Thank you for standing by, Welcome to the Precinct Properties 2021 Full Year Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by one on your telephone keypad. I would now like to hand the conference over to Mr. Scott Pritchard, CEO. Please go ahead.
Thanks, Jesse, and good morning, everyone, and welcome to the 2021 annual result briefing for Precinct Properties. I'm joined today by George Crawford, Precinct's Deputy CEO, and Richard Hilder, Precinct's CFO. The 2021 financial year has certainly been unique, where at the start of the year, we all had considerable concern over the impact of COVID on the global and local economy and the impact of these factors would have on our industry and our business. Despite a range of challenges throughout the year, the position we find ourselves in is very satisfying, operating in an economic environment which remains very supportive for the Precinct business. The program for today's call is outlined on page two of the presentation. I'll shortly provide an overview of the highlights of the result before touching on some major themes and reviewing Precinct's progress relative to our strategy.
I'll then hand over to Richard, who'll cover the financial result before George provides an overview of our markets and our operational performance. I will provide an update on our development activity, and as usual, we will be delighted to answer your questions on conclusion of the call. Moving to the highlights page. This year, as outlined on this slide, there are a number of highlights for the business. Most pleasing is the further growth in our AFFO, which has led to a 3% increase in our dividend for the FY21 year, with a full-year dividend of NZD 0.065 per share. We are really proud of our AFFO and dividend profile, having lifted our dividend every year since 2015, and are excited to announce a further increase of 3.1% for the FY22 period, lifting our dividend to NZD 0.067 per share.
We've had a very active year with regards to our capital management with the sale of the ANZ Centre, our first green bond issue, and our recent NZD 250 million equity raising. These initiatives place the business in a strong position with gearing at just 28%. Also pleasing is our operating performance, particularly during an apparent challenging period for office buildings. We have maintained our portfolio occupancy at 98% and have completed a significant amount of leasing in the period. We've successfully completed 10 Madden Street, and consistent with our ESG strategy, have once again lifted our GRESB score to 83, which is considerably ahead of the global average of 70. Turning to page four, the decision by the independent directors in March to internalize the management of Precinct was a key moment in the evolution of the business.
Precinct Properties was listed on the NZX in 1997 as an externally managed trust and has evolved significantly, particularly in the last 10 years as it has been corporatized, rebranded, adopted a new strategy, and has now been fully internalized. This decision places the business in a strong position to now leverage its market position and the experience and learnings of the management team as it looks to take advantage of market opportunities in the future. Our strategy has been well established and proven over the past six years as the business has developed NZD 1.5 billion of premium-grade real estate, which now forms the basis of our highly sustainable NZD 3.3 billion investment portfolio. The strategy has delivered sustainable and consistent growth in our AFFO and dividend since 2016, with annualized growth of around 4% per annum over that five-year period.
To build on this success, following the recent decision to internalize, the business is now considering its strategic options and believes the opportunity to access and utilize third-party capital could be a natural next step for the business. With significant opportunities in the market which present a large requirement for capital, the Precinct business will look to access this market to take advantage of these opportunities and present higher returns for our shareholders. Over the page, we focus in on the progress made relative to our strategy, which encompasses operational excellence, developing the future, and empowering our people. Most pleasing has been the performance of our business during a challenging year brought about by COVID and the inability for many of our occupiers to access their offices.
Despite these challenges, the business has maintained its occupancy levels, has completed a significant amount of leasing, and has once again met its AFFO guidance. We have completed a further development at 10 Madden Street and now have under construction NZD 800 million of development activity, with pre-leasing at an incredibly high level of 90%. Following the internalization in March, we have strengthened our management team following the decision by Precinct to hire staff from the previous manager. This internalization now offers the opportunity for greater alignment, a lower cost base, and a direct line to the Precinct board. Page seven sets out a summary of the key themes which we are observing in our markets, many of which are consistent with previous years.
These key themes are the city center, occupier markets, construction costs, and the impact of inflation. The city center has without doubt been impacted by COVID, with many refusing to return to the city until such time as it was deemed safe. With the period of time since the last lockdown extending, it is clear that we are seeing increasing levels of foot traffic returning to our cities. In Auckland, this first became evident during the America's Cup in March and has significantly improved over the past four months. The occupier market definitely has winners and losers. We are seeing significant demand for our assets, particularly those located on the waterfront in Auckland or in seismically strong buildings in Wellington. Those assets located in inferior locations or suffering from seismic issues are being left vacant and are not attracting occupier interest.
It is very clear that businesses are now making conscious decisions to lease very high-quality space in order to ensure that their workforce want to come back to the office. This time last year, we predicted that the construction market would soften and that we would see cost reductions due to projects being placed on hold and demand for work reducing. This has not played out as the construction market has continued to grow and with a very clear skills shortage evident, our expectation now is for costs to continue to increase. Finally, inflation. Our view is that Precinct is well-placed to manage a higher inflation environment with under-renting in the portfolio, structured rental increases and regular market reviews, as well as a very clear pricing power given the quality of the real estate and high occupancy levels, the business is well-placed to provide a good hedge against inflation.
Turning to page eight. As outlined, we are continuing to see a sustained recovery in the number of visitors to the city center. Pedestrian flows and the use of public transport remain strong and are continuing to grow month-on-month. Increased pedestrian flows are driving better sales in recent months at Commercial Bay, which is particularly pleasing. In Wellington, demand for office space continues to grow as government looks to shift their workforce into seismically resilient buildings and as their workforce grows. On page nine, we continue to see a recovery in the number of workers in our portfolio. As measured by the consumption rate from two of our most stable assets, we believe that between 85% and 90% of our occupiers' workers are now back in the office.
This return to the office, coupled with the material increase in leasing inquiry at Generator, gives plenty of insight into the increased demand that we are seeing. Across our client base, 95% of our clients require the same or more space to cater for their business needs. We have surveyed our clients who have recently entered into new leases to understand the drivers for their new premises. The findings of these survey results are outlined on page 10 and highlight that a major focus on their own employees is the key driver for choosing well-located and new office premises. Occupiers are prioritizing high-quality workspace to attract workers back into the office and are designing different ways of working with increased collaboration and lower density ratios. I'd now like to hand over to Richard to take you through the financial result.
Thank you. Good morning, everyone. It was an eventful year for Precinct, and it is pleasing to report total comprehensive income after tax of around NZD 180 million. This result was a significant improvement compared to last year and reflects the strong revaluation gain of NZD 283 million and a 21% increase in operating income. Partly offsetting these, the arrangement agreed in March to terminate the management services agreement and internalize the management of Precinct saw a one-off termination expense recorded for the period. Importantly, under the new internalized structure, Precinct has already benefited from net savings of NZD 6 million due to fees associated with leasing, development, acquisitions, and base management services not being payable. Management expenses for the quarter remained consistent to those presented in the March announcement. Turning to the next slides.
Net property income increased 28% to NZD 124 million, which was largely due to development completions, in particular, Commercial Bay. The decanting of 1 Queen Street and the sale of Pastoral House and ANZ Centre offset a portion of this increase. The period was again impacted by the effects of COVID, with Auckland and Wellington experiencing lockdowns. Precinct supported retail businesses with most of the NZD 1.1 million of support provided in the first half of the financial year. Adjusting for transactions and COVID abatements, like-for-like net property income rose 1.2%, with Wellington showing strong growth of 2.2%. Border restrictions impacted both retailers and restaurants targeting international tourists. As a result, Commercial Bay retail income was lower in the second half, following wash-ups for some retailers with gross occupancy cost clauses within their leases.
As mentioned, we supported retailers during the period, and this also saw us invest more in non-recoverable marketing and promotion activity. The border restrictions, combined with lockdowns and construction delays, resulted in a disruptive environment for our operating businesses, with Generator and Commercial Bay Hospitality generating a net property income loss for the period of NZD 3.6 million. Turning to the next slides, it was pleasing to see our preferred measure of operational performance, funds from operations, grow by 6.5% to NZD 0.0734 per share. This increase resulted from a higher level of cash flow generated from our investment portfolio and a favorable tax expense after adjusting for the termination payment. Adjusted funds from operations, which measures our dividend paying capacity, also increased, but by slightly less. This was due to higher leasing costs associated with historical leasing deals at 188 Quay Street.
The 2021 dividend of NZD 0.065 per share was 3% higher than the previous year and reflected an AFFO payout ratio of 100%. The following slide provides an overview of our tax expense. As noted, Precinct recorded a positive tax position for the financial year of NZD 67.8 million. The positive position is due to the reintroduction of depreciation on building structure, prior period contaminant expenditure, and the payment relating to the termination of the management contract being deductible for income tax purposes. A deferred tax asset relating to tax losses carried forward has now been recognized on the balance sheet. Precinct will continue to recognize a tax expense moving forward. No payments will be required until the deferred tax asset has been fully utilized.
Tax expense for FY22 is expected to remain low, mainly due to high depreciation, contamination expenditure, and the disposal of depreciable assets at 1 Queen Street. Slide 16 provides a valuation overview. The revaluation movement reflected a 9% increase on book values. Excluding developments, the investment portfolio saw a 9.3% increase, with Wellington assets recording an almost 15% uplift. Overall, cap rates across the office portfolio have firmed 50 basis points to 4.8%, with Wellington cap rates firming 78 basis points driven by a strong investment market. As mentioned, in February, the occupier market in Wellington remained strong due to demand for quality, seismically resilient buildings and a growing government workforce. This demand has resulted in market rental growth for the Wellington assets. In Auckland, the revaluation reflected a 7% increase on book values, with cap rates firming 40 basis points and market rents remaining largely flat.
Despite the cap rate for Commercial Bay retail remaining unchanged, the asset saw a 7.6% devaluation, which was largely due to lower assumed market rents because of reduced turnover assumptions in response to COVID. As at 30 June, the portfolio value totals NZD 3.3 billion, with Precinct's NAV per share at balance date increasing to NZD 1.52. Turning to the next slide. We completed around NZD 800 million of capital management initiatives in the period. These combined transactions will continue to support our strategy and have positioned Precinct for future growth. As at June, gearing, which excludes the convertible note, was 28%, well below our banking covenant of 50%. As previously guided, we expect to convert the convertible note to equity next month. Overall, we are pleased at how this instrument has performed for Precinct over the past four years, enabling us to execute our strategy in matching capital to developments.
Total committed funding is NZD 1.6 billion, with the weighted average term to expiry excluding the convertible note of 3.8 years. Our weighted average interest rate has reduced to 3.4%. Committed development cash flows have been partially hedged by forward swap agreements, with average hedging over the next three years of around 60%. We remain comfortable at these levels given COVID uncertainty and continue to provide earnings guidance based on forward interest rates. Interest coverage for the 12 months was 2.4 times against a covenant of 1.75 times. This is set to improve in coming periods following the recent equity issue and the conversion of the convertible note. Turning to slide 18. We remain focused on GRESB as our key ESG measure. For real estate entities, this remains the best measure and includes over 1,200 participants across NZD 1.4 trillion of assets.
Australian listed and unlisted companies are leaders in this space, with around half of all participants recognized as global leaders. GRESB scoring continues to evolve, with the organization looking to integrate TCFD and incorporate scientific targets. We have made further progress this year with the establishment of our sustainable debt program and the disclosure of our climate-related risks. In addition, we have begun to quantify the embodied carbon associated with our developments and have measured and saved or offset around 20,000 tonnes of CO2 equivalent emissions. This is important given the embodied emissions can contribute 30%-40% of a building's total emissions over its lifespan. Finally, we have confidence in our earnings outlook and the potential for future dividend growth.
Our portfolio is well-positioned, benefiting from quality occupiers under renting of 6%, a long WALT, high occupancy levels, and lease review structures that will generate earnings growth. These portfolio characteristics should also see our maintenance and leasing costs remain low for some time. The developments to be completed over the next couple of years will provide additional earnings accretion with an attractive average yield on cost of over 6%. Thank you. I'd now like to hand over to George.
Thanks, Richard, and good morning. Turning to section two, the state of our markets over the last year has closely reflected the impacts of COVID-19 on the broader economy. The first half of the year was dominated by the immediate impacts of lockdowns. These had the greatest impact on the flexible space and city center retail markets, as well as subduing office lease activity. The second half of the year has very much been a story of recovery. The return to the office, strong economic growth, and an increase in employment, has underpinned strong demand for prime office leasing. Employers are keen to attract people back to the office and are choosing good locations and high-quality buildings.
These same drivers of economic growth, high employment, and a return of people to the city centers, has also led to a solid recovery in city center prime retail, albeit with effects still felt from the absence of tourists. Turning to page 22. Auckland city center office is experiencing strengthening demand. The two-tier market for location and building quality is becoming increasingly clear. This is shown by the chart on the top right-hand side, with prime waterfront vacancy remaining very low at around 3%, but prime vacancy outside the waterfront precinct increasing to close to 15%. Our own experience backs this up and indicates a structural change in the market, with several examples of us securing leasing deals against competition offering much more aggressive terms. Over the last 6 months, our average Auckland incentive has been around 5%, compared with the market average of 15% reported by JLL.
Turning to Wellington, the market continues to be underpinned by strong public sector demand, a shift to quality, and away from buildings with compromised earthquake safety. This is supporting ongoing material rental growth, which is required to deliver the quality of buildings that the market is demanding, with JLL reporting a compound growth rate since the Kaikoura earthquake of around 4% annualized. Turning to page 24. As Richard noted, we've seen continued cap rate firming over the last six months. While we expect that interest rates are set to rise, our view is that the weight of capital looking for yielding assets and the extent of spread to bond rates, will continue to underpin valuations. Moving to section three, operations, and on page 26. Pleasingly, we have been able to secure some exceptionally good leasing over the year from very high-quality occupiers on strong leasing terms.
We have completed over 35,000 sq m in total for an average term of 11.2 years. This underpins our long-weighted average lease term of 7.7 years, which increases to 8.9 years if development leasing is included. Leasing demand, reflecting the shift to quality, has been particularly strong in our development assets, with new long leases secured to Deloitte, KPMG and Waka Kotahi NZ Transport Agency. We have also had substantial portfolio leasing completed of over 15,000 sq m, with a highlight being a new nine-year lease with naming rights to our existing client, Aon, at what was previously the ANZ Centre. Rental levels achieved across the portfolio have generally remained steady, with some growth occurring across renewals and new leases. For new buildings, we've achieved rental outcomes in line with our feasibilities, and the volume of leasing completed reflects the strength of that demand.
On page 27, we have a unique ability in the market to offer options across the office space spectrum. Most RFPs coming to market have some element of flexible space requirement, and our ability to offer this is a real strength. Building on the success of our private office suites at level 36 of PwC Tower, we are underway with another floor at level 17 of HSBC Tower. This is now under construction for completion later this year, and with marketing still to commence, we have already sold three of the five suites. Scott will shortly cover the 1 Queen redevelopment, and we see this as being a good potential use for the lower levels of 1 Queen Street. Turning to page 28. Our portfolio remains in very good shape with quality occupiers, a long weighted average lease term, and a high level of structured growth.
Focusing on our occupiers, we believe that in general, they are well-positioned to benefit from the current climate. The current environment clearly favors headcount growth in government departments, while professional services businesses are reporting very high activity levels. Technology is another key area of exposure for us, and we continue to see strong demand growth from this industry. Turning to Commercial Bay retail on pages 29 and 30. As already noted, the conditions in which we launched over the past year have been challenging, and in that context, we're pleased with the performance to date. The improvements in trading over the last six months give us confidence in Commercial Bay's success and reflects an increasing normalization of the city center, not just from the effects of COVID-19, but also from the extensive city center works.
Over the last six months, we've had the completion of the Lower Albert Street bus interchange, as well as the streetscapes on Quay Street and Lower Queen Street, and the opening of the public spaces at Te Komititanga and Te Wānanga. As shown in the chart on the bottom of page 30, since the end of the last lockdown in March, we've seen a significant and sustained improvement in foot traffic month on month for Commercial Bay, with July foot traffic up 42% compared to April levels. Moving to page 31, Generator was impacted during the year by the loss of events revenue due to lockdowns, as well as the contraction of member businesses, with occupancy declining from 89% at June 2020 to a low of 65%. We moved quickly to control costs, and as a consequence, we've achieved a result close to break even for the year.
Pleasingly, the recovery has been swift, with events revenue in particular bouncing back strongly, and occupancy now recovering to sit at 71% at 30 June. The sales pipeline is supporting the continued recovery, and we're seeing growth from a range of occupiers, with global technology and pharmaceutical companies particularly notable. We've also strengthened our relationships with member businesses over the last year as we've supported them through contraction and now back to growth, as well as using Generator to support businesses in dealing with the uncertainties that COVID brought to their workspace plans. We're looking forward to a successful opening of our first Generator site in Wellington in November and are experiencing good forward interest. Finally, before I hand back to Scott, on page 32, I'd like to provide an update on our transactions and opportunities.
We're pleased to have recently been able to execute on two Wellington acquisitions, which offer a strong opportunity for value accretion through building on our market position and leveraging our development capability. We see the potential for further opportunities in Wellington to take advantage of the strong market conditions there, which are supportive of development. Turning to Auckland opportunities, Auckland Council has announced their intent to undertake a market process for the sale and redevelopment of the downtown car park, and we intend to participate in that process. In considering how we best optimize shareholder returns from the range of opportunities that we are seeing, the potential benefits from partnering with other capital providers are being actively explored. Thank you, and I'll hand back to Scott.
Thanks, George. Turning to the development section. Page 34 sets out a summary of our current development commitments. Pleasingly, we have reestablished our development pipeline with around NZD 800 million of developments underway. We expect to secure a blended return on cost of 22% and a blended yield on cost of around 6.1%. Importantly, in the period, we have leased close to 20,000 sq m of development space, significantly ahead of completion, which has de-risked our development activities. Turning to page 35 and focusing on Bowen Campus Stage two. This project has progressed very well for Precinct. Since the commitment to 40 Bowen Street in June 2020, we have since committed to the second building at 44 Bowen Street and increased our overall leasing to 87%. Following the leasing to Waka Kotahi in 44 Bowen Street, this building is now 100% leased.
Pleasingly, we remain on budget and on program for these works, despite some challenges with supply chain and sourcing materials. Page 36 provides an overview of the Deloitte Centre, formerly known as 1 Queen Street. We recommenced construction just a couple of months ago and have started deconstruction of the existing facade. Having varied the lease with Bell Gully and the management agreement with the InterContinental Hotels Group for the hotel, this has paved the way for a new leasing deal with Deloitte, which we recently concluded. This new 20-year lease to Deloitte represents the ongoing demand for Precinct's portfolio, particularly within the Commercial Bay precinct. The remaining committed developments consist of 30 Waring Taylor and Bowen House, both in Wellington. Waring Taylor Street is a small redevelopment which will be the first launch for the Generator business in Wellington, set to open in November this year.
While Bowen House works commenced just last week, having entered into a new construction contract with LT McGuinness to undertake these works. The future pipeline of developments is set out on page 38 and includes Wynyard Quarter stages III and IV, as well as the Freyberg Building in Wellington. We expect to commit to the next stage of Wynyard Quarter in the next 6-12 months, having registered continued interest for these last remaining waterfront sites in Auckland. In addition, in having acquired the Freyberg Building earlier this year, our plan is to secure further holding income to give us sufficient time to redesign the building and commence works in the next 12-24 months. We believe this redevelopment opportunity is well-placed to take advantage of future demand in the Wellington market. In terms of the outlook, there is no doubt that we remain in uncertain times.
The strength of the economy and continued growth and demand for office space gives us confidence that we are very well-placed. Precinct has demonstrated a great deal of resilience in the past 18 months, and we expect to leverage the quality of our portfolio into the future. With the internalization now complete, the management team, along with Precinct's board, is considering its strategic options, with a likely outcome that we will look to utilize and access third-party capital as we look to take advantage of future opportunities in the market. Our business is well-placed, and with the changing workplace demands and a desire from business to occupy high-quality space in order to engage and attract their employee base, we feel confident that we will continue to attract high-quality occupiers and once again increase our AFFO and our dividend in the next financial period.
That brings us to the end of our presentation, and we look forward to any questions that you might have.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel the request, please press star two. If you are in the speaker phone, please pick up the handset to ask your question . Our first question comes from Arie Dekker with Jarden. Please go ahead.
Oh, good morning, guys. Yeah, just firstly, Richard, just in terms of indirect costs, where do you sort of, on a post-internalization basis, expect them to sit in FY22?
Yeah, they're a little bit higher this year, Arie. There's feasibility costs attached with Merrill Drive sitting in there. Also, higher tax costs, given the work we did around contamination, and also the interim valuations that we did. There's a few costs that ran into this year that won't be there moving forward. I'd probably bring that back NZD 1 million or so.
Okay. Thanks. Just in terms of CBHL, can you just sort of talk to what's going on there and what your expectations for FY 2022 are?
Thanks, Arie. The net outcome of CBHL this year is obviously pretty significantly impacted by lockdowns and also sort of getting those venues open. It's important to note that through those entities, they've been charged full rent, they've also been charged a pretty significant fit-out rent as well. They haven't been given the benefit of any kind of relief like all of our other retailers have. In terms of looking at it holistically, it's important to consider those other factors. Having said that, there's no doubt that we're looking to improve the financial performance of those venues in the next 12 months, our early indications, particularly over the last two or three months, is that they're beginning to trade really quite well. We're encouraged by that.
We will have an expectation over the next 12 months that they'll perform considerably better than what they have from a financial perspective anyway, in the next 12 months.
Okay, thanks. Just on the strategic options, you've sort of outlined third-party capital and also a couple of passive, active there, and then the city-centre residential development. Can you just talk a little bit to what your thinking is there and how you might sort of approach that?
Yeah, our view around accessing third-party capital, I think the reality is we are seeing a lot of opportunity at the moment. The fact is I don't think we can fund all of it ourselves. We've learnt a lot over the last five or six years. The business obviously had to de-gear very significantly to allow it to be able to fund its recent developments, including Commercial Bay. The benefit, of course, is that it owns it outright at the end. I think looking at what's in front of us now, I think we'll be able to provide better returns to our shareholders if we do seek third-party capital to help us take advantage of those opportunities. I think we can actually enhance our returns in doing that. That's from a sort of an active perspective.
There's also a potential for sort of passive third-party capital as well, so we're exploring that. In terms of residential, particularly in Auckland for us, we see it as being a market that's quite open, particularly for capable developers, institutional developers that have access to capital and are looking to develop really high-quality residential. We're probably thinking more build to sell than build to rent at this stage. Build to rent's still looking pretty tough. Some of the sites that we are looking at, some of which won't be a surprise to you, we think will probably have a natural bent for residential. That's where we'll also use third-party capital, and it might be that that third-party capital provider also has capability in this area.
Just in terms of the way it's presented, on the residential development, you're not precluding that involving third-party capital as well?
That's right.
Yeah. Okay. Just with Wynyard, in terms of your preferred approach on doing stage three, and then I guess just what you're sort of looking to ahead of making final commitment there?
The next stage, well, there's two stages really. There's two buildings left to build, each of which is about 10,000 meters. We'll look to proceed with one of those buildings. We will be very happy to do that on an uncommitted basis. We're seeing really strong demand for new space at the moment, particularly in those locations where businesses are identifying that they need to position themselves in order to attract workers. With unemployment at 4%, we're seeing this kind of war for talent intensify. I think the consequence of that is that they're using premises as a real lever to try and attract staff.
Our view is that we could either wait and pre-commit and take 12 to 18 months to do that, or we go, and we feel like there's more than enough demand in the market for us to go on an uncommitted basis for one of those buildings.
Sure. In that precinct, is there enough demand for more, I guess, short-term leasing or, and smaller suite space? Do you expect that to be a feature of when you have stage three?
Potentially. One of the things about the business now is that once you roll in our development leasing, we've got a weighted average lease term of eight and a half or nine years. We're really not opposed to doing shorter leases. If you look at sort of some other larger markets globally, what businesses are really valuing at the moment is flexibility, shorter leases. Given the platform of our portfolio, we're definitely able to offer both of those. That puts us in a unique position, particularly when you think about other developers in the Auckland market who, they must get 10-12-year leases in order to be able to exit their assets. We'll be looking quite happily to do leases of sub-six years.
Great. Thanks for that.
Thanks, Arie.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Nick Mar with Macquarie. Please go ahead.
Hey, guys. Just a quick one on the like-to-like rental growth. Could you just talk through how that's kind of made up in the context of some of those reviews or new leasing being at a premium? What's dragged down, I guess, the Auckland growth given, a lot of it's on fixed at the moment?
Yeah. Hey, Nick, George here. Overall, we've got a 7% growth on new leasing, as compared with previous contract rentals. That's on net rents. That is made up of a growth of around 9% for Auckland and fairly flat for Wellington. The reason for Wellington being flat on that is we have some gross rental growth but increase in operating expenses. For Auckland leasing, that would indicate 3% or so per annum from what's previously been indicated.
Also in like-for-like in Auckland, the building that we are in, HSBC Tower for the second half had quite a lot of, I suppose, structural vacancy. There's works being done for the backfilling of the space. Just the half was a little bit low.
Yes. What was kind of average occupancy over the year then versus the PCP when you're doing the like-for-likes?
It would've been slightly lower versus committed leasing. Don't have that number to hand. Sorry, Nick.
Okay.
The timing of Commercial Bay completing 2020 was higher.
Yeah. Okay. Just on the potential residential strategy, if you are doing build to sell, does that have a material impact on the tax status of the business overall?
No, it doesn't. We've had that kind of advice that we can do that.
Okay. No, that's great. Thank you.
Thanks, Nick.
Thank you. The next question comes from Jeremy Kincaid with UBS. Please go ahead.
Good morning, team. Just one question from me. It looks like 204 Quay Street has jumped on the balance sheet. I just wonder if you could talk to the nature of that property. Is it freehold or leasehold? I suppose, the development opportunities with that, given if it is leasehold or freehold.
Sure, Jeremy. Yes, the business has acquired 204 Quay Street. Purpose really of that acquisition is twofold. One is that it's a waterfront-located office and hospitality building, so sits within our strategy pretty comfortably. It's leasehold, perpetually renewable, and the freehold owner is VHHL. We've done a fair amount of work in regard to the current passing leasehold rental level, and we're very comfortable with the level of rent that it's attracting at the moment. Strategically, very important for us. It's adjacent to a target acquisition for us, and that's about as much as I can say about that target acquisition.
Great. Thank you.
Thanks, Jeremy.
Thank you. The next question comes from James Wallace with Craigs Investment Partners. Please go ahead.
Morning, team. Just one from me. On construction costs, you kind of noted in the presentation that supply chain pressures were presenting risks to your project programs. I was just wondering if you could give a bit more color around what kind of risk you're potentially exposed to in developments around, was it more timeline or cost impacts? Yeah, if you could just give some color there, I'd appreciate it. Thanks.
Yeah. Thanks, James. Definitely far more focused on the supply chain and sourcing and delivery of materials. Right now I can tell you that there is a ship carrying the remaining steel for Bowen Campus stage two that's supposed to make its way into the Wellington harbor this afternoon at about 3:00 P.M. The project team is awaiting that shipment and delivery. The thing that we're finding is, in terms of sourcing materials from offshore, if those materials miss a shipment, then there can be significant delays, and just because there's so much tension on the capacity of those delivery lines. How that plays out is that if you miss a delivery, then you're going to face some pretty significant delays. Those delays will go to program. That program extension will go to cost because your project will continue for longer.
You'll have longer holding costs, obviously, but also you might face potential liquidated damages. We are monitoring all of our supply chain risk incredibly closely with our main contractors at the moment.
Yeah. Thanks. I guess just in terms of your timelines, I guess if you, in terms of your current assessment, you've put that buffer into your timelines, or you update as you go, or?
No. Yeah. We always carry contingency in our projects, both financially but also in program. At this stage, we feel really comfortable about our program, and to date, based on the kind of approach we have to managing the risk, that we're on top of it, without question. Feeling good about our target completion dates across the development book at the moment.
All right. Thanks.
Thanks, James.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Pritchard for closing remarks.
Thanks, Jesse. Look, once again, just want to thank everyone for dialing into the call. We are pleased to make our way through what has been a really eventful and challenging year. To once again hit our guidance, continue our path, our AFFO and dividend path, which we are very proud of, is really pleasing. Thanks for your support, and look forward to keeping in touch with everyone in the next few days. Cheers.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.