Hi, good morning, everyone. Welcome to CapitaLand China Trust 3Q 2024 Business Update Call. I am Nicole, IR for CLCT. I have with me today, Tze Wooi, CEO, Gerry, Deputy CEO, Joanne, CFO, and You Hong, Head of IPM. Thank you all for joining us today. For the next hour, we will start with a brief presentation to provide an overview, followed by a Q&A session. Once the presentation concludes, we will open the floor for questions. If a question, please use the raise hand function, and I will pass the time on to you. I would like to hand over the time to Tze Wooi. Tze Wooi, please.
Thank you, Nicole. Good morning, everyone. Thank you for attending CLCT's 3Q business update. I know this is a very busy earnings season for everyone, so let me take you through the main business highlights in the next few slides before we open up for interaction. I think all of you are very familiar with CLCT as a China long-term play. Positioning ourselves to capture China's domestic consumption and the technology and innovation sectors. Building diversification of our portfolio mix to ride the market cycles has been our focus. For this year-to-date, nine months, our biggest asset class of retail is showing more relative resilience, vis-à-vis the logistics and business park segments, as you can see. For the nine months, our revenue is about 3.4% lower, largely due to the lower contributions from the logistics and the business park portfolio.
But this year, we also have the absence of the contributions from the two malls that we have exited, namely Shuangjing and Qibao. At the same time, the retail is being offset by the improved AEI performance from those malls that we did in 2023. So on a comparable nine-mall basis, the revenue for retail increased by about 1.6%. Extending to the net property income, a similar picture of 5% below year-on-year. Again, lower contributions from logistics, business park, as well as the exited malls. At the same time, we see a lot of churn during this period, so lower effective occupancies. And also for some one-off property tax that we used to receive, especially for business parks, these are absent for this year.
At the same time, if you look at our retail, due to the AEI, our top five malls, as well as the comparable nine malls, have been moving in the right direction of growing year-on-year. Overall, occupancy is healthy at above 91%. Shopper traffic and tenant sales continue to trend on a positive trajectory. At the capital management side, we maintain very stable cost of debt through our very active measures, maintaining a relatively high fix of 76%, and also pushing up our sustainability-linked loans in the meantime. If you look at the operations, breaking down the retail and the business parks and logistics, largely you can see the occupancy for retail being resilient, especially after our AEIs, and our proactive lease management have really enhanced the resilience.
Occupancy has moved back to a normal state of close to 98% as a portfolio, and several malls are almost full occupancy. For the nine months I mentioned earlier, traffic and sales consecutively, we are showing quarter-on-quarter improvement, especially led by the AEI malls, that is very clear. In terms of nine months distributed out, I would say one half tends to be stronger, and the 3Q data point starts to be trending a little bit softer, generally in line with what we see in the marketplace because of the consumer spending still being cautious. This brings us to why we see that the Chinese government has been pushing through a series of very targeted stimulus to boost the economy.
If you look at what they have announced in September, October, and likely next week in November, I think there is a lot of push to ensure that the economy is being stimulated, fiscal side and monetary side. I think they overall have a target to meet their full-year target. I think with all this, especially what we are seeing in the monetary easing, these are areas that we see that will be positive. As the consumption is being boosted, as the household income is being boosted, I think naturally sentiments will improve and this will benefit our retail sector. On the business park side, I would say largely, it is relatively stable. In the third quarter, we lost one anchor tenant in Xi'an. We are in the process to backfill it.
We are in advanced negotiation to close some of the free anchor spaces that will push up occupancy to closer to 85% by year-end. This is something that we are working on. Hangzhou, I think we have guided throughout the year. I think we are seeing more lease turnovers. As we sign new ones, we also have some business model that is fading off. All in, we are seeing a little bit of that stable occupancy despite bringing in new tenants. Xinghu continues to be stable and we are seeing good leasing demand at that sector. Logistics, if you break down the four, I think the three logistics have been progressively moving in the right direction. We have pushed Wuhan and Kunshan to almost full occupancy.
As we speak, period end for Chengdu, we cut off at 81%, but as we speak today, the occupancy has also moved up to the 83% level. At the capital management side, I think we have guided that we will continue to execute our strategy to increase the natural hedging, and you see us increasing the RMB denominated debts as a portion of our total debt book. In October, we also issued a CNH bond at a good interest that will help us to refinance the Sing dollar debt down, extracting savings along the way. As more of the renminbi easing cycle begins, I think we stand to benefit to enjoy more of these rate cuts because of the early actions and positioning efforts that we have done.
The last time we met you, I think we guided in 2022, our hedging fee was about 10%, 2023 is about 20%, and we are moving to 30% this year. As at September, we have already moved it up to 31%, and with the CNH bond, we are pushing up to 35%. I think we are accelerating this proportion to ensure the capital management side, we are capturing that upside. Along the way, I think the sustainability-linked loan has also been pushed up, which I mentioned earlier. Happy to share that the GRESB result is out, and we continue to maintain the five-star rating. Along the way, we have also moved our portfolio buildings to 60% in terms of attaining the LEED gold certification.
At the balance sheet side of things, I think we continue to hold our debt at the same level by bringing cash back from onshore to reduce the debt offshore, maintaining gearing at 41.6% between these two periods, largely driven by the RMB weakness. As we close this quarter, RMB is at its weakest point, both in terms of the third quarter performance as well as the September balance sheet reporting throughout the listing of CLCT. That itself will eat into a little bit of the gearing number that you see. Average cost of debt has been maintained. I think we guided that we are looking at this year about 3.5%-3.6% range. I think we continue to see us actively managing the cost of debt within that range. Other financial metrics continue to remain stable.
In terms of our debt maturity profile, we have completed all financing for 2024 and also have secured early commitment to refinance the 2025 debt tower. In a way, we have completed all the DPU in terms of refinancing for the next 12 months. I already mentioned, if you look at the doughnut on the right, this is something that we are continuing to diversify our funding sources with an emphasis to have more of the RMB product that will give us the competitive cost of borrowing, such that the overall loan book can be more competitive in terms of the financing cost. I think this slide you are very familiar. We continue to be one of the REITs that is most diversified and less exposed to any tenant concentration risk. During this period, we continue to advance in those sectors that we are seeing consumer demand.
F&B, we are increasing the NLA mix in terms of the overall and also the GRI, moving it to 27%. At the same time, you look at where the consumer spending is in our malls, we continue to capture more of the lifestyle, the info tech. This is something that we see a lot of pivot towards supporting national brands. This is something that we are actively bringing on board. At the same time, at the business parks, you see us focusing a bit more on sectors that are supported by the Chinese government's push for technology growth. You see us bringing in more enterprises that are in the electronics, in the engineering, and also in the info com. Overall, our top 10 tenants contribute about 9%, while the top one tenant is about 1% over. We will continue to be fairly consistent, looking at year-to-date.
Moving to the retail, I think I've mentioned earlier, if you look at the nine months, the traffic and sales are largely driven by what the AEI malls have completed. I think this is a large push towards improving the enhanced offerings, and you see footfall coming back. The kind of new concepts and brands that we've brought in have also attracted spending. Generally, we see spending oriented towards more value F&Bs, lifestyle services, and I mentioned earlier, the IT, electronics, et cetera. If you look at the Golden Week, I would say generally footfall has come back. People are traveling and going into malls to shop. Although we also observe that people are a little bit more cautious in what they spend. The general ticket item per head count in our mall have tend to drop down a little bit.
This is anecdotally quite consistent with what we are hearing from the retailers. I think they have to give a little bit more discount and value in order to capture some of this spending. I think for retail, I mentioned occupancy. If you look through, aside from our two biggest malls in Xinnan and Aidemengdun, I would say largely the rest of the portfolio had trended back to almost at 98%-100%, which is a healthy level. If you look at Xinnan and Aidemengdun, they are our two smallest malls in the portfolio. In terms of NPI contribution, they are less than 5%, 6%. I think we are really trying to de-emphasize the smaller malls, looking for opportunities for us to monetize and exit some of these less impactful and dominant assets. In terms of nine month reversions, this is on a duration effective basis.
I think retail for nine months, we are reverting at about negative 1%. You strip that negative 1%, I would say more of the negative coming from the new tenants that we are courting into the malls as a concept. That number, it's closer to the negative 4%, but balance off with straight renewals that we are seeing, that is slightly on the positive side. Overall, as you see us retaining more of our tenants, we should expect rental reversions to moderate, have less pressure to be on the negative side going forward. As we speak, I think reversion is always a number I mentioned to you. It's just a guide. What we are trying to do is really to strengthen our mall, to capture the flow of the business and to be competitive. I think that's more important to run that long-term business.
Occupancy costs, again, I think if you look at that, it has also been improving from the years of deep COVID across 2022, 2023, 2024. Things are normalizing back to a healthier state, where we are focusing first and foremost to improve the traffic, improve the sales, and I think the rent will then, in the next cycle, be able to catch up. I think these are some of the effort that we've done in the third quarter. In third quarter, if you look at Xizhimen, there's a bit of that number downtime effect, both in terms of sales and NPI. But once this is completed, it's completed by now, so the contribution will come in at the fourth quarter. Moving on to the business park side.
Again, I mentioned, if you stripped out the Xi'an Ascendas Innovation Towers, where one anchor tenant left us in the third quarter, we are in close negotiation to fill it up with another major anchor tenant. We are trying to consolidate some of these big MNCs into our park. The conversations are converging, and we are hopeful that by end of the year we are able to bring them in. And once they are in, I think we will move the whole portfolio to around that 89% level in terms of the occupancy, which is healthy if you look at where the relative submarkets are trending. Each of our parks are We are responding and addressing them quite differently. I think Xinghu, I mentioned, steady, capturing the demand in the sectors that we want, and we continue to see healthy sign-ins.
Some of the product that we have in Xinghu is scarce, and therefore it also creates that scarcity demand. I mentioned already on Xi'an. Moving to Hangzhou, I think if you look at where things are, I would say generally, business activities are warming up a little bit more than what we are seeing. Although the activities level have picked up, I think the rent continue to be a little bit soft because of the demand-supply imbalance. We have more landlord chasing a limited pool of tenants. I think we have to be a bit more competitive. And as we prioritize stabilizing the occupancies, I think rent is something that we have to be a bit more practical in the current market.
Moving to logistics, I think I earlier mentioned, if you look at where things are today, aside from the Shanghai, which we are really doing a deep dive to take some 6- 12 months time to reevaluate what we want to do with this, the rest of the malls, or rather the rest of the logistics assets, have moved to a level that we are comfortable by now. I think Chengdu, I just mentioned, as said, September is 81, but right now it is already in the 83% level. So generally, it is moving in the right direction. All of you are also very clear about our focus. I think the last few years really is about extracting value through our assets, looking for opportunities to unlock and monetize with a continued focus to improve the quality and also to improve our balance sheet strength.
I think this is going to be the main focus as we look at other opportunities. And I think this slide shows you what we have been, in a disciplined manner, programming the AEI opportunities, staggering the malls, and making sure that one is completed in a staggered manner, that income starts to contribute. Again, looking at where we are now today in the fourth quarter, there will be further opportunities for us to unlock value from the major anchor spaces. We continue to look at how the anchor spaces are performing. So for those weaker ones, we will take some early actions to recover space. I think these conversations are happening ahead of the natural expiry. And I think with that, I think we can position the malls longer term to be more competitive and also drive the rental yield productivity.
To conclude, I would say, I think all of us know that China, in the last few years, in terms of business conditions, in terms of the consumer sentiments, have been affected. These short-term challenges continue to be there as we navigate. But the good thing is, I think if you look at what I mentioned earlier, a series of government policy actions and acknowledging that the economy needs to be more primed, bringing on more fiscal and monetary measures and more targeted in terms of making sure the household income and the consumer and business confidence come back. I think these measures will take some time for them to filter down to the real business, but generally very positive in terms of the government already acknowledging and putting in specific measures to make sure the economy confidence comes back.
In terms of what we are managing in terms of our own portfolio across the three sectors, I think we are well aligned with all the key policy objectives. In terms of retail, continue to strengthen our AEI measures to make sure that when consumption confidence comes back, we are among the first mover to be able to capture that. I talk about business parks, different assets we are targeting differently. In logistics, we are moving up in the right direction in terms of occupancy. I think with that, I will just open up the floor for interaction. Thank you.
Thank you. Thank you, Tze Wooi, for your presentation. Now let's proceed to the Q&A segment. We have the first question from Terence. Terence, please.
Hey, Tze Wooi. Hi, Gerry. Hey, thanks so much for the presentation. Just wanted to ask more on the business park outlook. Could you give us a sense of what are you expecting for business park reversions going forward? Would you be able to hold occupancies, especially in Hangzhou? What's the expected downtime from the spec filling of the tenant in AIT?
Okay. In terms of AIT, I think we are trying to secure the commitment from one big MNC into the park. Looking at the timeline, I think we should be able to commit them in by end of the year. That is the target. In terms of when they can contribute income, I think that will be some time away because for such a big anchor space, we do have to do some fit-out, et cetera. A more likely window where the income will come in will be the second quarter of 2025. With that, I think if you look at Xi'an, our combined occupancy will move up to around the 86% level. That's where we are guiding in terms of committed occupancy.
Hangzhou is where, I think, although we are signing quite a lot of incoming leases, but it's always being negated somehow by the non-renewal. I think our strategies is really to also attract some people who can take up more big spaces at one shot rather than to spread too much of our leasing resources across many small ones. I think there will be some kind of leasing strategies that we got to pivot a little bit. All in, we are guiding that for Hangzhou, we should move the combined one to closer to the 85% level, 80% to 85% level. That's where we are aiming. Suzhou, I think, will be stable. I think stable as the 90s. I think largely this will be where we are thinking in terms of committing the business parks.
On reversions, I think for the nine months, largely, if you look at Suzhou, continue to be trending positive on a low single digit. Xi'an AIT is turning negative for obvious reasons because we have to balance the occupancy. Hangzhou, also in the negative. Overall, I think, the outlook for business parks as we prioritize occupancy, I think in terms of reversions, we are probably looking at the low single-digit range for outlook.
Thank you. Maybe looking forward into 2025 into next year, should we expect this to stabilize or is there concerns that this could worsen from here in terms of occupancies and reversions for the BP?
I think in terms of occupancy, the target is really to stabilize. Earlier I mentioned, Xinghu continues to be in the 90s. Xi'an, with what we are trying to do, should move us closer to the 86% level. For Hangzhou combined, we should be looking at 80%, 85% level. Largely, I think the occupancy will be stabilized around that range. We think we have to be a bit more practical in the current market where the asking renters a little bit more soft. I think the negative reversion is likely to continue into the 2025 outlook. I think in terms of balancing, that's how we are trying to do. Also going back to what I mentioned earlier, I think the key focus in this current market is really to be able to retain some of our tenants.
I think we have a slide to say that. If you look at the amount of tenants that we are retaining, this number is about 70/30 for business park. With more retention coming in, the reversions are less negative. But when you need to bring new one in, then chances are you need to give a little bit. Over to the next slide please. Help me on which page on retention.
The retention.
Oh, okay.
You need to go to the retention.
Okay. Yeah. Quite similar to business park to retail.
Yeah.
If you look at the retail retention is about Which slide is that?
I think retention.
Over here, you look at the retail is about 60/40, but in terms of business park, it's about 70/30. I think the less pressure is on retention in terms of the negative reversion. More when you need to bring people in, you need to incentivize a bit more.
Okay. That's great. Thanks so much. Maybe I can ask one more set of questions on the interest costs. Very surprising on this 2.9% CNH bond. How much more of that could you do going forward? What's your outlook on interest costs? You have given the guidance for this year. What's that 3.5%-3.6% for this year, but what's the outlook for next year?
I think as we actively manage our debt book, there are some plus and minus. We all know that the REIT, generally, we are on a high fix for the last few years. Some of those high fix hedges are going to roll off. As they roll off, naturally, the repricing into this context is still going to be a step up vis-à-vis what we've entered, say, three years ago. So that part is something that will move the cost of debt higher. But at the same time, because of the early actions that we have already taken to shift more of the currently and to capture some of this lower cost of funding, that's going to help us neutralize. The other two aspects would be likelihood the rate cuts will come in 2025.
If you look at the RMB side, it's quite clear that the LPR are on an easing cycle. On the neutralizing bucket, I think we are still guiding that our total cost of debt to be roughly in the same 3.5%-3.6% range as we approach 2025, all things constant. If we can have a little bit of that portfolio reconstitution where we monetize some assets and the proceeds can be used to pay down our gearing, that will help to advance and improve the total financing cost.
Okay, thanks, Tze Wooi. That's all I have for now. Maybe I'll go back into the queue. Thanks.
Thank you, Terence. Can I pass the time to Geraldine, please?
Yeah. Hi, good morning, Tze Wooi, Gerry. Yeah, maybe just building onto Terence's question on capital management. I think the 3.55% has not reflected your new onshore bond, right, which came into effect in October 2024.
That's right. Because we are looking at period end cutoff and looking backwards. So the CNH of the 2.9%, where we will be using them to pay down our, say, high 3% in terms of the cost of debt, that will be an improvement going forward. Yeah.
Okay. If you reflect that in, will the interest cost move, will it move a needle for the cost of debt?
It's not going to be a big needle. If you look at it, this is going to be an average. I think more will be seen if you were to allow the CNH bond for the whole duration of 2025. That will be a good savings for the debt that we are replacing. But for the fourth quarter, I don't think just because of the CNH bond, it's going to disturb the 3.55% materially. Yeah, because we are looking backwards always at weighted average cost of debt.
Okay. Cost only three months impact from this.
But we do expect that because of all this, the total financing cost for the year should reflect that positive saving.
Okay. Sounds good. So maybe just one more on DPU for second half. I think rents have weakened through the years, but interest cost has remained quite stable. So how should we be seeing your second half DPU as compared to the 0.03 delivered in first half?
If you look at what drives DPU, I think the biggest component would be NPI. Right? I think that is the first step we could take. Second, in terms of DPU, it is also impacted by the RMB. You mentioned the NPI, the RMB translation conversion back to Sing dollars. If you look at where the interest and funding costs are helped, I think that is being held steady. In fact, it could be a slight improvement and potentially any other leakages like taxes. So I think you start from that angle. I think the two halves where we are seeing, I think the business apart is going to be half and half. I think the business apart is going to see some weakness because of the income from FCI.
Okay. Thanks, Tze Wooi. If I can just slip in one more on the retail trading performance. I think it is very strong, surprising thinking out loud that travel normalization amongst the Chinese will see some leakage on essential spend. Maybe just some color on this, say, outperforming trade sectors or any guys that benefited directly from the recent policies.
I think in terms of where our malls are positioned, they are always doing a very domestic catchment business. We are not like some of the Singapore malls that we are very familiar with, that is attracting a lot tourist dollars. So I think that is the first point to be aware. Second, I think if you look at where the positioning of our malls and the kind of post-AEI, you are seeing us orientating our trade mix to areas or sectors that we are capturing the spend. I think this is where we are able to push F&B. So if you just now you ask me what are the trade types that are seeing improvement, I think F&B is a clear segment that we are seeing in terms of sales. Even in terms of the rent, I think this is a clear situation where the F&B is in demand.
I think this is an area that we continuously refine. We bring in what is trending, and by bringing them in, we capture spend. I think this is something that we clearly see and are moving more emphasis towards that. The rest of it, there will be some brands that naturally we have to attrition, and we do see a little bit of shift, especially in the electronics, the lifestyle gadgets, IT. People are shifting towards supporting more national brands. This is, again, if you look at where we have been able to push, these are the national brands that are seeing some improvement in their sales.
Other than that, I think if you look at the retail trade types today, I mentioned to you that education has always been an important, I feel, as a content in the mall because of where the Chinese families are orientating their spending towards the children. Education, hobbies, interests, this is an area that I think still have room to grow. The last few years have been difficult for the education operators, but we do see perhaps improved signs that things are a bit more normalizing back. I think there's scope for us to improve this area. Once we move the education from the 1%+ to 3%, I think there'll be more offerings, and I think that will also help to bring in more people, family-oriented spending into our mall. Services continue to be also showing year-on-year improvement.
I think that's just really a reflection of today's consumers when they go to physical spaces, the kind of experiences that they want to enjoy and where they spend their wallet on. I think we continue to be very active to tweak all these kind of trade caps and the kind of brands and concepts. Leisure and entertainment has a bit of difficulty because of lack of good films released. These are very event driven, very seasonal driven. If you have a big blockbuster entertainment, this sometimes will just drive a lot of activities. I think for this nine months, this is also quite quiet. Beauty and healthcare is, again, something that people continue to pivot and pay more attention, healthy lifestyle, gym. These are areas that we need to treat the content within our mall.
Yeah, thanks, Tze Wooi. Very clear.
Thank you. Thank you, Geraldine. Can we have Jonathan, please?
Good morning, Tze Wooi. My questions relates to the logistic park business. Firstly, you mentioned some improvement at Chengdu. Could you elaborate on activities there? I missed the number you mentioned you expected occupancy to improve to what number. Secondly, could you update us on the repositioning of Shanghai Songjiang Logistic Park? Have you completed the reevaluation, and what do you intend to do over there? Thank you.
For Shanghai, I think we are still in the period of studying deeper whether a few choices that we are exploring and keeping an open mind to be more flexible and agile in this current market. We are, at the same time, trying to improve in terms of its leasing conditions, potentially signing new leases that are on a shorter term that people can use the space very quickly. This is one track that we are doing. The other track, we are really deep restudying the scope, and hopefully we can customize some of this building to bring in a tenant that is willing to use the space on a longer wheel. In return, we have to specs it up for them. I think we are still in the midst of evaluating this. While short term, we will sign in some short-term leases.
At the same time, obviously, I think we are also looking for exit options if there is good monetization possibility on the table. Your first question relates to, I think, the logistics in Chengdu. I think the Chengdu logistics parks, in terms of location, is actually very near to the Chengdu Shuangliu International Airport. I think if you look at the context, it is something like near Changi Airport and Changi Business Park, that logistics kind of feeling where they have a big zone. I think this is the kind of internal supply chain movement, last mile delivery nearer to the consumer market. These are some of the spaces that we are leasing out towards more consumer-related 3PLs. That number continues to be there in demand. We are projecting closer to the 85% mark by the end of this year.
You want, Tze Wooi, whether you have any more color you want to describe for the tenants that we are seeing some demand?
Yeah. In the logistic park, we have three warehouses. One of it is occupied by a cold chain operator. The rest is actually quite a number, is 3PL, and some of the serving the food, as well as the-
Consumer
consumer-related products. I think they are generally, when we visited recently, it was quite healthy, the business vibrancy there. I think we are hopeful that the demand will come. Yeah.
Okay. For Shanghai, when you say to customize the building, do you mean customize to a non-logistic for a portion of the logistic park?
I think we stand open to possibilities of how we want to strike a deal with the end user. If the end user is someone with a little bit of industrial manufacturing kind of business model, that is something that we need to evaluate whether we can accommodate and in terms of specs, what they need. This park, when we bought it is more for 3PL. But the 3PL in the current market, in terms of where they used to be servicing, that demand has sort of dropped off. It is also closer to the, Songjiang is near to the Yangshan port, right?
Yeah.
That is quite a port that the freighters, they are moving ins and outs. That demand has sort of tapered off in the last one, two years. That is why we lost that 3PL business. As I say that we study the repositioning, we are open-minded on various options.
Okay. And lastly, with the recovery that you are seeing in Kunshan and Chengdu, could we infer that there is some rock-based recovery for the logistic business? Has the business bottomed and recovering?
In terms of occupancy, definitely you already see if you look through this slide, we have moved the occupancy for Chengdu from the 60s to today, the 80s, and Kunshan and Wuhan are almost full. I think that is the first step that we want to address in terms of this business. In terms of occupancy, definitely if you compare half and half, I would say then things should be improving. But where we see things a little bit more volatile is at times, I think the business model of the tenants, I think that is an important consideration. Sometimes the business model is no longer competitive. They may leave us, and therefore we need some time to replace them. And the current market is such that the rental is too soft. That is why you see in terms of logistics parks, our negative reversions is more pronounced.
I think you can work out your math. In terms of occupancy, half and half, things should be bottoming and improving. Rent, softer than where we were collecting versus two, three years ago.
Thank you, Tze Wooi, and I look forward to better performance in the second half. Thank you.
Thank you, Jonathan. Can we have Vijay, please?
Hi. Morning, Tze Wooi. I have three questions. Maybe I will take it one by one. My first question is in terms of stimulus. I think a lot of the stimulus came after the results, right, in the early October part of things. Based on your ground discussion, have you seen any of this resulting in a sustained momentum for any of the segments like retail, logistics, and business parks? How do you see this impacting moving forward?
I think, first and foremost is we like the fact that the government have acknowledged the situation, and they have since end September come out with a series of policy stimulus and continuing the momentum to engage and to be more targeted, especially with some industry and market feedback. I think that's the first positive thing that we are taking away. How soon this real stimulus can filter down, I think we have to be taking a more pragmatic approach. I don't think these sort of things can be instantly overnight. I think sentiments are generally improving if people believe that all this stimulus will come back. I think that's our view, that to filter down will take some time.
If you look through our three asset classes, we feel that the retail is probably the first asset class that we'll be able to capture when that confidence is improving and the sentiment is improving. Being our largest asset class, contributing 70%, I think what the management have been focusing to do is really to strengthen our own portfolio in terms of being able to compete, being able to put in offerings that then can capture the attachments, spending power when things normalizes and improve. I think that's very clear what we're trying to do. Business parks and logistics, I think if you look through our year-to-date numbers, these are really the two that are facing short-term pressure in terms of the demand supply and the rentals. I think this sort of thing takes some time to address itself in the marketplace.
Again, it comes back to for each of our park, we have to be a bit more targeted and focused on where we want to lease people in, and hopefully we are able to lease in occupiers that can partner us slightly longer, and we can ride through these market cycles better. I think that's the approach that we are taking. Private enterprises, in terms of business expansion, generally still very cautious, and I think you need to give them some time to build that confidence back and also to have that improved outlook. Same thing for logistics. If you look at where the demand supply is, there are more supply coming on stream, more landlords chasing the limited pool of demand. I think that's where you see rental pressure coming in.
I think in a nutshell, that's how we look at it and how we are trying to manage our portfolio mix such that on a relative basis, the retail resilience will help to counter the down cycle that we're facing in the business park and logistics.
Got it. Thanks. Very clear. My second question is, how is the investment landscape in China at this point of time? Taking all your comments into consideration, in terms of portfolio optimization, should we expect you to divest some of the business parks and logistics and add more of retail in the medium term for CLCT? What kind of valuation should we expect by the end of the year?
These are all very good questions that we think about all the time. I think as a REIT manager, we run a diversified portfolio of asset classes, where it makes sense for us in terms of extracting value, such that the overall portfolio quality can improve, our balance sheet strength can improve. I think that's how we are guided by deciding what to do with it. I don't think we are mechanical in treating, like at this juncture, we can only sell one asset class and buy one asset class. We don't try to think from that perspective, but more so of which assets, if you look through our portfolio, are non-core, for example, don't contribute a lot, and in terms of growth prospects, it's not going to be very positive.
I think those are the things that we'll be spending a lot of time to look for opportunities to monetize. In terms of valuation, I think there is definitely, in today's China market, the appetite for China assets are much less compared to the past. So a lot of potential buyers are coming more from domestic players. If you look at our six, seven divestments to date, they are all towards domestic buyers. I think that's going to be the trend that we see. Potentially who are buyers, the SOEs, the insurance funds. These are typically the main players looking for opportunities. In terms of valuation, generally, if you look through our portfolio, in June, we have adjusted the value of potentially our weakest asset class of logistics. We took down the valuation by about 8%.
In terms of business parks, I would say relatively speaking, our parks are healthy. If you look at the general market, we are performing much better in terms of occupancy, in terms of rent, in terms of passing yield. I think business parks as a whole, I think there's less downward pressure on valuation come year-end. Retail is where I see a mix. I mentioned if you look through our nine malls, potentially the weaker ones where we are having a little bit more lease churn and negative reversions are still in that cycle. Those are the ones that, come year-end, we may potentially see a bit of downward revaluation.
Thanks, Tze Wooi. Just to clarify, would you be adding more weightage on retail? Going back to the earlier slide of going retail in the medium term, three to five years, compared to other segments.
We like retail because it's an asset class that I think we have that platform strength. We have that ability to cost and manage and synergize them because of a longer track record in this space. But again, we can't just use a simple yes tick box. Just retail has to be catchment focused, have to be very oriented and making sure that within that space that we are operating the business, we are high in the quartile of the market positioning in terms of capturing the business. So I think we want to improve our retail quality as we reconstitute, meaning that we want smaller, older, less competitive ones out. We want one dominant one able to capture a bigger catchment and able to allow us to inject more comprehensive offerings. So I think we are looking out for opportunities as we reconstitute.
Retail continue to be asset class that we like. Business parks, it's more driven by the cities of locations that we are in. We are also looking at opportunities to monetize some stake, for example, and working alongside the SOEs, because I think in this current environment, if you can be in partnership with them, that potentially may help in terms of getting some of this business traction moving. Logistics is our smallest asset class. I think that's an area that we have to be a little bit more mindful as we look for new opportunities to scale. The entry cost is very important, the tenant quality is very important, and understanding the competitive landscape in the location is very important. So I think that's how we look at it. We don't mechanically say that we want to buy one and sell the others.
We don't look at investment from that perspective. It's driven by improving portfolio quality.
Got it. Thanks, Tze Wooi. Just one last question. I think in terms of policy stimulus, especially on the property side, has there been any direct benefits in terms of taxes or something? Earlier you mentioned that some of the tax benefits for business parks are rolling over, meaning that it is not anymore. Maybe can you give some color on this?
Yeah, I think it is still early days. I think let us give the government some time to work out the specific measures. I think generally you would appreciate that they want to be a bit more pro-business, want to be more pro-consumption, meaning that they want to release more income to the household. This is why you see they have unilaterally moved down the mortgage loan financing rate. That is, in effect, saving the household income, right? Because they used to be paying the mortgage loan at higher rates, but now they pay lower, so they have some disposable income from the household. I think that the Chinese government are trying to target the various sectors in their own ways.
On your particular question, whether we stand to benefit from any business tax, property tax, I think this is something that we will always on the ground be very actively looking to see what are the tax policies they have and how we can stand to benefit given our status. I think, You Hong, if you have anything to add as well.
Maybe I just want to add, I think in terms of system-wide, we have not really seen a lot. I think the property issues they are addressing is more the residential side of things. I think anecdotally, we also have certain say, for example, in cities where they have carried out some of the AEI programs, there could be cases where we qualify for incentive or rebate or certain financial benefit, which obviously we needed to, sort of, I would say lobby or queue with the government. I think we are seeing more
Some of these are bearing fruit. I think that AEI, TI, some of the tax benefit that we had on the business park side in terms of getting the status of incubator status, we are continuing to enjoy it. So, I think, hopefully we will get more. The thing is, there are pockets of opportunities. The Chinese government generally has certain tax incentives. I think what is required of us is to stay very close to the ground and to interpret it, and making sure that we can qualify for it and being ahead of the queue. These are things that we have to do anyways, so let's hope that, as they want to prime the economy up, they want to lower the business cost, tax is an area that we hope to benefit.
Thank you, Tze Wooi. That's very clear. That's all I have.
Thank you, Vijay. Can I pass the time to Terence, please?
Hi. Good morning. The tenant sales on the whole slowed down on a quarter-on-quarter basis. But I see what was reported is the tenant sales for F&B services, IT, those are up. Can you please share which trade categories went down in the quarter?
Maybe I will answer that. I think we have seen the supermarket, some of them not delivering as good sales this quarter, especially the bigger format ones that we have seen. I think that's one area. F&B, we see good business. The other big trade is fashion. Fashion continues to be slightly lower. I think the trend has been there, not just this quarter. It's been there for a while. In terms of Singapore, another area that we are looking into is the vehicle. It did good in some of our malls, but it did not do so good for some of our other malls. I think it's a mix.
On a mix basis?
Yeah. The other area we observe a bit of year-on-year variance is in the area of, let's say, the jewelry. I think the Covid years of 2022, 2023, a lot of people are not able to travel, and they buy some of this to store wealth. I think there was a big push to buy jewelry gold during those years. But as we look into 2024, that has also tapered off a little bit. So that is an area we see a bit of year-on-year down on top of what You Hong mentioned, supermarket, services. Generally, if you look at the retailers, they are slightly on a price point reduction mode. You have read a lot about it, that things that used to sell, let's say, 128, they have to price it at 88. All this contribute to overall the retail sales numbers are slightly down.
If you look at the quarter, I would say if you benchmark ourselves with the key cities that we operate our business in Beijing, let's say in Guangzhou, in Changsha, in Chengdu, generally, it's quite in line in the sense that the third quarter has been soft. We are also seeing similar softness. But because of some of our AEI efforts, some of this trade that we have brought in and the brands have brought in have helped to make us do better.
Okay. Just on that point, in terms of looking across the portfolio, why is it that the Rock Square tenant sales has slowed down quite a bit, whereas if you look at, say, Grand Canyon, that is quite a bit more stable on a quarter-on-quarter basis. I imagine the tier one malls, tier one city malls should generally do as well, generally speaking.
Yeah. So you specifically highlighted Rock Square. Rock Square, I mentioned, is because of some softness in the vehicle sales
Right. Yes
services sector. Because we are also changing some of these vehicles, some of these units within our mall, they have given us good traction in terms of brand, in terms of footfall in the last two years, I would say. But this cycle is also a little bit tapering, and we want to also use this cycle to inject a little bit of other offerings. So the year-on-year drop a lot was driven by this. Cinema in the third quarter are also some of this law effect. We do not see a lot of blockbusters. At the same time, we are also taking some early actions to recover some space at some of our assets, changing the cinema operators where the weak one go out, the new one come in. We see this happening in our Sharefull. You see us recovering a bit of space from our Rock Square.
All these actions impacted some of these sales, even for our most dominant and top contributing season. In the third quarter, sales is a bit down because precisely we are doing a little bit of reconstitution of the food zone. Essentially last year, these 1,007 square meters are contributing sales. Because the quarter we are doing all these changes, this positive effect will come in from the fourth quarter onward. There will always be a little bit of these actions driven, asset specific driven, that add to the overall number that we report.
Okay, got it. Thank you.
Thank you, Terence. We still have a little bit of time left. Do we have any other questions? If not, otherwise, thank you, Tze Wooi. Thank you everyone for joining us. Tze Wooi, before we go, would you like to share a few words?
No, I think we have discussed a lot. I think definitely China market today is going through a bit of that challenge. What management are doing is really to scrub through our portfolio. We are looking through our three asset classes, relative strength, relative resilience, retail are leading right now. I think that's where we want to add more focus. I mentioned there will be opportunities for us to do a little bit more AEI unlocking value. That's going to take some effort and time for us to strengthen the retail. Business parks and logistics, at this juncture, we have to ride through that negative cycle, and that's where our diversified portfolio will help to counterbalance each other. Policy measures are coming in. Interest rate reductions are coming in. We have taken early actions to improve our debt capital management.
I think that early move will help us to strengthen our debt side of things, and I think that is our relative strength to counter some of this potential asset weakness. Overall, I think that is where management are focusing to do to continue to strengthen, look for opportunities to exit some of, and monetize some of this so that we can improve the balance sheet strength. I think these are the clear focus of management and, yeah, I will just sum up that way. Thank you.
Thank you, everyone. I hope this discussion has offered valuable insights into our operations and future outlook. Feel free to reach out to me with any questions. Thank you and have a good day.
Thank you all.