Ladies and gentlemen, thank you for standing by, and welcome to the Charter Hall Group 2023 half year results briefing. At this time, all participants are on a listen only mode. There will be a presentation followed by a question and answer session at which time, if you wish to queue for a question, you will need to press star followed by one one on your telephone keypad and wait for your name to be announced. Please note that this conference is being recorded today, Monday, 20th February, 2023. I would now like to hand the conference over to your host today, Mr. David Harrison, Managing Director and Group CEO. Thank you. Sir, please go ahead.
Good morning and welcome to the Charter Hall Group half year FY23 results. I'm David Harrison, Managing Director and Group CEO of Charter Hall. Presenting with me today is Sean McMahon, our CIO, and Russell Proutt, our CFO. I'd like to commence today with an acknowledgement of country. Charter Hall is proud to work with our customers and communities to invest in, develop, and manage properties on land across Australia. We pay our respects to the traditional owners, their elders past, present, and emerging, and recognize their continuing cultural and contribution to this country. Slide five in the group highlights. It's been another half year of ongoing growth and resilience. Operate earnings post-tax was $ 240 million or $ 50.7 per security. For the 12 months to the end of December 2022, that equates to a return on contributed equity of 28%.
A metric we continue to focus on closely as we lead the sector with its metric for long-term investors. The group's property investment portfolio has grown to $3 billion as we look to reinvest, retain earnings, and deliver an attractive 10.4% investment return, inclusive of a 4.8% yield. FUM growth continues to be strong, with total FUM up 10.1% over the six months to $88 billion and property FUM up 11.2% to $ 73 billion. The growth is a result of our ongoing partnerships with tenant and investor customers, delivering positive outcomes for them, which ultimately translates into attractive returns for our security holders.
That growth saw us undertake a record first half of transaction activity with $ 7.9 billion of gross transactions as we continue to actively curate our portfolios to drive performance via acquisitions, divestments, and developments. Noting a record level of development completions and a committed development pipeline. The group's balance sheet remains resilient with 3% net gearing and significant liquidity. Whilst the 4.4% NTA growth reflects the quality of our long-term investments and retained earnings. Finally, the group's investment capacity of cash and undrawn debt stands at $ 6.5 billion, and that excludes committed but uncalled equity commitments, which provides further capacity to this metric. Our focus remains on delivering sustainable growth for security holders, replenishing dry powder, strengthening resilience, and a vigilant focus on property fundamentals, given our leading scale in most sectors we choose to participate in.
Slide six outlines our strategy, which remains unchanged. We use our expertise in customer relationships to create value and generate superior returns for our investors. $ 2.1 billion of gross equity was allotted during the half, with our wholesale partnerships being particularly active in this period. Of the $ 7.9 billion of gross transactions during the period, we acquired $ 6.1 billion and divested a further $1 .8 billion of assets. Our focus remains on ensuring we manage portfolios to preserve capital and drive resilient income returns, optimizing the earnings growth from assets we manage. Finally, we continue to focus on investing alongside our capital partners and delivering enhanced returns. Slide seven highlights our post-tax operating earnings per security and distribution to security growth.
We've consistently delivered earnings growth for our investors. Based upon our no less than $ 0.90 OEPS guidance, we will deliver a five-year compound annual OEPS growth rate of 19%. Similarly, we delivered a continued 6% annual distribution growth CAGR for investors, a leading long-term distribution growth rate in the iREIT sector, with franking credits providing significant additional tax benefits for our security holders. Importantly, we've been able to deliver that growth in returns for our investors whilst also retaining significant investment capacity to fund new growth initiatives and invest alongside our capital partners. We've retained more than $ 850 million in earnings since FY 2018. That is being used to support new fund creation and invest alongside our capital partners, providing alignment of interest and delivering future earnings growth for security holders.
Turning now to slide nine and our FUM growth. As mentioned, the period was a record half for transaction activity. Net property revaluations continue to be a positive contributor to FUM growth as the strength of income growth across our assets mitigates cap rate expansion. It was particularly pleasing to see our Long WALE triple-net lease portfolios predominantly exposed to CPI rental increase recognized with continued ongoing valuation growth. The attractiveness of our industrial logistics portfolio was also evident with strong market rental growth being reflected in our valuations.
The platform's development book was also a significant contributor to FUM growth, with our flagship Chifley South project being added to committed developments, post gazettal of its upzoning and floor space to create a twin tower complex that will total more than 115,000 sq m of lettable premium grade space over two towers. When property fund growth of $ 7.3 billion is combined with our investment in the PIM partnership, we ended calendar year 2022 with $88 billion of group FUM. On slide 10, you can see the breakout of that $88 billion of FUM by equity source or segment and by property sub-sector. We continue to remain well-diversified across external equity sources and across property sectors, enjoying the support of our investor partners across all segments in which we operate.
On Slide 11, we break out our property FUM in more detail. The PFM platform comprises over 1,600 properties and delivers more than $ 3.1 billion of net rental income. We continue to focus on delivering a sustainable and resilient return through property sector diversity, with a focus on diversity of rental escalators, market rent growth profiles, and long lease assets to high-quality tenant customers, noting our sector-leading property platform WALE of 8.2 years. The weighted average cap rate across the platform of 4.5% reflects the quality of our core portfolio, with long weighted average lease terms and attractive rent structures in markets with good market growth fundamentals. On Slide 12, we provide some more detail on the major tenant customers across the platform. Our top 20 tenants make up almost 60% of platform rent.
These tenant customers are heavily concentrated in non-discretionary industries and sectors, whilst we expect the high caliber tenant roster will drive resilience but also provide growth as these customers expand their businesses. 21% of platform leases are triple net, and 20% of platform net income is CPI-linked, providing strong rental growth and CapEx-efficient portfolios for our investors. Importantly, we continue to partner with our tenants, and this is reflected in the fact that 71% of our tenants have more than one lease with us, while 28% of our tenants work with us across multiple sectors. The resilience of our major tenant customers and our concentration towards these essential industries underpins the defensive nature of our portfolios and their ongoing outperformance. On slide 13, we provide more color on our recent office leasing successes. Active asset management sits at the heart of Charter Hall's business.
This means working with our tenants to provide attractive solutions, thought leadership, and flexibility, which drives greater tenant retention and sourcing of new tenant commitments. As the largest office landlord in Australia, we're able to provide multi-location space opportunities to an increasing volume of repeat business customers, also welcoming new customers to our platform. First half FY 2023 saw us execute a record 258,000 sq m of leasing deals in office. We had a very strong 81% retention rate with our existing office tenant customers, a reflection of our partnership approach with our tenants. Pleasingly, we executed a significant quantum of leasing at our new office developments, further advancing these projects and continuing our track record of delivering new office stock for our investors that is predominantly fully leased on completion.
Most pleasing is the high-quality nature of renewals and new leasing to blue-chip corporate tenants and government tenants, which combined comprises the overwhelming majority of our leasing. We achieved a 7.9-year WALE across all deals nationally, and our office portfolio occupancy sits at a healthy 96.2%, significantly ahead of the national average of 85.4%. Slide four demonstrates our leasing success in industrial and logistics. Similar to office, it's been an exceptionally busy period, with 470,000 sq m of leasing deals achieved. We also continue to enjoy exceptionally strong retention rates with our existing customers as our partnership approach these tenant customers look for ongoing relationships with Charter Hall. Developments also form a significant part of our activity as we continue to complete new developments, commit new pre-leases, and curate further develop to core opportunities.
Densification of sites continues with recent planning approvals and 85% pre-leasing of a multi-level logistics facility in South Sydney as a example of greater site densification. The outcome of our active asset management is that our industrial and logistics portfolio enjoys exceptionally high occupancy of 99.5% and a sector-leading 10.3 year WALE. Turning to slide 15 and our equity flows. Our strategy of accessing multiple sources of capital continues to deliver growth in equity flows through the cycle. During the period, wholesale partnerships were particularly active with successful completion of the Irongate REIT privatization and several office partnership transactions. We enjoy strong working partnerships with approximately 100 wholesale capital partners and expect these investor customers will continue to be active in periods ahead.
Australian real estate continues to screen attractively to global investors, offering attractive rental structures, good governance, and transparent rule of law. We continue to enjoy the support of capital partners given our ability to successfully deploy capital in attractive acquisitions and development opportunities, investing alongside them to create a strong alignment of interest. On slide 16, we outline our transactional activity. First half 2023 saw us active in deploying equity into developments and acquisitions. Our strong tenant relationships continue to provide us with access to some leaseback off-market opportunities which are mutually beneficial. Example of this during the period included the Z Energy and Gull New Zealand portfolios.
We're also very active with a number of significant office transactions, including Southern Cross and the 50% investment of our $ 800 million plus 555 Collins Street development in Melbourne, along with value-add opportunities at 383 Kent and 74 Castlereagh Street in Sydney CBD. We continue to actively curate our portfolios to drive long-term returns for our investors. Turning to slide 17 in our development book. The group continues to progress various developments across its portfolio, creating investment-grade and institutional-quality properties, adding significant value through enhancing both income yield and total returns. It's been a strong period for completions, with $2 billion of developments delivered in the last 12 months. Notwithstanding completions, our total development pipeline continues to be robust at $ 15.4 billion, which I note more than 50% of which is committed development.
Our committed projects continue to grow, with Chifley South having now moved into our committed projects stream. This development is a great example of our ability to provide our investor customers access to new investment product and enabling them to deploy capital into unique opportunities. Our ability to deploy capital in our industrial and logistics pipeline also continues to be a key advantage to the group and drives significant capital inflows. The forward pipeline of committed projects will generate high quality, long leased assets for our funds and partnerships while providing attractive incremental fund growth for CHC and enhancing our credentials to attract further capital. I'll now hand over to Sean McMahon, our chief investment officer.
Thanks, David. Good morning, everyone. As David has discussed, our property investment portfolio provides a strong alignment of interests with our investor customers, while also ensuring its security holders benefit from our property expertise. Our property investment portfolio has grown to $3 billion, predominantly as a result of new incremental investment. Occupancy continues to remain high at 97.4%, and the WALE is a very attractive 7.7 years. Our weighted average rent review has risen to 3.7%, reflecting our underlying exposure to CPI-linked leases. The weighted average cap rate remains a firm 4.61%, also reflecting the attractive characteristics of the assets we own. The portfolio remains well-diversified across sectors and by investment, with an 82% weighting to the core East Coast markets.
We continue to allocate incremental group capital to investments that support new fund creation and the ongoing growth of our existing funds. The growth in the property investment portfolio reflects the group's desire to continue to invest alongside our investing customers and ensure a strong alignment of interest. Turning to slide 20, the property investment portfolio movement. During the period, we made net investments of $ 132 million in our property portfolio. Our investment portfolio has delivered an impressive 13.7%, four and a half year compound annual return for Charter Hall security holders. Our property investment portfolio yield at 4.8% continues to remain significantly greater than the distribution yield to the MSCI core funds.
As David explained earlier, we've retained over $ 850 million of earnings since FY 2018 that have been used to invest alongside our capital partners and support new fund initiatives. This has delivered significant returns for security holders and is an important part of the success of the group. Let's turn to slide 21 and our earnings resilience. As can be seen on this page, our property investment earnings are characterized by the high quality of the tenants that provide that income and the diversity of sectors which produce them. No single asset is more than 5% of the group's property investment portfolio. Government makes up an impressive 20% of portfolio income. 16% of the property net income is also from CPI-linked leases. As I explained before, this CPI exposure has seen the weighted average rent review lift to 3.7%.
The property investment portfolio can be considered a very defensive, well-diversified core investment portfolio. Let's now move to ESG on slide 22. Climate resilience, recognizing the role we play in communities and responsible business are embedded in everything we do at Charter Hall. During the period, we brought forward our commitment to net zero Scope one and Scope two carbon emissions by five years to 2025. We now have 47.8 MG of installed solar across the group's platform, an increase of 600 kW since June 2022. We've also undertaken another $ 900 million of sustainable finance transactions, which recognizes the ESG performance of our assets and their attractive environmental credentials. We also remain committed to engaging with the communities in which we operate and donated over $ 700,000 during the half, much of it going towards disaster recovery in flood-affected communities.
We also facilitated 117 employment outcomes in partnership with social enterprises as part of our goal of providing 1,200 employment outcomes for vulnerable youth by 2030. 17 of our funds scored in the top 20% of GRESB, with three funds recognized as global and regional sector leaders.
Finally, we continue to focus on ensuring we operate with the highest level of governance, recognizing our responsibilities to our investors and the community. We launched our third modern slavery statement, outlining our efforts to prevent occurrences of modern slavery in our supply chain. I will now hand over to Russell to provide details on the financial results.
Thank you, Sean. Good morning to everyone on the call. Slide 24 presents a summary of earnings for the first half of fiscal year 2023. As David highlighted, the group reported statutory earnings of $226,500,000 and operating earnings of $239.9 million. In the following slides, I will discuss the key metrics impacting each of our three reported segments. Operating earnings and group EBITDA were 9% and 8% down respectively compared to first half of last fiscal year. The difference between the periods was a result of reductions in our property investment segment as well as funds management. The property investment segment EBITDA reduction of about $5 million can be largely attributed to higher finance costs in the underlying funds and partnerships.
As noted on a later slide, while we are about 55% hedged across the platform, we did experience an average increase in cost of debt of about 70 basis points compared to the first half of last year. Development income was $3,500,000 higher and in line with expectation. For our funds management segment, we reported $ 229 million of EBITDA, and whilst down from the prior comparable period, reflects a very strong period of performance. I will expand further on this segment on the following slides. We continue to size our distributions based on target growth rate of 6% per annum and distributed $ 20.80 per security, representing a 41% payout ratio and retain our operating earnings of about $ 140 million.
Turning to slide 25 and looking at the funds management business in more detail. The funds management segment continues to drive our growth. The base fund management revenues increased more than 30%, reflecting the growth in FUM during the year. It is worth noting that in the half, these fees represented two times total operating expenses. At $96 million, transaction and performance fee revenues were strong in the half, reflecting our transaction activity and performance fee realization from outperformance in our group funds and partnerships. Property services revenue were up more than 60% as the scale of the business grows and activity levels increase, particularly in providing development management and leasing services to our funds. With respect to the 6% increase in operating expenses, growth in headcount and wage levels is the most significant contributor to this increase.
However, with the changing economic climate, we've been very focused on managing costs and scrutinizing all spending throughout the business. The chart on slide 26 illustrates the evolution of the platform and the value of scale in driving profitability and quality of earnings. The top black line shows the absolute earned EBITDA margin, including all transaction performance fees, showing the first half's margin achieved of 75%. Adjusting for transaction and performance fees, the second line shows that the EBITDA margin achieved has increased to 64% in the half. I would highlight that we would expect this margin level to moderate somewhat from this level for the full year. The combination of scale and investment performance provides a greater potential for transaction performance fees in the future. Moving forward to slide 27, our balance sheet as at 31 December.
As you can see, the group continues to be in a very sound financial position. We continue to maintain a strong liquidity position with modest net leverage, which was 3% at the half, which translates into investment capacity at the headstock of $ 567 million. This is exclusive of any capital recycling and retained earnings in future periods. As has been mentioned, the investment portfolio has increased in the half to $3 billion. As we have highlighted previously, and most importantly, the returns on capital metrics continue to be strong and reflects our continuing ability to invest capital effectively. Maintaining strong return on capital metrics is fundamental to ensuring the business employs capital effectively and to generate earnings growth on a per security basis. Finally, on slide 28, we provide an update in relation to the debt funding across the business.
Our approach to financing has not changed. Our strategy is tailored to the particular investment vehicles and the nature of the assets and investor profiles. At more than $28 billion of total facilities, including $ 5.2 billion executed during the half, we have grown our borrowing capacity in line with our overall business growth. Across the group, average gearing was approximately 30%, and the platform's average cost of funding was 3.8%. With, as I mentioned, 55% of drawn debt hedged. The business continues to diversify debt capital sources and will access bank and capital markets in multiple jurisdictions. We've also completed nearly $3,500,000,000 of sustainable financing across multiple funds, representing about 12% of our total book.
As has been referenced earlier, the group had approximately $ 6.5 billion of available liquidity or investment capacity at 31 December and is well positioned to continue to support further growth. I will hand back to David to wrap up and comment on guidance for FY 2023.
Thank you, Russell. Now turning to slide 30 and our earnings guidance. Based on no material adverse change in current market conditions, we reaffirm that FY 2023 guidance is for post-tax operating earnings per security of no less than $ 0.90 per security. The FY 2023 distribution security guidance is for 6% growth over FY 2022. That now ends the prepared remarks, and I now invite your questions.
Thank you, sir. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. I show our first question comes from the line of James Druce from CLSA. Please go ahead.
Yeah, good morning, David and team. Pretty good result with $4 billion worth of net acquisitions first half. How are we sort of thinking about the second half now?
I assume the question's in relation to transactions.
Yes.
Yeah, look, there's no doubt that, you know, transaction volumes will slow down. We're not expecting to replicate, you know, the first half, which obviously included the IronGate re-privatization. However, I would expect, as we've done for many periods, to continue to sort of judiciously look at opportunities. We've got dry powder across the platform. You've probably seen, you know, various sort of recent media articles on our continued activity in most sectors. I would expect us to continue to focus on CPI linked, Long WALE acquisitions. I think we've got a very robust office and industrial development book, you know, so we'll be focusing on developing that out.
You know, as and when, you know, opportunities emerge, we've got, you know, over 100 wholesale investors that have thankfully enjoyed pretty strong returns with Charter Hall over many years. We expect to continue to partner with them on interesting, you know, acquisitions as they emerge. Hopefully that gives you a bit of color.
Yeah, no, that's helpful. Thank you. Also just thinking about the second half skew in earnings, if you're just thinking about guidance, how should we think about performance fees and development income for the second half?
Look, you know, you can do the math yourself. Obviously, we're looking at a first half skew. That's not surprising given the volume of transactions in the first half. I don't, you know, really think there'll be a great deal of difference between sort of first half, second half performance fees. You know, as I've said for, I think this is now 18 years, you know, it's very difficult to forecast transaction activity. We've always been sort of conservative around looking forward on transaction activity. You know, and there's no doubt the whole sector's got headwinds in terms of, you know, rolling or sort of rising weighted average cost of debt.
I think if you look at all of those things, that gives you an idea why we've guided the way we have.
Okay. One more if I may. The committed development pipeline is up to $8 billion now. It's getting pretty big. I think it's a great credit to the team. Just thinking about the run rate for replenishing industrially, you're still seeing plenty of opportunity there?
Yeah. You know, fortunately, we have a very large land bank within our existing funds and partnerships. You know, unlike others, we're not out chasing, you know, record land prices in most of the prime markets. You know, we're in the course of pre-leasing great infill sites in Sydney, Melbourne, Brisbane. I think that will continue. I would also just point out that, as we've said many times, you know, a lot of the development is being funded in wholesale funds and partnerships. The dry powder exceeds what we've talked about in terms of investment capacity, because a lot of our wholesale partnerships, you know, have committed equity that will get drawn over time for particular projects. You know, that's over and above our stated platform capacity.
But you know, the reality is that construction costs have risen over the last couple of years. We're just starting to see that plateau out in certain sectors. And fortunately in really tight markets, as you mentioned with industrial, our tenant customers are needing to pay higher rents. You know, economic rents have risen. And therefore, if you want space delivered for your operations, you're gonna have to pay, you know, market rents, which are significantly above where they were a year or two years ago. We're still comfortable we're gonna get an attractive yield on cost and enhanced IRR doing developed to core in our funds and partnerships, and I'd expect that will continue.
I'd also say in the office portfolios, we've been talking about the bifurcation of tenant demand towards modern assets for some time, and it's playing out. Most of our office projects that we've delivered in the last few years have been practically 100% leased at completion. That momentum's continuing with our current developments. 60 King William Street in Adelaide's virtually 100% leased, and it will be completed in 2023. We're seeing very similar momentum in our major office projects, 555 Collins Street, where we've recently announced Allianz Australia is joining what is a very high caliber tenant roster. I think we'll see similar momentum in our other office projects.
I think it'll continue to be a feature, as I said on the call. We've stepped up the total volume of completions. You know, you can do the math yourself and look at that committed development book and then, you know, divide it over the likely development period, both in logistics and office, and you'll see that our development completions will continue to rise, given the sort of pre-leasing I've just talked about. Particularly, you know, the, you know, large value of some of those projects, such as Chifley South, and our other office projects that are going to be completed over the next couple of years.
Okay, great. Thank you.
No problem.
Thank you. I show our next question comes from the line of Sholto Maconochie from Jefferies. Please go ahead.
Hi, everyone. Just on the equity inflows that look like they were down about on a net basis, you know, 50%-53% year-on-year and 38% sequentially. What was driving that look implies about $1 billion of redemptions. What was driving that lower number besides the lower gross headline number?
In any particular period, we might have a liquidity event in one of our funds. I think the features of our two wholesale pooled funds, the office and the industrial fund, is that, unlike some of our peers, we've been able to bring both existing and new capital in to meet the demand for secondaries over the last six months. When there's not a liquidity window, investors, if they wanna lighten up their investments, will request secondary sales. And we fortunately have been able to get both existing investors and new investors to fund those. Obviously that's a net neutral fund flow. You'll have inflows equal to the outflows with secondaries.
That's why you're seeing a sort of increase, if you like, in outflows and therefore that has an impact in reducing your net inflows.
Yep, understood. I noticed PFA's got a review event this year, on the performance fee, but also for the, I think, the liquidity windows. Any redemptions in the PFA fund and in CPOF coming to 2024?
CPOF doesn't have a liquidity window till 2027.
Okay. Yep.
liquidity window. PFA, yes, has gone through its liquidity window and as is the case in virtually every liquidity window we've had in the direct funds, there are redemption requests, and they are generally met over a period of time. PFA is no different, but, you know, the volume of redemptions is not materially different to anything that we've seen. You know, we sort of don't provide any greater detail on the volume of redemptions. What I would say is in all of our direct funds, you know, whilst as you'd expect, net inflows are slowing down, we're still getting good inflows across all of those funds, including office funds, industrial, diversified.
You know, we don't really see it as anything more than sort of business as usual, having been running these things...
And then any-
-for well over a decade.
You've got a lot of scale in office industry. You're pretty strong there. With any assets, you've looked to classes, into that you're not already in, to get some more scale. Obvious you've got a bit of dry powder. What sort of asset classes would you look at that you don't currently have a bit of scale in?
Oh, look, I think if you look at the history of this group, we have tilted into different sectors over the time. We've obviously, grown our presence in social infrastructure, you know, originally with the acquisition of Folkestone. As you know, you know, we've got a listed social infrastructure REIT, and we've complemented that with other acquisitions like the Telstra Exchange portfolio. We are looking at, aspects of the living sector that may provide some, scale opportunities, but we're really going to sort of look at, how we can get scale in those sectors and, you know, we'll announce something when we've got, you know, meaningful FUM, that you know, actually complements the growth of the overall platform.
Yeah, just finally on the PIM, I think it's six months confusion, second half last year was $ 13.3 million. This period was $7 million. Was that just a performance fee-related impact on the half-on-half on the earnings for PIM?
That was primary difference between the comparable periods 'cause they measure on, obviously, at the end of the fiscal year.
Okay. Thanks. Thanks very much.
Thank you. I show our next question comes from the line of Lou Pirenc from Jarden Group. Please go ahead.
Thank you. Good morning. Thanks for the detail on the office and logistics leasing. Can you maybe talk, given the concerns that the market has with office, just more about the rent, kind of what are you seeing in terms of incentives, in terms of effective, you know, rental growth in the renewals, new leasing and development markets?
The most important thing, Lou, for us is that we're achieving above feasibility, both face and effective rents on pre-leasing. I think I've mentioned and other commentators have mentioned, you know, there's pretty strong bifurcation of tenant demand towards modern assets and assets that have been completely retrofitted and new amenity put into those complexes. I think we are seeing evidence of both face and effective rental growth. A bit like what I said before about industrial, you know, the economic rent for new development in office is rising. Obviously rising construction costs mean you're gonna need higher rents for to make new developments viable. You know, like we're seeing in logistics, I think people are prepared to pay for better quality.
I actually don't see a lot of weakness in the new development sector in office. I've been on public record as saying, you know, there's gonna be quite a bifurcation. I think the more modern assets are going to enjoy very low vacancies, and older stock are going to actually experience the opposite. You know, you don't have to listen to me. You only have to look at the level of sort of pre-leasing we've been able to deliver on our office projects over many years, and that's continuing.
Thank you. Russell, quick one on the look-through gearing clearly up quite a bit in the last six months. Are there any covenants based on look-through gearing? Is there a level where you kind of don't want to really get at that?
Yeah, sure. At Head Stock, there are no look-through gearing covenants at all in the system. There's no cross defaults, no cross collateralization at all. It's purely non-recourse financing in every fund and partnership. It has increased a bit, but that is also a reflection of some of the development spend and some of the big larger pool funds like CPIF, which were low single digits historically gearing. Just follow through on the math, but there's no issues or problems with any LVRs within the system.
I just add, Lou
Great. Thank-
You know, if you look at the numbers, our property investment portfolio is virtually our NTA. The little bit of gearing we've got on balance sheet is to fund the curation that we're doing in development investments, which generally gets recycled back to the balance sheet once we've curated or secured a planning approval or pre-leases. I think the... And this has been the case for the whole of the listed history of Charter Hall. There seems to be a because of what some other groups went through with look-through gearing covenants in the GFC, there seems to be a sort of focus on it. It really has very little impact on the way we look at our balance sheet for the reasons Russell outlined.
Thank you.
Thank you. I show our next question comes from the line of Grant McCasker from UBS. Please go ahead.
Good morning. Yeah, this is actually a follow-up question. If we look at the fund-level gearing's gone from, you know, under 27% to over 30% over the period, and you've talked about a large committed development pipeline, you know, it would suggest gearing's going to increase before we start talking about, you know, potential asset value movements. How should we think about gearing of the funds over the medium term? You know, where are you comfortable with them?
Well, as I said before, Grant, that you gotta be careful of a one-dimensional approach because a lot of our development is in partnerships where there'll be further committed equity drawn. There has been, you know, an elevation in some of the fund gearing with acquisitions and further development during the period. We don't really think gearing in that it's sort of fund and partnership level's gonna move much further than where it's at, and it generally gets replenished with continued sort of recycling. I think in both our pooled funds, CPOF and CPIF, there's assets that will continue to be recycled. I think for the last seven or eight years, we've been reporting, you know, group divestments of close to $ billion a year. I don't see any reason why that's not gonna continue.
As we put in our valuations announcements. At December, you know, there's cap rates softening across the market. You know, fortunately, we have the combination of strong, both fixed and CPI-linked rent increases, helping to offset that. In a lot of our wholesale funds and partnerships, there's unrecognized development margins that get recognized as projects get completed, which also provides a bit of a buffer to any sort of cap rate expansion.
Okay. Thank you.
Thank you. I show our next question comes from the line of Richard Jones from JP Morgan. Please go ahead.
Good morning, Dave. Can you clarify whether the CLP performance fee has been paid in the first half or is to come in the second half?
It's measured and paid in June, so the first half is an accrual, based on, you know, where we think the overall performance fee will get measured and paid. There's a whole range of reasons why you only accrue a certain percentage of that, including the fact that the final performance fee is going to be determined by valuations at June this year. As I said before, I gave up crystal balling future asset values a long time ago. We would expect, you know, the full, the 100% of that portfolio will get valued in June and the full performance fee will be payable in June.
Okay. Thank you. Just, Russell, just to clarify your comment just around the funds management margin will moderate in the second half. Was that a comment related to the margin inclusive of performance and transaction fees?
No, it's the one exclusive, the 64%. I've said in the past that kind of the gold standard is getting to kind of a run rate X transaction performance fees of around 60%. We have some costs in the second half, some accruals, which will moderate the full year. We hope to come in at around that level, but I just wanna make sure people didn't think that that trend line continues on for the second half. It was a little bit of timing of cost in the fiscal year.
Okay. Thank you. Cheers.
Thank you. I show our next question comes from the line of Stuart McLean from Macquarie. Please go ahead.
Good morning. Thanks for your time. Just another one for Russell. Just regarding the interest costs coming through in the property investment line item, we've got 55% hedging. Can you just run through maybe how that rolls off over the next two to three years, and the swap rate as well, just so we can have a better idea of what's happening with the interest cost in our property investment line item, please?
I'm gonna have to come back to you on that, Stuart, 'cause that's a, that's a big calculation across the various funds. You'd assume that it's reasonably hedged at those levels for the next two years. I'll come back to you specifically 'cause it's based on our weighting of each particular fund. I don't have that in front of me.
Okay. Great. Thanks very much. Second question, David, six months ago, you commented on CPOF, not quite being at hurdles, to achieve a performance fee, not quite in the upfront territory. Can you just provide an update there on CPOF, please, six months later?
Our pool funds have rolling three-year performance tests, and they go back to inception of the fund. CPOF started in June 2006. Unlike CPIF, it has yet to hit its performance fee hurdle. I guess I'd sort of take a view, given the current environment, you know, we're probably not thinking that that is going to be something that gets paid at the next assessment date. However, you know, as I said earlier, you know, there's a lot of development margin we've been able to deliver in both CPIF and CPOF over the years, for the benefit of our wholesale investors. I think it's a fund that, you know, will eventually hit its performance fee target.
I sort of wouldn't like the market to be thinking, you know, there's a big performance fee coming at the next assessment date 'cause there's too many variables out there, not the least of which, you know, none of us really can sort of predict where cap rates might be at a point in time.
Understood. Clear. Thanks for the update there. Just a final one on equity flows. Are there any planned raisings coming through over the next six months that we should be watching out for?
Well, you know, a wholesale platform like ours is, you know, often in the market raising equity, so it's, you know, we don't often announce when we turn them on and off. As I said earlier, at any particular point in time, we've got equity flows coming into the platform. I'd expect equity flows to continue in our logistics fund. I'd also expect, you know, as we have shown in the last six months, that we'll continue to generate both existing and new partnership inflows. It's not just the pooled funds, but it's the partnerships. As I've said before, you know, the direct platform is continuing to raise monthly inflows.
They're slower than they have been, you know, up until, you know, the steep rise in interest rates, in the last six months. Both in our direct platform and in our household platform, good quality, real estate, is still being sought after. I don't see any massive change in demand for real assets over coming years. People are more cautious, but I would expect us to, you know, continue to be able to attract capital in all of those segments.
Thanks for your time today. Cheers.
No problem.
Thank you. I show our next question comes from the line of Ben Brayshaw from Barrenjoey. Please go ahead.
Oh, hi, David. Congratulations on the result. I just have one question. Could you talk about unlevered IRR expectations and just broadly how you're seeing those in the current environment? I can see that the weighted average discount rate across the platform sitting around 5.8. It hasn't really moved much since bond rates have backed up. Just curious as to whether you think that that is representative or independent value is lagging in long-term growth assumptions, you know, just in light of the shift in the environment.
The first thing I'd say, Ben, is we've had a roller coaster of 10-year bond yields spike to 4.2, went back to 3.2, now they're back around the midpoint of that. I think most, particularly wholesale investors, look at the risk premium they want on an unlevered IRR against what they think the average bond yield's gonna be over the next 10 years, not what a particular spot rate is. Over all of my career, that spread for good quality real estate like Charter Hall owns, you know, has been anywhere between sort of 250-350 risk premium above the, what the market's expected long-term bond yield is.
You know, all I would say to you is, you know, capital doesn't react as quickly as the liquid bond market does. You know, when it hit 3.2, I think, you know, we're at, you know, a spread that is sort of in that average. Obviously, it's narrowed a little bit now. I guess the other thing I would say is those weighted average discount rates that we quote and publish are valuer's rates, where they also are forecasting their valuations the full impact of stamp duty. If you're an investor in an existing platform, your go forward IRR is better than a valuation discount rate 'cause they're not factoring in, you know, the full impact of stamp duty on the valuation.
That's always been a little bit of a interesting differential between the way the valuers value things and then the way the market sort of values long-term IRRs. The other thing I'd say is that there is a different expectation of a risk premium to bond yields dependent on your sector. In logistics, for example, you don't have to be Einstein to work out it's virtually sub 1% vacancy market in every major market in Australia. Therefore, the dynamic for an industrial or logistics investor to invest, knowing that there's strong market rental growth ahead, would... Most of the time, I would say that the value is in predicting market rental growth below the generally accepted view among investors.
I think part of what's driving that discount rate is our high proportion of our portfolio in industrial and logistics, social infrastructure, and other CPI-linked Long WALE retail investments. No surprise when you've just printed 7%, 7.5% rental growth that, and you've got uncapped CPI on your leases, your valuers aren't blowing out their cap rates. You gotta look at the composition, if you like, of our weighted average discount rate. You know, the other thing I would add, you know, there's a lot of negativity around office. We're still averaging on both existing and new leasing, 3.5% fixed annual growth over long-term leases. I can't find too many economists with 10-year CPI forecast above 3.5%.
You're not gonna get too many valuers forecasting CPI above 3.5%. It's still a pretty solid fixed rental growth profile for a modern office portfolio. I know it's a long-winded answer, Ben, and I know what you want me to tell you, but I don't think there's as much pressure on a blowout on discount rates as some people think.
Thanks for the colors, David.
No problem.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. To withdraw your question, please press star one one again. I show our next question comes from the line of Alex Prineas from Morningstar. Please go ahead.
Thank you, and thanks for the presentation. Just, are you able to just comment on sort of leasing conditions this, you know, this calendar year? Is there any sign of improvement or deterioration in leasing conditions? Secondly, you've made some comments in the past, some interesting comments around things like workspace ratios and, you know, bifurcation in the office market, being supportive of office demand for those core CBD office buildings. Just wondering if you can sort of provide an update on that or maybe a bit more of a medium-term outlook on office supply and demand.
My comments around the bifurcation of tenant demand is not specifically directed at core CBD. Whilst I think core CBD will perform well, I think if you look at the vacancy rate in modern office buildings in all locations, city fringe, suburban and CBD, you'll find they're extremely high occupancy levels compared to older stock. As I said earlier, if you look at the completion of new office buildings that we've done in the last seven years, virtually all of them have been fully committed by completion. If I look at our current new office buildings, we've got a, you know, sort of $ 450 million project in Richmond in Melbourne, which was anchored by a pre-leased Aussie Post.
We've got 555 Collins Street in Melbourne, which, you know, the leasing is advancing at a pretty attractive velocity. More importantly, what we've been most pleased about is the quality of the tenants that are committing to our project. You know, we have been very careful in making sure that we can maintain that high tenant customer quality across our platform. I don't think there's any doubt that in, particularly in office markets, modern buildings are going to continue to attract tenants. I think that, you know, the older stock is gonna struggle. I've said it many times, you know, older stock that hasn't been completely retrofitted, are gonna suffer the highest vacancy rates, and modern buildings are going to enjoy, you know, very low vacancy rates.
Like we're seeing logistics, if you've got low vacancy rates, you've got a pretty good chance of driving effective rental growth. You know, it'll be more difficult in older stock to drive real rental growth if, you know, vacancy rates are rising. It's very different by market. There are some markets that we've completely avoided because we're really worried about new supply as a percentage of the total stock. You know, I think you only have to go through our property portfolio to work out, you know, which markets we like and which markets we're avoiding.
Thanks. Any sort of signs of how leasing is progressing earlier this year relative to last year? Is it any numbers to sort of say whether it's improving or deteriorating?
I think if you look at our slide deck, the sheer volume of leasing deals that we've been able to carry out in office industrial says it all. We're getting roughly 2/3 existing customers leasing our office space, 75% in industrial. That's always a good sign of a healthy portfolio that a lot of your tenants wanna renew with you. I'd have to say, in the first couple of months of this calendar year, tenant inquiry is better than it was in the previous six months, particularly for the new office buildings that we've got coming out of the ground.
You know, notwithstanding all the rhetoric in the media, around you know, the return to work, I think we are seeing very strong evidence that governments, corporates, are being stronger in their encouragement of people to get back to the office environment, much more than they have in the past. I think that acceleration's gonna continue. I think, you know, what people have called densification or the percentage of your pre-COVID workforce that's back in the office, you know, is going to continue to rise. I think everyone forgets that pre-COVID densification was probably only about 85% anyway with, you know, you know, people out of the office and holidays and whatever so I think it is definitely improving.
You only have to look at the vibrancy in major capital city markets to see that is the case. Yeah, Melbourne's a little slower than other states, but it's coming off a low base. I don't see any reason why, you know, that won't continue. You know, we're pleased with the level of tenant demand. In other sectors like logistics, it's still virtually zero vacancy market. You know, we're continuing to see strong tenant demand. To your earlier point, yes, I think workspace ratios have increased. I think people want more space per FTE than they have in the past.
I think we're also seeing, particularly when we talk to major customers about how they're gonna fit out new office space that they're pre-committing to with us, they're putting a lot more space aside for common areas and amenity and, you know, town hall space and client space. They are all the factors that's increasing this workspace ratio I talk about.
Okay. Thanks very much.
Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the conference back to Mr David Harrison, Managing Director and Group CEO, for closing remarks.
Okay. Thanks, everyone, for your time. As usual, reach out to Phil and the team if you wanna have any one-on-one discussions and undoubtedly we'll get to talk to everyone over the next couple of weeks. Thank you.