I would now like to hand the conference over to Mr. Scott Pritchard, CEO. Please go ahead.
Thanks, Kaylee, good morning, everyone, welcome to the 2020 annual result briefing for Precinct Properties. I'm joined today by George Crawford, Precinct's Chief Operating Officer, and Richard Hilder, Precinct's Chief Financial Officer. As we are all aware, the 2020 financial year has been incredibly challenging, with the impact of COVID-19 on our country, our industry, and on our business. Despite these challenges, our business has continued to move forward, in particular, has completed the largest development in our history, which has placed our business now in a very strong position. The program for today's call is outlined on page two of the presentation. I will 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 will hand over to Richard, who will cover off the financial result before George provides an overview of our markets and our operational performance. Following that, I will provide an update on our development activity. As usual, we will be delighted to answer any questions at conclusion of the call. Moving to the highlights page. This year, as outlined on this page, there are a number of highlights for the business. Most notably is the further growth in our AFFO, which has led to a 5% increase in our dividend for the FY 2020 year. Also pleasing is our operating performance, particularly now that we have completed Commercial Bay and have a portfolio that is 98% occupied with an eight-year weighted average lease term.
Further leasing on the new PwC Tower, taking it to 97% leased, and the commencement of works at Bowen Stage 2 following further leasing are also key highlights in the period. Turning to page four and our strategy. Our strategy has been well-published over the past eight years as we have reviewed, refined, and adjusted our strategy as we have progressed. We've set out the key moves, and in particular, highlighted the establishment and now the conclusion of our 2020 vision. Looking forward, we're excited to continue to develop our pipeline of development opportunities, growing our market position in the flex space and co-working market, and looking to secure future opportunities to grow value for shareholders. Over the page, we focus in on the transformation that has occurred from the 2020 vision and the benefits which have accrued to shareholders.
Most obviously, we have established some time ago a sustainable dividend policy, which is backed by AFFO and is now demonstrating the benefits of our strategy. As outlined in today's announcement, we are guiding to a lift in the FY 2021 dividend to NZD 0.065 per share. In driving this transformational change, we have significantly improved the quality and the resilience of our portfolio. Through divesting B grade assets and investing into new premium grade assets, we have attracted long-term leases with high-quality occupiers, and the portfolio is well leased, providing for a high degree of certainty that the rents will be paid. Over the page, we focus on the additional aspects of our strategy, which supports the outperformance that we strive for. Our key sustainability elements comprising our people, operational excellence, and our development activities underpin the functions of our business.
In addition, we have identified that in order to drive outperformance, we believe we can achieve this through our portfolio by way of stock selection, through our development activities, and finally, through our operating activities, in particular at Commercial Bay Retail and through Generator. Page seven sets out a summary of the key themes which we are observing in our markets, some of which are even more topical given that we have moved into alert level three here in Auckland yesterday. The key themes are working from home, our occupier markets, our views on the construction market, and the activity levels in the city centre. I will comment briefly on each of these themes, but take a closer look at both working from home and city centr e activity levels. There has been much debate about the merits and effectiveness of working from home.
Our sense is that there has been some impacts to the office market, but we don't see those impacts as being materially detrimental to the market. I'll spend a bit more time on work from home shortly. Our occupier markets remain relatively resilient. In Auckland, there is expected to be more volatility in demand from occupiers. However, we are heading into this challenging period with the majority of new supply already leased and with the supply-demand balance at equilibrium. In Wellington, we see this market as continuing to remain quite strong. This is underpinned by demand from central government in a market which is also facing a significant amount of obsolescence.
In our view, the construction market, particularly vertical construction, will undoubtedly soften over the next 12 months, with some in the market suggesting that construction costs could reduce by up to 10%. Finally, city centre activity levels, which I'll touch on in just a moment. Turning to page eight and taking a deeper dive in the work from home trend. Office space utilization and office workplace strategies have evolved significantly over the past two to three decades. It wasn't that long ago that office workers had individual offices, had 20-25 sq m of space per person, and had no ability to work from anywhere other than their office. Today's more agile office workforce is far more mobile, and we've seen density ratios increase significantly to enable more people in less space in an effort to enhance collaboration, but also to contain costs.
Technology has enabled a more mobile workforce. Despite these changes, in pre-COVID, the workplace was evolving into a place where collaboration occurred, where workers met and consulted with one another, but they were not often the sole place that workers would work. With the advent of COVID, these practices have endured and have been extended. However, our view is that the role of the office remains as important as ever, and we do not see a material change in the premises areas for office occupiers in New Zealand. Supporting this theory, the following page outlines that of the 161 office occupiers, which Precinct has within its portfolio, to date, just four businesses have indicated that they will look to sublease some of their space for a total area of around 6,000 square meters.
The vast majority of our occupiers have recognized that the office space remains critical to the success of their business and is a key driver in attracting talent and also a key driver in fostering talent. Over the page, we set out the public transport and pedestrian counts for the Auckland and Wellington city centres. As outlined on this slide, without tertiary students and without international tourists, pedestrian counts have increased in Auckland to be 83% of what they were this time last year. To us, this signals that the vast majority of office workers were back in the office up until the reintroduction of lockdown yesterday. Similarly, in Wellington, the public transport utilization was higher than Auckland, with bus patronage in excess of 90% of the same time last year.
These trends give us confidence that the city centre office is here to stay, and that following COVID, our expectation is that prime grade office in central cities will remain a core aspect of any successful business. I'd now like to hand over to Richard to take you through the financial result.
Thanks, Scott. Good morning, everyone. Total comprehensive income after tax for the year was NZD 35.1 million. This compares to NZD 190 million last year, with the difference relating to last year's revaluation gain and this year's devaluation. Despite this, our operating performance was strong, with our preferred measures, funds from operations and adjusted funds from operations, both higher in the period. As noted, at the time of the interim results, tax expense was expected to be low given the amount of activity occurring within the portfolio. The low expense was due to the disposal of depreciable assets, leasing costs, and deductible CapEx. The reintroduction of depreciation on structure for commercial buildings will provide additional tax deductions from 1 July 2020. As at 30 June, the total value of undepreciated structure was NZD 817 million. This will see Precinct's tax expense remain low over the coming years.
Slide 13 provides a breakdown of operating income. Net property income for the period increased 2.1% to NZD 97.2 million. During lockdown levels 3 and 4, Precinct provided support to clients impacted by COVID-19. This was achieved through a range of measures, including rental abatements totaling NZD 1.7 million. Notably, these were fully expensed in the period. The completion of developments continues to increase net property income. These additions have been partly offset through asset disposals and foregone income associated with Wellington Government assets in One Queen Street. Adjusting for the COVID-19 abatements, developments, and transactions, like-to-like income growth was 3.1% higher, with the Auckland portfolio seeing an increase of 2.5% and Wellington achieving a 4.8% uplift. Generator recorded gross operating revenue of NZD 18.6 million and contributed NZD 8.6 million to operating income.
Including Generator's rent expense of NZD 6.8 million, which is excluded due to IFRS 16, the net contribution to funds from operations reduces to NZD 1.8 million. Turning to the next slide. With the decision last year to move to an AFFO-based dividend policy, it is pleasing me to see both FFO and AFFO grow in the period. Of these two measures, we continue to believe that AFFO provides a better measure of funds available for distribution, and this grew by 11% or 5.9% per weighted security. The 2020 dividend of NZD 0.063 per share was 5% higher than the previous year and reflected an AFFO payout ratio of around 100%.
Had it not been for COVID-19 rent abatements, which were fully expensed in the period, AFFO would have been around NZD 0.064 per share. Over the coming years, we expect maintenance CapEx and leasing expenses to reduce, reflecting the age and quality of the portfolio and its long-term weighted average lease term. This, combined with ongoing developments, should support earnings stability and growth. Turning to slide 15. The devaluation movement of NZD 66 million reflects a 2% decrease on year-end book values. Excluding developments, the investment portfolio saw a 2% increase, with the Wellington assets recording an uplift of 5.8%, while Auckland was largely flat. Across Wellington, the valuation gains were mainly attributable to affirming cap rates, particularly those of long-term leases to government entities.
In Auckland, while there was affirming cap rates and continued market rent growth, the impact of COVID-19 on both the One Queen Street project and Commercial Bay led to an overall devaluation decline. Commercial Bay recorded a revaluation decline of NZD 81 million due to costs associated with COVID-19, the accounting treatment of liquidated damages, and the lower Commercial Bay retail valuation. Adjusting for the NZD 26.7 million of liquidated damages revenue recognized in the period, the net year-on-year movement attributable to Commercial Bay was NZD 54 million. Valuers have also noted that retail assets have been impacted more than office assets due to the economic conditions and the office portfolio's long -WALT and covenant strength. As at 30 June, the portfolio value totals NZD 3 billion, with Precinct's NAV per share at balance date reducing to NZD 1.45. Turning to the next slide.
Our approach to capital management remains proactive, and we are focused on initiatives that support our strategy. During the year, we settled the NZD 163 million USPP and refinanced the NZD 150 million bank debt facility, which was due to expire in November 2020. Total committed funding remains around NZD 1.2 billion, with a weighted average term to expiry of around four years. With an expectation that the convertible notes will be converted to equity, the next liquidity event is the maturity of the NZD 70 million bonds in December 2021. The balance sheet remains in a strong position, with gearing, which excludes the convertible note, of around 29% against the covenant of 50%. The sale of Pastoral House at the end of April reduced gearing and will help to fund future opportunities.
In addition to the sale, another capital recycling initiative is being explored through the potential sale of the remaining 50% interest in the ANZ Centre. Our weighted average interest rate has reduced to 3.9% in the period, with hedging levels falling to around 56%. Both reductions reflect an increase in borrowings and several swap restructures undertaken in the period. Interest coverage remains good at 2.4x against a covenant of 1.75 x. This ratio is expected to improve as developments become income producing and on maturity of the convertible note. Turning to slide 17. We continue to make good progress on sustainability. In the year, we improved our GRESB rating to above the global average, and most pleasingly, verified our carbon footprint, obtaining a carboNZero certification in the process.
We are also reducing the portfolio's carbon intensity and have a goal of ensuring all our office buildings have a minimum NABERSNZ rating greater than three. While we have made progress in this space, we will look at ways to improve our reporting and reduce emissions further. Over the coming 12 months, we intend on submitting to CDP and report under the TCFD framework. Finally, despite the current uncertainty, we expect adjusted funds from operations for the next financial year to increase 3% to NZD 0.065 per share. We continue to have confidence in our earnings outlook due to the portfolio's quality, its client base, and strong WALT. The portfolio also benefits from a high proportion of structured reviews, with around 15% of the portfolio subject to a market event over the next 12 months.
The reintroduction of building depreciation and lower interest rates will support further earnings growth over the next years. In addition, Generator and developments such as 40 Bowen Street will continue to provide further earnings accretion. Consistent with our policy, we anticipate growing the dividend for FY 2021 by 3.2% to NZD 0.065 per share. Thank you. I will now hand over to George.
Thank you, Richard. Good morning, everyone. Turning to our markets on pages 20 and 21. Overall, we've seen a good level of resilience within our city centre markets, and this has also been reflected in our portfolio activity, which I will cover shortly. Wellington has shown the highest level of resilience, underpinned by continued public sector expansion and a shortage of quality office stock. This is resulting in low vacancy and is supporting rental growth. The prime market in Auckland continues to have low vacancy levels, despite the increase in stock following the completion of Commercial Bay. The impact of COVID-19 means some businesses are looking to sublease space. However, these are mainly in the city fringe markets, and as Scott mentioned, the impact on our own portfolio appears to be limited.
We expect the prime rentals will remain fairly flat in the near term, however, as there are more options available. Demand for flexible space in Auckland and Wellington has been strong over the last year. This has impacted in the short term as some businesses contract or consider sublease alternatives. Over the medium term, we expect continued growth and demand as occupiers increasingly recognize the benefit of flexibility. City centre retail market conditions remain challenging, with continued impacts from the growth in e-commerce, as well as the loss of international tourists. Consumer spending post the April-May lockdown has been strong, however, across the market, and I will shortly provide further detail on the first two months of trading at Commercial Bay. Moving to page 22, the investment market has rebounded, and we have seen a number of market transactions complete at strong metrics post-lockdown.
The inability of international buyers to physically view assets has been a challenge, but it hasn't prevented international buyers transacting. Very low interest rates seem here to stay and combined with the tax changes, we believe will continue to underpin demand for quality assets. Turning now to our operations. Page 24 provides a reminder of our value drivers. For our investment portfolio, we benefit from highly secure cash flows with strong defensive characteristics underpinned by 98% occupancy, a weighted average lease term of eight years and a very high-quality occupier base. Government pays around a quarter of the rent and over half of our rent is paid by investment-grade entities. Supplementing our investment portfolio are our operating exposures and development activities, which both drive further value creation.
Our development activities support maintaining the quality of our portfolio through creating both high-quality assets and attracting and retaining high-quality occupiers in our portfolio. Our operating activities include Commercial Bay retail and our flex space provider Generator. As well as driving a premium to market rentals, these activities add value to our real estate by underpinning demand and improving the amenity and community around our assets. I will provide some insights on our investment portfolio performance and operating activities, and Scott will then cover off our development activity. As outlined further on page 25, we now participate fully across the office spectrum, from traditional long-term leases through to co-working space. This means that we can deliver to the evolving markets requirements. Turning to our portfolio activity on page 26.
We're pleased to say that solid leasing activity continued during lockdown, with a number of key leasing deals concluded in June and July. This has included the 2,000 square meter lease to a confidential party, which has taken the Commercial Bay tower to now be 97% leased. For us, this activity is a key indicator of the underlying strength of the office markets and the confidence which many occupiers have in the future of the office, as well as the value of being located in Auckland and Wellington city centres. The strength of the market through the year and the benefit of that for our own rental growth is further evidenced by the 8% lift on previous rentals on new leasing, as well as our market rent reviews being settled on average 11% higher than previous contracted levels.
Acknowledging that we are once again in a lockdown position in Auckland, page 27 summarizes the impacts from the April-May lockdown period. That was a very difficult and uncertain period for our occupiers, and our approach was to maintain very high levels of communication and to provide support for those businesses which were most affected. We provided a total of NZD 1.7 million of abatement across April, May, and June. Just under half of this was contractual support to office occupiers for the lockdown period, with the balance mainly discretionary support for our retailers. Importantly, across all of our office leases, no abatement was provided other than to three parties with contractual abatement rights. Turning to page 28 and 29. These slides reinforce the extremely high quality and resilience of our investment portfolio, underpinned by long-term leases to New Zealand's government and highest quality businesses.
Looking at the chart on the top right-hand side of page 29, importantly, the significant amount of long-term leasing completed over the last few years through our development activities has resulted in a very strong level of secured cash flow and as shown in the chart below, very low levels of annual lease expiries in the forthcoming years. Moving now to Commercial Bay on page 30. It's pleasing to announce today that the PwC Tower at Commercial Bay has reached 97% leased, well ahead of our target of 90% when we committed to the project. The first occupiers have moved in and the post-completion fit-outs are well underway. With both the retail and office open, the focus is on completing the remaining works and working with Fletcher Construction to agree the COVID-related costs and the final account.
Commercial Bay retail opened on 11th of June, and as outlined on page 32, we have had a very strong initial two months of trade. Sales performance has been ahead of valuation assumptions, with food and beverage being a key outperformer. We are well advanced on the next round of openings, which will include two signature restaurants, as well as international retailers who were delayed due to COVID-19. The chart on page 33 provides further evidence that Commercial Bay retail is delivering to its promise, with the weekends being our busiest days and reversing the historic position of the city centre emptying out on weekends. Regrettably, we are once again closed. However, we remain confident that Commercial Bay will continue to be well supported by Aucklanders as soon as we can reopen. Turning to Generator on page 34.
Our strategy of investing in this space is now proving its benefits across the portfolio. Of our total leasing in the period, around 7,000 sq m has some Generator element to it. This includes the new lease to Ernst & Young at Bowen Campus, as well as around 4,500 sq m of leasing to clients who are growing out of Generator sites into the Precinct portfolio. Pleasingly, we have also concluded two managed leases to global corporates who essentially have dedicated premises in a Precinct building, but with all of their office needs being outsourced to and managed by Generator. Generator has returned a solid and profitable performance for the year, driven by a 13% lift in revenue. Despite the impacts of COVID-19, essentially closing the events business for the fourth quarter of the year. We remain confident in the medium-term demand outlook, with businesses increasingly valuing flexibility.
This view, along with a positive outlook for the Wellington office market, supports our ongoing growth plans with our new Wellington sites at 30 Waring Taylor Street and Bowen Campus, planned to open in late 2021 and 2022 respectively. Thank you, and I'll now hand back to Scott.
Thanks, George. Turning to our development section. Page 40 sets out a summary of our current development commitments. We expect to secure a blended return on cost of 18% and a blended yield on cost of around 6.7%. It is worth noting that with the completion of Commercial Bay, the current development activity that we have committed to includes Wynyard Quarter stage 2 and the first building at Bowen Campus Stage 2. In the last 12 months, we have committed to Bowen Campus stage 2, while deferring One Queen Street and continuing towards completion of Wynyard Quarter stage 2. Turning to page 41 and focusing on Wynyard Quarter. The second stage of Wynyard Quarter has progressed well during the year. We committed to the project with no leasing in late 2018, and we're delighted with the construction and leasing progress to date. Construction has progressed very well.
We are currently fully enclosed with fit-out works underway internally. Despite the impacts of COVID and the initial lockdown period, we remain on program, which is a real credit to the main contractor, Hawkins. The office space within the building is 100% leased to Media Design School and also to a global tech company who have leased the top two floors. The next area of focus is on the three retail tenancies with leasing now underway. Now turning to the following page and focusing on Bowen Campus. Over the lockdown period of March through to May, we were very pleased with the level of ongoing inquiry from occupiers for the stage 2 of Bowen Campus. Pleasingly, we were able to agree terms and negotiate development agreements with EY and Fujitsu, which together with Generator, means the building is 72% pre-leased.
Construction has now commenced, and we are currently on site completing piling for the build. Our expectation is that the building will be complete in late 2022. It is our hope that we will also commence works for 44 Bowen Street during the 2020 calendar year. Based on the inquiry levels and negotiations which are currently underway, we remain confident that this will occur. The future pipeline of developments is set out on the following page and includes 44 Bowen Street, Wynyard Quarter stages 3 and 4, as well as One Queen Street. We continue to assess our options regarding the One Queen Street site in order to determine the highest and best use for the development.
In terms of the outlook, there is no doubt that we are in very uncertain times, and the move to alert level 3 for Auckland and alert level 2 for the rest of New Zealand yesterday confirms this. Despite this, we feel very fortunate that Precinct is in an incredibly strong position with a long weighted average lease term, very little expiry risk, and a high degree of structured growth. Most importantly, some of the highest quality occupiers in New Zealand. We remain confident, and our confidence is reflected in our guidance being a lift in the dividend for the FY 2021 period. This is the result of years of planning and execution in order to have the highest quality portfolio possible. I'd like to thank you all for joining us for today.
That brings us to the conclusion of our presentation, and we're happy to take 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 your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Arie Dekker with Jarden. Please go ahead.
Good morning. Yeah, first question just in relation to the additions to Commercial Bay through 2020. Can you just give a bit of a breakdown of that NZD 200 million? Also just some commentary on w hat might still need to be accrued in 2021, if anything? Then just also of those 2020 additions, the cash split for 2020 versus 2021?
Arie. We've accrued everything into the end of year accounts for what we need to spend. That's in the financial statements if you see that there. In terms of spend in the period, it would be in and around NZD 100 million or so, slightly more than that. The accrual for Commercial Bay at the end of 30 June is in the mid-NZD 40s.
40s, okay. Great. Just in terms of, I guess, the relief you've provided, given an outline of the deferrals and abatements for the FY 2020 year. Obviously cognizant of that, we're moving into a new lockdown period of uncertain duration. But just in terms of, I guess, the retail at Commercial Bay in particular, is there anything in the way of relief that you expect to come through the FY 2021 accounts associated with this lockdown or just generally slower activity because of the impact of COVID on international tourism and events in the central city?
Yeah, Arie. Scott here. At the moment, we've had a period of time where for all of those retailers at Commercial Bay, the leases effectively started for those that opened on 11th of June. A large majority of those actually had a period of rent-free, which was not related to COVID-19, but was very much a function of incentives for those new leases commencing. They've had a really strong period of trade, as we've reported. Generally speaking, there's no abatement rights that exist for those retailers now that we're back into alert level 3 and the centre is closed. We still need to work through what that means. We have stated, and I'll restate it again, that we're a long-term owner, and so we're pretty keen to support all of our occupiers to the extent that it's necessary throughout the business.
The dividend guidance and AFFO guidance for the year has taken into consideration some assumptions around the likelihood that we could be in lockdown again during the year. As you've said, it's quite uncertain at this stage, we don't know whether we're going to be in this particularly alert level 3, or whether we go to 4, or whether it goes to 2 and what that means. Our assumptions for AFFO and our div guidance has taken into consideration a form of conservatism around an expectation that we may be in lockdown.
Sure. Okay. No, thank you. Just on the ANZ potential divestment of the remaining 50%. Can you just comment on timing for offering to the co-investor on that?
Yeah, that's passed. So that asset can now be taken to the and we've appointed an agency to help us with that program. That'll be effectively launched in the next couple of weeks, although there are a bunch of participants in that market who are already aware that it is available.
Great. Thank you.
Thanks, Arie.
Our next question comes from Nick Mar with Macquarie. Please go ahead.
Morning, guys.
Hey, Nick.
Hey, just a couple of random questions. The outlook for maintenance CapEx from here, 20 basis points. When you were coming into all of this, I think the guidance was circa 40 basis points back in, I think, 2017 for post-completion. What's changed in your view around how much maintenance the portfolio requires?
I think just continuing to sell out of those older assets, Nick. One of the big lessons that we've learned, being involved in this business for quite a while, is that as the buildings age, they definitely attract quite a lot more maintenance CapEx. Back in 2017, we probably didn't assume that we'd sell as much as we have, and our expectation is that we will exit the remaining 50% of ANZ. When you think about what we've built, and there's a couple of billion NZD really that we would have built once we finish what's on our books at the moment, our expectation is that 20 basis points for maintenance CapEx is one of the benefits of that.
Now, that doesn't mean that 20 basis points will exist for 10 years or so, but that's what we expect in the short term, having just finished completion of all of those developments.
Yeah. No, that's great. Just on the Bowen Campus and the 44 Bowen. Sorry, did you say you'd expect to start in the calendar year 2021 on the second site?
No, we're hoping to try and pre-commit 44 before Christmas.
Okay.
We've got a bunch of discussions, negotiations which are underway at the moment.
Yeah. How much cost save is there for getting both up and running at once versus doing them separately?
Yeah. Look, there's a couple of NZD million in that. If we can get the stage 2 or 44 Bowen up and running before Christmas, we think there's some savings that we can bank there.
Cool. Lastly, just on the kind of sublet market. Within your leases, what kind of control, if any, do you have over the tenant's ability to sublet or whether or not you guys get say in how it is sublet, if they do go down that avenue?
Hi, Nick. George here. Yeah, typically it's on a sort of not to be unreasonably withheld basis. We'll generally take an approach of working cooperatively with one of our occupiers who has an excess of space, to make sure that we get a good long-term outcome for the buildings. Whether that's through them subleasing it or surrendering space, that's what we work through that on a case-by-case basis.
Just a couple of extra points. There's also use provisions which protect us. There's also, in the instance where someone might want to assign the lease, then there's sort of greater protections for us around approving who the party might be. When someone sublets, obviously, we continue to retain the head lessor the hook for any guarantees and so on.
Yeah. No, that's great. Thanks a lot.
Our next question.
Thanks, Nick.
comes from Adam Lilley with Craigs Investment Partners. Please go ahead.
Good morning, guys. Just thinking more about portfolio. Do you have a view at the moment as to what your portfolio value is relative to, say, replacement costs? Maybe on just like the Auckland market and the Wellington market.
Hey, Richard here. Auckland is closer to the replacement value, but Wellington is quite divergent. The replacement value in Wellington is close to double the valuation down there. Values are probably what, 60% or so of replacement. In Auckland it is closer.
Okay. Thanks for that. Just one other from me. You just mentioned, there's been a number of swap restructures in the period. Is that by way of blending and extending, or how have you approached that?
Yeah. Blend and extend and also just pushing some out a bit. That was largely done in lockdown. The reason for that was around negative interest rates primarily, and that mismatch between for swaps.
Do you have zero- rate floors in your policy agreements?
Yeah.
In those policy agreements.
on the bank documentation.
Okay. That's all for me. Thank you.
Thanks, Adam.
Our next question comes from Jeremy Kincaid with UBS. Please go ahead.
Good morning, guys. First one from me, just around valuations. What have the valuers done with regards to the change in depreciation laws? Have they made any assumptions there?
They're aware of it, come the valuations. It was clearly public information. I don't think they were fully factored into the valuations. You would've seen research notes and some publications from all the houses, indicating that valuation uplift in theory, but as you'd be aware, they point to transactional evidence. I don't think that was fully priced into the values at 30 June.
Okay, sure. The second one from me, back to the ANZ Centre. I suppose I had your gearing ratio at a pretty manageable levels, especially with the convertible notes maturing. Is the thinking behind that divestment more around optimizing the portfolio and as you talk about, getting maintenance CapEx down even lower or is there something bigger on the horizon?
For us, it's about sort of funding for One Queen. We are working through our options on that development and we're making quite good progress on it. It's probably a little early to say where we're landing in terms of timing and use, but we feel like it'd be nice to think that we could get underway with that next year, early next year, potentially. In order to do that, we'd like to take some capital off the table out of ANZ and be able to fund One Queen.
On HSBC, sorry, One Queen, can you be capitalizing interest over the next 12 months even if you're not doing anything substantial to it now?
Yeah, the short answer is yes. I can talk to you about that.
Okay, fantastic. Thank you.
Thanks, Jeremy.
Once again, if you wish to ask a question, please press star one on your telephone and for your name to be announced. Your next question comes from Shane Solly with Harbour Asset Management. Please go ahead.
Good morning, guys, and thank you for the rundown. Well done on a solid result given a very challenging period of time. Got a couple of questions. First one, Scott, just in when you talked about work from home, how do you think about allowing for that in your portfolio going forward? What's the practical impact for you on work from home?
I think for us, one of the things that we're learning and a good process that we've just worked through is the completion of the new PwC Tower. Obviously, our users are really focused on how best they use the real estate that they've leased. We're fortunate in that the buildings that we have allow either very dense occupation or also occupation that can evolve. Technology is a big part of work from home, and we're definitely seeing a demand from our occupiers for tech-enabled options to be throughout the building. That's definitely being put in place in the new PwC Tower, and there's been a really strong response to that.
Our occupiers across the board, bar the four that we've identified today that are looking to sublease, and we've talked to all of them, and they all remain very comfortable around the premises that they have and the area that they have. What they are thinking about is how best to use their space, whether or not they need to spread out some of their desking systems, so that the space is not so dense. Also in doing that, they potentially reduce the number of desking stations that they have and recognize that the workspace might be more for collaboration, training, development, meeting, value-add functions rather than just processing functions.
If I just add to that, Shane.
Great
that we are seeing quite a lot of interest in Generator space from businesses who have a higher number of people working from home but still want to retain a hub. They may have a 20 staff but a 10-person office and have a sort of rotating aspect. Also are keen to use Generator spaces for meetings, particularly where the tech-enabled facilities within those meeting rooms are at a good level.
Okay. Thanks, George. Just a second point. Just to expand on the deferral component, and the period, can you just expand a little bit on your expectations on deferrals, either for the period or the coming period?
Yeah. In terms of the deferrals, we expect all those deferrals to be fully paid back. The businesses which we provided those to are solid businesses. We made a general offer across our portfolio to businesses who felt that they would like to defer a portion of rent for a period, that we would enable them to do so. That was well-received, but we actually had very low levels of take-up. As I say, they were from solid businesses, so we expect that to come back to us.
Okay. Within the next six months, you'd expect the deferrals to be repaid?
Those deferrals were offered on a repayment through monthly rent over two years.
Okay. All right. Just to pick up on this maintenance CapEx point too that you've called out. Does that include tenant incentives or not?
No, it doesn't include incentives. No.
Okay. All right. Thank you. Can you just talk about, in terms of the valuations, how did the valuers assess retail or ground floor retail, that amenity component?
Commercial Bay specific, Shane?
Across the portfolio.
Probably don't actually know that level of detail in terms of the retail at the base of the towers. What I would say about the retail generally is that, we're seeing a pretty wide spread of the impact on retail. For high-quality retail, you've seen a reduction in value of around 10%. For more suburban-based, lower quality, you've seen devaluations up to 20%. Our like for like valuation impact at Commercial Bay was around 6%. That sort of reflects the quality, I think. The thing that's exacerbated the valuation impact for Commercial Bay retail is the COVID costs, which we're still just finalizing at the moment.
Okay. Thank you. Well done. Agree with you. I'll let others ask questions, but that's a great outcome, guys. Well done.
Thanks, Shane.
Your next question comes from Angus Simpson with ANZ. Please go ahead.
Angus.
Angus Simpson with ANZ.
Sorry, I was on mute. Apologies for that. Good morning, guys.
Hey.
Hey.
Just further following on from Shane's question with regard to Commercial Bay. If we think about the split between office and retail, what was the changes in cap rates between the two, and then value on completion broadly unchanged year on year. What sort of other, I guess, assumptions did valuers make comparing office versus retail?
Between the office and retail, the office was largely unchanged. It's got a long-term WALT, really quality client base there. That was broadly flat year-on-year for the valuation. The cap for the retail, that did move out somewhat. That was a 25 basis point shift. That's at about five and a quarter for the retail, which is a large driver for that valuation movement. The office is largely unchanged. Look, across the board, the value is certainly valuing the long-term secure nature of our cash flows. Other valuations, they were certainly increasing the level of rent-free and vacancy assumptions in other assets that I've heard have been valued. That doesn't impact our portfolio so much just because of the, again, the quality and the long-term nature of the WALT.
Okay. That makes sense. Was any of the devaluation related to cost increases that weren't COVID related?
That weren't COVID related?
Yes.
No, not really.
Perfect. Thanks for that. Just a last question from me. Just in relation to the under and over renting in the portfolio. I think last time you reported it, that the portfolio was above 5% under rented. How does that looking, I guess, in the next 12 months with the view of maybe flat market rents in Auckland? Do you still expect to see, I guess, positive re-leasing spreads? I guess how would it compare to the 8% or 9% delivered this year?
Yeah. I'll kick it off and then hand over to George. In terms of the under renting, Wellington is significantly under rented, 9% under rented. In terms of Auckland, it's largely flat in terms of that under renting. That's largely driven because of Commercial Bay Tower. The Commercial Bay Tower is based on obviously the new transactions on higher face rents. That's an over rented position. The rest of the Auckland portfolio would still be under-rented by a couple of percent.
Yeah. Look, in terms of leasing that we have underway at the moment, we are generally putting out terms and negotiating on terms which are a premium to passing rentals. That continues to be the case, particularly around the assets other than the PwC Tower and the Commercial Bay precinct. Also seeing that continue in leasing in Wellington.
Brilliant. Thanks. That's all from me.
Thanks, Angus.
There are no further questions at this time. I'll now hand back to Mr. Pritchard for closing remarks.
Great. Thank you. Hey, look, once again, thanks everyone for dialing into the call today. Despite the challenging environment that we do have, we're really, really pleased with the result. We're really, really pleased with how the business and the portfolio has shaped up, and that fact that we've completed Bowen and we've completed Commercial Bay and we've got a full portfolio. Somewhat fortuitous with the timing, but very, very thankful to be here and obviously thankful for your support. Have a good day, everyone. Appreciate it.
That does conclude our conference for today. Thank you for participating. You may now disconnect.