit. They're going to sell the secondary stuff, which is what we've sort of been seeing happening.
I think in industrial, as I alluded to, you're going to start seeing such a body of sales evidence above December values that valuers can't keep bullshitting themselves around where the cap rates continuing to rise in a pretty strong sector with virtually zero vacancy. I think Ben Ellis in CQR made it pretty clear. We think shopping center convenience cap rates and net lease convenience cap rates at or around their peak. I think you're going to start seeing some evidence and cap rates printed in transactions that will be premiums to December valuations. So, yeah, across the board, that would be my sense. But in six months' time, I don't want you coming back going, "Oh, yeah, but this asset sold for this." There'll be the exceptions. But as a general rule, that's sort of where I think we're at.
I'd also make the point, and I've been through lots of cycles where cap rates have been static for several years, decent quality portfolios, high occupancy. We've got the highest office occupancy in the country, one of the youngest office portfolios. Income growth, consistent income growth, ultimately drives valuation growth in line with the income growth if you've got static cap rates. So, I think that's sort of where we are in the cycle.
Okay. Thank you. And just one other one of course, on the gearing. I know there are no look-through gearing covenants, but look-through gearing has edged up to almost 37%. At what point does it start becoming concerning?
Doesn't worry me. I've got no look-through gearing. I've got 40x interest cover ratio. I think we're probably whiter than white in our disclosures compared to many other peers that don't even bloody talk about look-through gearing. Look, you don't have to be Einstein to work out. You guys get a lot of visibility on CLW and CQR and CQE. CLW obviously spot look-through gearing at 31 December prior to divestments. And we've given you an idea of sort of pro forma. Some of those funds, gearing will come down. CLW is the largest investment on the co-investment on the chart or balance sheet. So, as some of these other funds, gearing comes down, so will our look-through gearing. But seriously, at AUD 80 million of net debt or whatever we've got, I'm hardly worried about it.
Okay. Thank you.
Thank you. Ladies and gentlemen, I'm sure I know further questions in the queue. I would now like to turn the call back over to David for closing remarks.
Okay. Thanks, everyone, for your time. I'm sure we'll catch up with a lot of people in coming weeks, and we'll reconnect at that time. Thanks very much, and thanks to my team.