Good day, and thank you for standing by. Welcome to Centuria Office REIT Half Year 2023 Results. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Grant Nichols, COF Fund Manager. Thank you. Please go ahead.
Good morning, and thank you for dialing into the Centuria Office REIT Half Year 2023 Financial Results and Fund Update. My name is Grant Nichols, and I am COF's Fund Manager. Joining me today is COF's Assistant Fund Manager, Belinda Cheung; Group CEO, Jason Huljich; Centuria Head of Funds Management, Ross Lees; and Group Head of IR, Tim Mitchell. I would like to commence today's presentation with an acknowledgment of country, where I'm joining you from the lands of the Gadigal people of the Eora Nation. Centuria manages property throughout Australia and New Zealand and pays its respects to the traditional owners of the land in each country, to their unique culture, and to their elders past, present, and emerging. COF has generated solid results for FY23, delivering funds from operations and distributions consistent with guidance.
COF has achieved significant leasing outcomes during the first half of FY 23, continuing to reach considerable leasing momentum since the start of the pandemic, which has resulted in new and renewed terms across more than 50% of the portfolio. During the first half of FY 23, COF has leased over 24,000 square meters of vacant space, which increased portfolio occupancy to 96.4%. These leasing outcomes were enabled by COF's geographically diversified portfolio of young quality assets that offer good workforce commutability, high levels of amenity, and attractive, affordable rents, providing the accommodation solutions that tenants are increasingly seeking. COF's geographic diversification has been particularly important as many office markets outside the Sydney and Melbourne CBD demonstrated positive net absorption through 2022.
Earlier today, we published various documents on the ASX relating to the full year results, including a results presentation, which we will go through this morning. Starting on slide 4. COF delivered a solid performance in HY 2023, including generating funds from operations in line with guidance, with FY 2023 FFO guidance reiterated. Paying distributions in line with reaffirmed FY 2023 distribution guidance, representing a current distribution yield of over 8.5%. Delivering an NTA of AUD 2.40 per unit after like-to-like portfolio revaluations as at 31 December 2022, declined by less than 2% from COF's prior value, and maintaining ample debt covenant headroom and undrawn debt, with 35.6% gearing as at 31 December and hedging it at 58.1%. Further, portfolio occupancy increased to 96.4%.
Each increase in occupancy was particularly pleasing, considering COF incurred material vacancies at 154 Melbourne Street, South Brisbane and 203 Pacific Highway, St Leonards, post third June. These vacancies have already been largely addressed. Looking at the results summary in more detail on slide 5. During HY 2023, leases were executed over 15,000 square meters, representing 5% of the portfolio's NLA. Further to the executed leases, COF has received signed heads of agreement for an additional 15,336 square meters, including two heads of agreement which combined to over 7,000 square meters at 818 Bourke Street in Docklands, which will largely address the vacancy at this property. The heads of agreement for around 2,500 square meters at 203 Pacific Highway, St Leonards, which will also largely address the property's vacancy.
An increase in pre-commitment at the Wyatt Street Adelaide development to 76%. Construction is on track to complete in the second half of FY 2023. Rent commencements from these lease commitments mostly occur in the first half of FY 2024. Of the other 30,000 square meters of total leasing, pleasingly around 24,000 square meters related to previously vacant space, pushing occupancy to 96.4% with a WALE of 4.2 years. As a result of the leasing, only around 14% of COF's portfolio leases expire before FY 2025. Like for like, portfolio revaluations declined by less than 2% from COF's prior portfolio value, with the re-weighted average capitalization rate extending 17 bits during the half to 5.75%, resulting in net tangible assets of AUD 2.40 per unit.
In regards to valuations, while there has been a noticeable reduction in transaction volumes across the market, of those assets that have transacted, there is evidence of bifurcation based on quality and leasing risk. Well-tenanted, high quality buildings have continued to trade on competitive sales metrics. For the remainder of FY 2023, COF reiterates FFO guidance of AUD 0.158 per unit and distribution guidance of AUD 0.141 per unit, with distributions expected to be paid in equal quarterly installments. Based on the recent trading price, the distribution guidance equates to a distribution yield in excess of 8.5%, which we believe provides an attractive compelling yield. In reaffirming guidance, COF has taken into account current and forecast changes in interest rates and continues to monitor economic conditions.
Moving to the vision, strategy, and objectives for COF on slide 6. Our focus to COF has been, and will continue to be, generating predictable and quality income streams by building Australia's leading office REIT. Through active and engaged management, Centuria seeks to further enhance the COF portfolio by taking advantage of the opportunities that have come from having a diversified portfolio of quality Australian office assets. Looking at this more practically on slide 7. We believe tenants are increasingly seeking high-quality accommodation in new generation buildings that provide healthy lifestyle-orientated work environments, efficient floor plates, improved amenity, and competitively priced accommodation. There is increased demand to be located in areas that provide efficient commutes to improve employee satisfaction and attract the best talent.
When looking specifically at the COF portfolio, it has been positioned to deliver on many of these qualities by offering a young portfolio with an average age of 17 years, high-quality assets with 90% meeting A-grade specification, highly efficient buildings with a near 5-star average NABERS energy rating, buildings that provide large efficient floor plates that are attractive to government and corporate tenants, which is important given that many metropolitan and near city office markets are dominated by large corporate and government tenants. Locations that are easily accessible by both public and private transport, with generally generous car parking availability and a price point that is relatively affordable. Moving to slide 8. Another aspect of the COF portfolio which we think has materially contributed to COF 's recent leasing success is COF's geographic diversification.
COF's portfolio of 23 assets is truly diversified, with no single state exposure greater than 25%. Contrary to speculation that tenant demand for office space would be soft and universally reduced across all office markets, particularly in non-CBD markets, many Australian office markets demonstrated positive net absorption or an increase in leased space over the past 12 months. Much of this positive net absorption occurred in metropolitan or near city office markets, with the Melbourne fringe demonstrating the strongest 12-month net absorption of any Australian office market. Notably, negative net absorption was concentrated in the Sydney and Melbourne CBD, markets COF has limited or no exposure to. Whilst the Sydney CBD is the largest Australian office market, it is only around 18% of the national office market and not indicative of all office market conditions.
Since the first impact of COVID in 2020, COF has leased over 150,000 square meters of office space, representing more than 50% of the portfolio. Rather than being a one-off, we believe that COF's exposed markets consistently provide a sustained level of tenant demand. Cost encouraging leasing activity since COVID also runs contrary to the anecdotal speculation concerning the impact flexible work may have on demand for office space. Positive industry data reveals an increasing number of workers returning to the office across all markets, tenants are generally seeking to accommodate peak occupancy rather than average occupancy, as tenants increasingly recognize the benefits offices provide to collaboration and culture. Consequently, we are confident tenant demand will continue.
Before I hand over to Assistant Fund Manager, Belinda Cheung, to take you through the financials and portfolio metrics, I'll provide a brief overview of the manager and the benefits Centuria provides to CFW on slide nine. CFW is an externally managed REIT that forms part of the larger Centuria Capital Group family, a leading Australasian real estate funds manager operating under the ASX ticker code CNI and included in the ASX 200 index. With more than AUD 21 billion of assets under management, Centuria Capital Group specializes in the real estate markets, including decentralized office, urban infill, industrial facilities, cost-efficient healthcare property, daily needs retail, large format retail, and agriculture across Australia and New Zealand. CFW accounts for around 11% of Centuria's total assets under management and is the platform's largest office real estate fund. There is strong alignment between the broader Centuria business and CFW.
Advantages of being managed by Centuria is that the group has a long and successful track record in property funds management and has a substantial commercial property platform, particularly in relation to office real estate. With in-house property and facilities management, Centuria provides innovative, deep leasing capability and hands-on management of the CFW portfolio. Centuria Capital Group remains CFW's largest unitholder and has been a strong supporter in CFW's evolution to now be Australia's largest ASX-listed pure play office REIT that is included in both the ASX 300 and FTSE EPRA Nareit index. The latest demonstration of CNI support for CFW, and office more generally, is SERC by Centuria, which has been detailed on slide 10. SERC by Centuria recently opened in 2 of CFW's assets and is a new Centuria-operated flexible workspace business that provides quality workspace solutions within the underserviced metropolitan and near city office markets.
Offering excellent technology and best-in-class facilities, SERC delivers existing and potential COF tenants enhanced building amenity with the opportunity to easily add additional office space for project-based work or to potentially branch into new markets with a satellite office presence. We think the creation of the SERC business will definitely assist COF in attracting and retaining tenants. I will now hand over to Belinda.
Thanks, Grant. Moving to the FY 2023 financial results on slide 12. COF produced funds from operations of $48.6 million, or $0.081 per unit, and paid distributions of $0.0705 per unit in quarterly installments. The payout ratio for the first half was around 87%. Due to the rapid rise in interest rates, finance costs have increased by $6.3 million to $15.7 million for the first 6 months to December 2022. During FY 2023, COF incurred an average floating interest rate of 2.6%. The impacts from COVID-19 have continued to dissipate, with the expected credit loss and rent waivers reducing by $1.2 million from FY 2022, and the rent collection for the period remaining strong, averaging over 97%. Turning to capital management on slide 13.
AUD 257.5 million of debt refinancing was finalized during FY23, bringing total debt facilities to AUD 962.5 million across a diversified pool of 6 lenders. The REIT's weighted average debt maturity is 3.4 years, with no debt tranche expiring until FY25. During the period, COF executed AUD 210 million of new swaps, resulting in approximately 58% of the total debt hedged. We will continue to monitor COF's balance sheet and hedging profile closely. COF's loan-to-value ratio was 37.1%, and the interest cover ratio was 4.9 times. Both provide ample headroom to our debt covenants of 50% and 2 times respectively. With ample headroom and over AUD 100 million of available liquidity, COF's balance sheet remains robust and well supported by its financiers.
Turning to the portfolio overview on slide 15. Metrics on this slide represent the quality of assets COF has assembled in Australian metropolitan and near city office markets. Beyond the asset metrics, such as 90% of the portfolio being A-grade with an excellent average NABERS energy rating of 4.8 stars, the portfolio is supported by excellent tenant covenants. Around 80% of the portfolio income is derived from government, listed, and multinational tenants, with only a small exposure to SMEs. The ability to attract quality tenants is reinforced by nearly 70% of COF tenants by area exceeding 2,000 square meters, indicating robust and large tenant demand for quality metropolitan and near city office market assets. These statistics dispel some misunderstandings of metropolitan and near city office markets regarding the belief that only CBDs attract larger tenants and better tenant covenants.
In what may surprise some, over 50% of ASX 200 companies are headquartered in metropolitan or regional office markets. Additionally, a number of metropolitan office markets are dominated by government tenants, which reinforce the availability of quality tenant covenants. Moving on to leasing on slide 16. COF continued to complete a significant number of leasing during the first half, with over 30,000 square meters secured, representing 10% of portfolio NLA. As a result of the portfolio leasing, COF has increased occupancy to 96.4% and improved the resilience of the leasing profile, with more than 84% of the portfolio now expiring at or beyond FY 2025. Most notably, occupancy has increased to 100% at 584 Swan Street, Richmond, and to 90% at 818 Bourke Street, Docklands.
Maintaining high portfolio occupancy is a key management focus. We are actively seeking outcomes to further improve COF's lease expiry profile. Turning to portfolio valuations on slide 17. COF externally valued 13 of the 23 assets as at 31 December 2022. The portfolio weighted average capitalization rate slightly expanded 17 basis points to 5.75%, which resulted in a circa 2% decrease or AUD 45 million decline on a like-for-like basis. Note that recent significant executed head of agreement received at 818 Bourke Street and 203 Pacific Highway have not been included in this valuation cycle. COF's average valuation per square meter as at 31 December 2022 was AUD 8,346 per square meter, which compares favorably to increasing replacement costs.
While there has been a noticeable reduction in transaction volume of the assets that transacted, there is evidence of bifurcation based on quality and leasing risk. Well-tenanted, high-quality buildings have continued to trade on competitive sales metrics. Recent examples include 88 Main Ridge Street in Collingwood, which sold on a yield for 4.8%, 220 London Circuit in Canberra, which sold on a yield for 4.25%, and 2 Eden Park Drive in North Ryde, which sold on a yield of 5%. Moving to sustainability initiatives on slide 17. COF, by its nature as a REIT, has no staff and is solely a portfolio of assets. COF is externally managed by Centuria Capital Group and aligns itself to Centuria's sustainability framework.
Specific to the environment, COF has maintained its energy efficiency with its portfolio average NABERS energy rating of 4.8 stars. All current and future COF developments are targeting a minimum 5-star Green Star rating. Solar installation projects are ongoing across the office portfolio. Social initiatives include Centuria's annual employee engagement survey, where 94% of Centuria's employees reveal that they are proud to work for the company. A new digital tenant portal, TEN, or Tenant Engagement Network, was also launched to enhance relations and communication with office tenants. Centuria is also committed to gender diversity and inclusion. At present, there is roughly a 45%-55% split of female to male staff. On the governance front, Centuria delivered its second sustainability report in October, adopting the Task Force on Climate-related Financial Disclosures recommendations.
This means climate change is now a standard investment consideration, with adaptation plans being developed across the Centuria portfolio. Centuria also published its third Modern Slavery Statement in late 2022, and issued its Code of Conduct to suppliers, setting out Centuria's minimum standards to be adhered. I will now hand back to Grant to cover the market outlook and guidance.
Thanks, Linda. Looking ahead on slide 20, we believe the following key themes are likely to dominate 2023. We expect tenants will continue to gravitate toward workspace that can heighten company culture and will actively seek space that creates and cultivates rather than simply a place to work. This particular point is driving increased leasing activity with better quality buildings with strong amenity winning the lion's share. Regarding increased construction costs, though it appears that further rises may be moderating, increased costs are already evident in many markets across Australia. This is certainly an issue for developers, owners of established properties are somewhat insulated from these costs and may, in fact, benefit as increased construction costs will likely temper office supply. Another aspect of increased construction costs is that it may lead to higher levels of tenant renewals because the fit outs become prohibitive.
This will be beneficial to existing owners of established properties, particularly those that provide quality of Something like Seaworth. Turning to tenant demand on slide 21, as already mentioned, many Australian office markets have demonstrated robust tenant demand throughout 2022, COF is exposed to a number of them. While Melbourne Fringe has had the strongest net absorption, positive absorption was also clearly evident in Brisbane, Perth, and Canberra. Some commentators expect the flight to CBDs, the weakest tenant demand was evident in the City and Melbourne CBDs. Reasons for this could be lifestyle amenity is driving demand, key to that is the commute. The shorter or more is the second most important factor in job selection after remuneration.
80% of tenant moves occur within markets, and a substantial amount of key tenants are located outside the main CBDs, with 53% of ASX 200 companies headquartered in metropolitan or regional office markets. Please back tenant demand, we have seen evidence of rental growth for highly desirable buildings in Brisbane and to a lesser extent, Perth and Canberra. Concluding on slide 22, across the US portfolio, we are encouraged by the leasing activity that Centuria has been able to generate and continues to see across our invested markets. This leasing gives us confidence as we proactively address current vacancy in the term lease expiry. Rising interest rates throughout FY 2023 have impacted asset and debt pricing. In reaffirming guidance, Centuria is taking into account current and forecast changes in interest rates and continues to monitor economic conditions.
Centuria Office REIT will also continue to monitor and manage its balance sheet and debt exposure. For the remainder of FY23, Centuria Office REIT reiterates FFO guidance of AUD 0.158 per unit and distribution guidance of AUD 0.141 per unit, with distributions expected to be paid in quarterly installments. Based on the recent trading price, the distribution guidance equates to a distribution yield in excess of 8.5%. We thank you for through office rates. I will now hand back to the operator and invite any questions that you may have.
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for admission to be announced. To cancel your request, please press star one one. One moment for the first question. First question comes from the Miles Shoto, Madame Noc-Maconochi from Jefferies. Please proceed.
Oh, good day, Grant, everyone. Thanks for your time this morning. Got a lot of leasing well done on the leasing front. I just had a couple of questions from the call. Was that saying the stuff at Burke Street and Pacific Highway will more contribute to earnings in from one half 2024?
Correct.
Okay, sweet. Just noticed, obviously, because you have quite a lot of leasing volume was up, you know, materially, sort of 59%, you know, is a lot year-on-year, and sequentially on the volumes. Is that what's driving the big increase in the amortization add back? Because it seemed to go up quite a lot on the because the base, its effective rental growth was sort of even backing out the lower ECL was muted. It was about AUD 13 million of add back versus AUD 8.2 million last year. Was that because of the higher incentives and leasing volumes in the period?
No. If you actually go in your static counts, which breaks out that number, it's mainly been impacted by straight-lining.
Okay.
In the first half of particularly last year, we had a number of leases that were surrendered so that new tenants could come in. When you modify or surrender a lease, the straight-lining has to be reset. That is what is really impacting that number.
Okay. To be reset. Okay, that makes sense. What would, what would the incentives, I know they have to put in on the leasing, what do they do sort of year on year on a percentage number?
Yeah. Leasing, leasing incentives are pretty consistent with what we were doing through the prior financial year. On average for new tenants, we're giving up 31%, and for renewals it was about 22%.
Okay. Not bad, for renewals. Okay.
Yep.
Just on the cost of debt, what are you assuming in the second half to get to your guidance on the WACD for the period?
We're looking at a management curve that's thinking about where the current yield curve is and obviously building a buffer into that. At the moment, our forecast is pretty consistent with the broader market.
Okay. Makes sense. Then just on the gearing, I think the target was 25%-35%. You're sitting above that. Is there any plans to sell some assets, to sort of get that to lower than the sort of top end of your range?
In terms of gearing, we're pretty comfortable at the moment in that we have got a lot of debt covenant headroom. We've got an ICR of 5 times. We can withstand quite substantial changes in valuation before we get close to breaching the LVR covenant. Notwithstanding that, obviously balance sheet management is a key focus, and we will look at our asset allocation through the course of this calendar year in relation to our gearing.
I was gonna say, if you look forward to 2024, sort of ICR is around about 3-ish, and you've got some transaction evidence for some good quality suburban markets at below your cap rate. You'd look to capitalize on that, 'cause you're trading below NTA, to be creative, to potentially sell them to your NTA if there was demand to trim the portfolio. Would you look at that potentially or something more formula driven?
Yeah. I think when you think about asset allocation, obviously balance sheet is one aspect, but also whether or not we've maximized value on each individual asset. Also, I've said this previously, we are, or we have created a portfolio of relatively young assets, so there are some older assets within the COF portfolio that we will probably transition out of over time. It is a matter of getting those assets in the most valuable or for us to maximize the value before we will look at doing that or effecting that transaction.
That's great. Just finally, you look around the CBDs in Melbourne last week, and there's a lot more traffic, people around Sydney. Have you seen an increase in your physical occupancy in sort of December, January? I know it's early days. It seems it's a bit busier in the CBDs and even suburban markets.
It's probably been the last two weeks that we've started to notice a more material return to work. I think this is universal that we're seeing across Australia. In saying that, a lot of the markets we're exposed to have had better return to work rates than what we've seen in Sydney and Melbourne. If you think about Brisbane, Perth particularly, they have almost normalized to pre-COVID levels. I think it's more that Sydney and Melbourne are catching up to where other markets are already at.
Yep, makes sense. thanks very much, Grant, and then well done today on the result.
Thank you for the questions. One moment for the next questions. Next up, we have Tribhuvan Bhandari from Morgan Stanley. Please proceed with your questions.
Hi. Good morning, Grant, Belinda. I just got a follow-up question. The 24,000 square meters of new leases that you signed in HY, in the first half, will they contribute to second half earnings, or are they more delayed starts? I'm more referring to Melbourne Street rather than Bourke Street, which you covered off on in the previous question.
The three material parts of the agreement that we discussed today pretty much all impact the start of FY 2024 or through the first half of FY 2024. At 154 Melbourne Street, we have done slightly better leasing than what we anticipated, but it's still not going to have a material impact on FY 2023 earnings. We are most likely to incur slightly higher debt costs than what we initially forecasted, and that will be offset by the slightly better leasing that we've done through that period.
Okay. What contributed to rent in the first half will be pretty much be the same as the bucket that will be contributing to rent in the second half, and it's not until FY first half of 2024 when we should see a kick up in genuine, you know, rent generating occupancy. Is that correct?
Correct.
Okay, cool. Hey, can you walk us through the economics of this SERC by Centuria? I appreciate you've put slide 10 there in the pack, but like, can you give us some numbers, you know, in terms of the sort of returns you're expecting or the rent you're charging relative to, say, the rest of the building in Help Street or Melbourne Street?
COF is a trust, we can't operate a business. The way the scenario works is that C&I has effectively taken a lease over that space.
Right.
that business. In terms of the reason why Centuria has looked at these assets and looked at the co-working business, I think we have a firm view that co-working is pretty ubiquitous in the particularly Sydney, Melbourne CBD, but in a lot of the markets that we're invested into, there is an under supply of co-working opportunities. Having this flexible workspace business, we think will not only add amenity to obviously the CF portfolio, but provide a business opportunity for the wider group.
Okay, fair enough. Capital management. I've seen in slide 13 your weighted average hedge maturity. It was about 1 year, 6 months ago. Passage of time is still now 1 year. Can I assume that COF strategy is to just keep a weighted average hedge maturity of 12 months going forward? Do you have any intention of getting longer dated hedges? Would you rather just short-term stuff, at least, for now?
Look, I wouldn't say that that will be consistent with what we'll do going forward. I think as we mentioned at 30 June or the 30 June results, we are taking a flexible approach to hedging. We meet on a monthly basis to discuss where our hedging sits and what opportunities are available within the market, and there is a lot of monitoring of where the yield curve is. Now, obviously there's an inverted yield curve at the moment, so there potentially is opportunity to put in some longer dated hedging. It really is a matter of taking the opportunity to present themselves through the course of the year. I wouldn't say that where we'll be at 30 June will be entirely consistent with 31 December.
Great. Just my last question. Your, your cap rate moved 17 bips last half. What are your thoughts on how we should think about cap rates for the next 6 months?
Look, I think a lot of that will be determined by what happens in terms of market evidence. As mentioned in the call, there has been bifurcation. We continue to see some pretty strong sales for quality assets. Assets that have sold on softer metrics generally have either substantial vacancy or some material lease expiry risk. So I think that may start to become more evident as we go forward, but obviously it will be driven by what transactions occur. One thing to, I think, consider for COF, we're starting from the weighted average cap rate of 5.75%, which is probably gonna be higher than some of our peers. To an extent, I think we are coming off a more sustainable base.
That's terrific. Thanks very much, Grant.
Further questions. One moment for the next questions. Next question we have to live from Tom Bodor from UBS. Please proceed.
Morning, Grant. Just was interested in your valuations. There's a comment there about the heads of agreement not being included in the vals. My question is, you know, are the heads of agreements that you've achieved at sort of better or worse levels than sort of the market assumptions, the valuers used in those vals? Or put another way, do you expect the heads of agreements and the leasing there to be accretive to your vals?
Like on a standalone basis, I expect them to be beneficial to valuations. If for no other reasons, you are mitigating downtime. In terms of rents that we are likely to achieve, they hopefully will be somewhat better than where a valuer would have assumed prior to the lease commencing. I think there would be some opportunity for valuation appreciation based on those leases. Consistent with my prior comment to Simon, I think valuations in totality will be dependent on what transaction evidence we see between now and 30 June.
Okay. No, that's clear. Thank you. Then on 818 Bourke Street, just back to that lease. Last time we spoke, I think it was temporary project space.
Operator, can you confirm whether we are still on the line?
Yes, certainly.
Can you confirm whether Tom Bodor is still on the line?
Tom, we can still hear you. Maybe we would like to press star one one again, while I take the next questions.
Just before you take the next question to preempt what Tom was asking in totality, Tom was alluding to at the half year, we did have project space within 818 Bourke Street from CPB. CPB are not proceeding. They are not one of the tenants that has taken a heads of agreement over that space.
Thank you. One moment for the next questions. Next question is from Andy McFarlane from Jarden. Please proceed.
Oh, hi, team. Thanks, Tom. just a quick one, this one for me. Looking at cash flow statement, it looks like there's been a reasonable pickup in payment supply. I'm just wondering, is that reflecting a pickup in lease incentives that have been paid? If it does that include, you know, 818 Bourke, where there's been a large trench done, on Oaks and Heads, or are you expecting that to come through later in terms of what that means from a cash position perspective?
I'd imagine, Andy, that if you recall, we are funding through a development in Adelaide. That is most likely where a significant portion of what would appear to be our CapEx spend is being directed. It hasn't been in relation to any increasing incentives or capital works that we're undertaking across the broader portfolio.
Okay. No problem. Another question, I guess, just to follow up is just around the budget for incentive. What are you sort of thinking you're expecting to be paying in terms of incentives over the course of FY23?
It does vary state by state. What we're seeing is that incentives are relatively stable across all markets. In the markets where we are seeing rental growth, we haven't seen a reduction in incentives yet. At this stage, we are still forecasting incentives to be pretty consistent with what we've been paying for the last 12 to 18 months.
Cool. That's helpful. Thanks, guys.
Cheers, then.
Thank you for the questions. One moment for the next question. The next question comes from the line of Murray Connellan from Moelis Australia. Please lead.
Morning, Grant. Morning, Belinda. Congrats on a good result. Was just wondering whether you could unpack some of the leasing spreads that you've been seeing across the leasing that's been done in a bit more detail, please?
Sure. In terms of our leasing spreads across the portfolio, the average is about a 2% increase. Again, there was some variation state by state based on that. As mentioned on the call, the most pronounced leasing or most pronounced rental growth we are seeing at the moment is in Brisbane and to a less extent, Canberra and Perth.
Great. Just in terms of the levels of vacancy that we're seeing across the sector more broadly seems to have been a mixed bag node by node over the last over the last half. Would you be able to just give a bit more color in terms of which sectors you're seeing from an industry perspective that are more active in the leasing market at the moment, you know, where the inquiry is coming from, and then, you know, whether there are any standouts in terms of those looking to let go of space or reduce footprint at the moment?
I think the industries that have been most under pressure, and this is probably manifested in the performance of Sydney, financial services and tech have probably been two industries that have reduced their take-up of space. The benefit for COF is we don't have a lot of exposure to both those industries. If you think about things that are doing quite well at the moment, infrastructure, mining related services, the markets we're invested into, like Brisbane and Perth, have definitely been benefiting from those types of industry taking additional space.
Great. Thanks very much.
Thank you for the questions. As a reminder, to ask questions, please press star one one on your telephone. There are no further questions at this time. I'd like to hand it back to Grant for closing.
Once again, thanks for your interest in the Centuria Office REIT. If you have any follow-up questions, please don't hesitate to reach out to either myself or Tim Mitchell. Otherwise, thank you and have a nice day.
This concludes our conference for today. Thank you for your participation. You may now disconnect your line.