Hi, everyone. Thank you for joining us today. Welcome to CapitaLand China Trust 1Q 2023 Business Updates call. I am Nicole, IR for CLCT. Together with me is Tze Wooi, CEO, Joanne, CFO, and You Hong, Head of IPM . Over the next hour, we will be having a short presentation before proceeding to our Q&A section. We will be taking questions after the meeting, so appreciate if you could raise hands if you have any questions, and I will direct the time over to you, for you to raise your questions verbally. I will pass the time on now to Tze Wooi. Tze Wooi, please.
Yeah. Thanks, Nicole, and welcome, everyone, to our 1Q business update. Let me just quickly take you through our slides, and then we can move into the Q&A. For most of you who have followed us, you would know that we are now more known as a diversified REIT. Now the portfolio comprises 11 retail malls, five business parks and four logistics. City location are primarily oriented towards the Tier 1 and the high provincial capital cities. We ended the year in terms of our assets space of SGD 5.2 billion, market cap SGD 1.9 billion. Across our asset classes, the occupancies are trending above 90%. If you recall how 2022 was being played through and shaped, you would realize that the second half, especially in the fourth quarter of 2022, being a very difficult environment for our business.
As we close the chapter on one quarter 2023, I would say that we are moving towards improving business environment. Looking at our retail, you can see the leading indicators from the traffic side, the sales and also the retail occupancy. I think these are all improving quarterly and year-on-year. Looking at 1Q 2023, I would say that January and February was a little bit still slow. As we move into March, we see a little bit more leasing and business activities being converted. We have actually done about 30% of our retails NLA in terms of renewal. Over at our new economy side, again, if you look at what we have been focusing to do, is really to look at the post-COVID environment, where are the new demand and where the business activities are shaping up.
As we look at capturing some of these, how we look at balancing some of this tenant quality against our occupancy target and also our asking rental. Quite similar to the retail, I think the business environment is improving. Generally, people are more traveling, people are looking at space commitment, people are making business decisions. About 20% of our NLA is done in the first quarter. If you look at where we land in one quarter 2023 versus a year ago, some of the moving parts in the portfolio, you will see that Qibao, we are running off its business, so you see a little bit of that dilution effect. Other than that, there are several of our assets that I will take you through later on in terms of the program that we are doing in terms of AEI.
There will be a little bit of downtime as we take the area to do all these adjustments with the upside only flowing through in the second half of this year. Also, if you look at where we landed the year, I think the occupancy in the fourth quarter was lower, but we managed to sign in more in March this year. Some of these space handovers will take a bit of time for the revenue to come in. On the operations side, I think we just wanted to highlight that in the first quarter, the Grand Canyon has already completed their AEI for the mini anchor space. Similarly for Yuhuating that we have mentioned to you across 2022. These are also progressively completing towards one quarter of 2023, and its positive uplift will start to flow in from the second quarter onwards.
What we are embarking on now next is actually to look at two major, I would say, the anchor space recovery and also to convert those space into high yielding. One is at Grand Canyon, the basement where we take back space, and the other is at a partial take back of the AEON's supermarket at Rock Square, and also some of the F&Bs over at Level 3. These are something that we're doing, and the effects will come in in the third quarter. On the capital management side, I just want to highlight that we have completed in advance all the refinancing coming due in 2023. Take opportunity to extend the maturity further out to 2027 to 2029, thereby lengthening it. We also take opportunity to increase the percentage of the sustainability loan proportion.
All in, I think if you look at our ICR, it's maintained at a healthy level of 3.6x , well above the regulatory as well as the bank covenant. We continue to be prudent by hedging our loan books at 75% on a fixed portion. If you look at the debt profile, I think currently we are about this balance of onshore and offshore. I think we are constantly reviewing how we can, I would say, increase the proportion of the onshore debt because I think the onshore debt are now getting a bit more attractive in terms of the all-in cost. This is something that we are working on, as we look at how to rebalance some of this onshore and offshore gearing profile. From a debt maturity standpoint, I mentioned earlier, if you look back three months ago, there was a tower coming at 2023.
This has since been refinanced out to 2027 to 2029. Essentially we are all done for the year. Moving quickly to our portfolio, I think the key takeaways I want to share here is if you look at how our portfolio is shaped today, the continuous effort of our AEI in the past few years have now strengthened the tenant exposure. We are no longer having any exposure to the department stores. That's fully exited. If you look at the fashion exposure, that has also incrementally been brought down to a level of 30% today. On the other hand, we have been increasing exposure to the more dynamic F&Bs, the services, the leisure and entertainment, the sports, the health, and athleisure type of brands.
These are the ones that we are seeing a little bit more ability to capture the consumer spending. I think some of these efforts are playing out. On the other hand, we are continuously looking at opportunity when this expiry profile reaches, or we actively engage some of these anchor supermarkets to take back space. You can see the supermarket anchor also progressively coming down. That will help us to release more area to inject new and more interesting offerings. On the new economy side, I think that is where we are in terms of positioning the park and capturing the tenants. I think so far you see us increasing to attract people into the park that are of the sectors like the semiconductors, the biomedical, et cetera. Let me just move on quickly to the retail side of things.
I think if you look at where traffic and tenant sales are, I would say traffic on a year-on-year has improved. I think this one, really, you can see that uptick mostly across most of our malls. If you look at tenant sales, it is advancing slightly faster. If you look back at where we are, some of the malls in the first quarter are already reaching the pre-COVID levels, with some of the AEIs even doing better than pre-COVID. I think largely we are moving into an environment that you see recovery, and I think let us look at this recovery over the next few months. Trajectory-wise, I think we are in a very healthy level. I mentioned earlier, these are the few trade categories that we see able to capture some of the spend. F&B, as we have mentioned.
As we bring in new concepts that are able to connect with the shoppers of today, the sales are doing well. Beauty and healthcare services, and especially for the cinema leisure entertainment, I think there have been very difficult times over the last one, two years because of restrictive measures. Since the uplifting, I think this year, they are able to capture some of this China New Year flow back with new office movies being released. Overall, if you look at in terms of our occupancy, I would say that the uptick, it is clear that sequentially we are moving from a quarter, and we are able to convert some of these opportunities in the first quarter of 2023. Moving on to the new economy side.
I would say that among the few, Hangzhou, as I mentioned to you, I think in the last update, this is a park that is more having the e-commerce small enterprises. We do see some of these enterprises' business model being disrupted somewhat ever since the Alibaba ecosystem and then all these COVID restrictions. A lot of these small enterprises are set up startups that were helping that whole ecosystem move from the customer-facing front. Some of these have slowed, and I think during the fourth quarter, especially last year, there are some renewals that are not done in time. You see a little bit of that carry on into January and February, but as much you see things improving.
I think let's give that backfield a little bit of time, and also to look at how we want to capture some of these leasing strategies as we go along in a post-COVID environment. I think I mentioned earlier, I think we are constantly looking at how to diversify and also objectively looking at how to be a bit more tactical at times, balancing the few objectives, the occupancy, the kind of asking rent, and also the tenant we want to bring in. Largely, if you look at how we have been collaborating, I think this is an area that we'll continue to outreach and talk to the government in terms of in a post-COVID situation, which tenants sectors are more in demand that the government would like to attract into the district. This is something that we're working on.
Overall, I think we do sign up a little bit more if you look at where things were in the fourth quarter and now moving into one quarter. I think we would like to see this momentum improving as we look forward into a more, I would say, improved sentiment. Largely, if you look at where the demands are coming from, I think these are, again, quite well in line with the park positioning and also where the sectors are going. I think if you look at the professional services, the infocomm and the biomedical, these are areas that we continuously want to build the talent community and something that we'll spend our time to focus. Logistics, I think, is fairly stable, I would say, in terms of its occupancy. Not much leases are up for renewal in this quarter.
I think if you have been looking at how we've been looking to shape our portfolio, I think the focus remains the same. Now that China has opened up, I think there's a lot of pro-growth policies that are supporting. I think the monetary policy is also very accommodative. You see the government focusing a lot on the economic development front, trying to create jobs, employment, all this positive feel-good factor. I think we need that to carry on for a while to see the implementation down. As the business confidence and consumer sentiments improve, I think it will shape what we want to do in the second half much better. We'll continue to focus on that three tenets of creating value. We have seen some of these ideas extracting through AEIs, and we'll continuously look at opportunity to monetize some of our assets to recycle.
It will help us to further our growth in the strategic alignment of where we want to shape the portfolio towards this on a longer term. Short term, I think we will focus to strengthen retail holdings, bring in a little bit more of the new economy assets that can give us that quality in terms of that strength in the revenue sectors. As we become bigger, cost of capital becomes better, then we look at bringing on board the more bigger commercial integrated. These are some of the first quarter's results that I want just to highlight to you. I think you can see where we are coming from. We are reducing exposure or space towards anchors and bring on board more shops, more retail offerings, that can better capture some of the catchment spending of today.
Some of this upside, as we speak, they are progressively being completed towards the first quarter, and starting from April onwards, some of this upside will flow in. I mentioned it earlier, this is the Grand Canyon. Same thing. Upside will start to come in from the second quarter of this year. This is a slide that I wanted to share with you, that the next major AEI that we will be embarking on is actually the basement of Grand Canyon. We will be taking back the whole basement, which is currently leased to an anchor supermarket. We are going to reduce the format into something that is, I would say, more interesting, that could connect with the younger shoppers of today. I think this anchor has been around for a long time. I think we need a refresh.
We have chosen something to partner us, and I think alongside that, there will be more area that we can use to inject a little bit more activities towards the basement. I think we are progressing the work, and you can see that progressive completion towards the third quarter and towards the end of this year. Similarly, at Rock Square, we have already started the take-back of some of the area from the AEON space. Again, we are going to be able. This is a good area and Basement 2, where the escalator will come out from the MRT. This is going to be a huge flow of traffic, and I think we are going to configure into something that is smaller and able to have those capture the fast moving.
All in, I think we are also expecting these works to complete around the third quarter, and similarly at Level 3.
This is a good chance for us to take back some of these bigger F&Bs that are reaching its expiry. You will know that we have done quite a fair bit to rejuvenate Rock Square since our first acquisition in 2018. These are the last batch of the big format F&Bs that are coming up. It gives us that good opportunity to resize and to bring in a little bit more things to capture spending. Look forward to this coming in in the third quarter. I think these are some of the examples that we are doing for this year. I will not talk too much of it. I think I will just leave with you some of this that I have already mentioned, and we will move into the Q&A.
Okay. Thank you, Tze Wooi. Let's now go into our Q&A section. Can I pass the time on to Terence Khi?
Hey, thanks, Nicole. Thanks, Tze Wooi. Congrats on a good set of numbers. Maybe I can first ask on the reversions. Could you share on the reversions for retail, business parks, and also logistics, if possible?
Yeah. Reversions, I would say for the one quarter, a large part of the reversion positive effect was through Yuhuating's AEI. So that lend us in about 3% for the first quarter. For the business parks, as I mentioned earlier, we are also trying to balance some of this asking rental with the occupancy target. So on a net basis as a portfolio, we are reverting at about 1.5%. Logistics is a bit flat for this quarter because there are not too many expiries and renewals happening.
Thanks. Especially for the business parks, you mentioned that we are looking at some of the smaller e-commerce tenants leaving. So, how should we see occupancies trending? Have we seen the worst of it yet? Or when should we expect a firmer recovery?
Yeah. If you look at where things were, I think six months ago, then rolling into December and rolling into March, I would say that the so-called dilution or the attrition of those smaller players have probably, we have seen that big buck of it happening. In terms of March, you do see activities picking up. I would think that those attrition that we are seeing in the fourth quarter, when things are coming through for expiries in January and February, the smaller players are still not picking up space. But as we move into March, I think with the reopening, I think with the business activity improving on a net basis, we are signing a little bit more leases. As I mentioned earlier, there's a slight. I think one quarter is probably the trough if you look at where things are.
And I think in terms of the occupancy, as we move towards June, September, we should see that progressive improvement that's in alignment with the whole business activity outlook that I spoke about earlier.
Thank you. And final question from me. In terms of the debt financing cost, I see that it has gone up slightly from fourth quarter to this quarter. Post the refinancing, how much more should we expect in terms of higher costs? Do you have some sort of outlook in terms of what will be the cost for this year?
Yeah. If you look at how we ended the whole of 2022 at about 3%, it was a weighted average. And if you look at where we started the year, obviously, it was lower, right? We tracked sequentially. But where we end off the fourth quarter, the rates have already moved quite visibly and all of these are very clear. The base rates have already reached about 3% and some of our refinancing in the second half of 2022 were repriced. So that sequentially moved our average cost of debt to about 3.48%, as you see. But if you look at the next slide, you can also see that essentially, we have already refinanced the tower of 2023 up. So this extension of maturity and the cost of debt, I think the majority have been built into this 3.48% already.
If you look at the amount of loan base that we are still subject to the interest rate volatility, I would say not a lot. Barring how interest rate would move, I would say that the amount of refinancing has been already done, is already inside our cost of debt, and the amount that is still subject to further will not be significant.
Okay, thanks. Maybe I will leave it here and ask more questions later. Thank you.
Thank you, Terence. Over to you, Geraldine.
Hi, good afternoon. Are you able to hear me?
Yes.
Okay. Maybe a couple of questions. The first one, a second question to Terence's first question. For the loan that was refinanced this quarter, SGD 200 million, are you able to let us know what was the rate that was secured, and if it was onshore or offshore?
The SGD 200 million is offshore. Joanne, you want to share a bit more there?
Yeah. Actually, Geraldine, for the loans that we are refinancing, obviously, I think we didn't want to know that now that we are actually basing off annual margin has also impacted to a certain extent. So in terms of the margin, we do see some impact on the margin. And of course, the fixed rate is also given against the existing leases three or four years. So I think all in, it is around that kind of 4% that we assume, because if you see the current swap rate is already about 3%, plus another margin, it is easily 4%. Yeah, I hope that answered your question.
Okay, thank you. Very clear. My second question will be on your business parks reversions. I think this quarter looks a bit more modest compared to the above 5% that you've been achieving for the past many quarters. Do you think that we are still in the growth stage in terms of passing rents? And how long you see the risk of supply going on for in the business parks space?
Yeah. If you look at when we first acquired the business parks, I think we have been guiding that we can revert in the mid-single digit, right? About 5%-6%. I think in the last few, or rather since acquisition, we have done slightly better in the sense that we were able to talk about the 6% level. But as you look at the passing rental that are coming up for renewal, we have to then look at each asset in specific. Which are the ones that are coming up for renewal against what are the new tenants that we would like to attract in. Also looking at where things were impacting some of these tenants due to the COVID-19 disruptions, people's business outlook may have moderated. Some are also reviewing their own business model in terms of space needs.
Some of these are going through as we negotiate for leases. I think what you see in this quarter is a reflection of that window of negotiation and therefore the rental reversion has moderated down. I think this year is where I mentioned for some of those, we have to keep looking at where to find the right balance. I think in the Hangzhou area, that's where because of the tenancy, the occupancy that we want to bring in and also some of the new supply coming, I think in terms of asking rental, we have to moderate a little bit. I think in Suzhou, I think it's a little more steady. I think so far Suzhou is less impacted because of the park positioning and also the kind of tenancy exposure we are already oriented towards the professional services, the infocomm, the biomedical.
I think these are the areas where they are less, I would say, rent sensitive per se. I think it will be quite asset specific, but largely we should moderate down a little bit, if you want to balance the occupancy versus the tenant that we want to bring in.
Okay. Thanks so much, Tze Wooi. Thank you.
Okay. Thank you, Geraldine. Can I have David, please?
Yeah. Hi. Good afternoon, everyone. A few questions. The first one is that on a portfolio basis, revenue and NPI were down slightly year-on-year. With regard to the new economy assets, were there any assets that also had a negative year-on-year performance?
In terms of the new economy, you mean?
Yeah. Any business parks or logistics that saw a negative year-on-year performance in revenue or NPI.
Yeah. The main ones are actually the two Hangzhou that I mentioned.
Okay.
If you look at where we ended the year in the fourth quarter and how things were shaping into the first quarter of 2023, we are actually working off a lower occupancy relative to the first quarter of 2022. Essentially these are the two new economy assets that you see that slack down in terms of that year-on-year variance.
Okay. I also noticed that the WALE of your business parks and logistics is now much shorter than the shopping malls, which are already pretty short. I noticed that you have a lot of renewals for the logistics properties this year, and I assume you have some renewals for the business parks. On a more normal situation, what should the WALE be for these segments? Surely they should not be so short, right?
Yeah. David, you rightly pointed out. I think for the logistics asset, if you recall, we acquired this from a third party only towards the end of 2021. This is going to be the first lease cycle post-acquisition that we are renewing. Obviously, the current WALE is a legacy that we took over. As we look at the new lease structure, we are thinking of how to stagger them better than to have all of them bunching together. That's definitely something that we would like to work through the renewals this year. Most of the market, I would say, unless it is very built to suit, unless it's a very clear single purpose type, I would say the business parks so far behave also around the two to three years kind of WALE. Obviously, with the space, the anchors, they take up more.
I think we can look at extending beyond three years. These are some of the feedback that we are already well aware. We'll work through with the property teams to look at selectively extending and staggering some of this WALE for different assets. This is something that we're looking into.
Finally, for the logistics park leases, do you have any guidance on what type of rental reversions you would expect for your first round?
I think logistics have to go again asset by asset and depending on the second half. Hopefully, we are moving into a window where the business outlook is a little better than where we ended last year. I think it all depends. It is very difficult for us to prescribe a reversion ahead of time. Give us some time and we will probably update you along the way.
Okay, got it. Thanks. Thank you.
Thank you, David. Can we have Joy, please?
Yeah, thank you. Hey, Tze Wooi.
Hey.
Just a follow-up on logistics. Have you started negotiating with your tenants on renewal? We are seeing quite a lot of supply coming through this year.
Yes.
What is the risk of non-renewal at this stage?
Yeah, I think definitely this is something that we are watching very closely, especially this is something that we are renewing for the first time since acquisition. We are clear that this is something we would like to do. Obviously, we have already hit some and negotiated some of them. As I mentioned, we have to choose the window right. If you were to do it too early, sometimes it may not work directly into our favor because this is the first time. What we are trying to do is to progressively, I think by June, by September, we are going to close some of these negotiations. You are right. Supply is an issue, is city centric, is sub-market centric. So far, I would say that the location of our logistics, it is good. Yeah. It is near to all the transport nodes.
So far, if you look at Shanghai, you look at Kunshan, I think these are okay. Wuhan probably will feel a little bit more in terms of competitive supply. I think that is the first one that we are trying to address. Yeah. Chengdu, again, this is the only asset we have. Many small leases. So we are also trying to look at how leasing has done in the past, whether we can amalgamate some of these spaces to tenant out differently. Definitely, this is a core area of work that we want to do. To answer you and David, it is very hard to guide reversions at this point in time. Supply, landlord, tenants, they are always in that bargaining situation. So, let us see. Yeah.
Okay. I guess just on the strategy itself. When we took on this new economy asset, it was supposed to diversify risks in terms of earnings and et cetera. But, having owned it for a year and about a bit, how do you feel about managing some of the risk? Because actually the tenancy risk is very different, right? For example, your Hangzhou Business Park.
Yeah.
Do you feel that it distracts you from looking at your shopping mall and doing your AEIs at your shopping mall and getting better rental reversions there?
Yeah. I wouldn't say distract. I think it's part of the strategy that we want to diversify, and we have inherited the commercial teams that are looking at business parks all the time. So it's not really like having a retail team looking at new asset classes, but more so of already absorbing the existing Ascendas-Singbridge team who have been looking at the same assets for the last decade or so. I think from that perspective, I wouldn't say it's a distraction. Looking back at our strategy to diversify, I would say if you look at how we have navigated 2021, 2022, the whole vehicle is strengthened by the new economy in terms of that pivot. When you look at our whole earnings profile, about 70% came from retail, and the new economy actually contributed to the 30%.
Of course, if you look at 2021, 2022, which are the ones that are more subject to COVID measures, it's actually the retail, right? The business parks and the logistics give us that earning base, although they are not as large as the retail, but at least that 30% of earnings profile is stable. Retail needs a lot more active, I would say, adjustments along the way. That's why you see a lot of the identified AEIs are exactly to do that, notwithstanding we need to take down some of these assets, but to let them be stronger in the second half to capture the spending. So, on totality, I think the new economy has helped us to diversify, not just geography, but also asset class and the tenant base. If you look at our top 10 today, five of them are already coming from the new economy.
Now of course, Hangzhou, it's a case in point where if you look back, the disruptions, the smaller enterprises are the one that felt the heat a bit more, and therefore from a leasing angle, we've probably got to rethink whether we want to lease out to bigger players or different sectors. But that was a decision taken a while ago because e-commerce startups were on the rise. But now that the market may change or pause or things are slower, I think this is just part of the business that we've got to keep adjusting ourselves as we find what are the tenants we want to bring in. So this bring us back to the point where I mentioned you have to balance a bit on occupancy, the sector they want to attract, and also the asking rental. I think this is just part and parcel of business, Joy.
Yeah. Okay. Thanks. Just one last point on funding. If you were to get an onshore loan, what would be funding cost for that SGD 200 million, and why are we deciding to take the loan offshore instead of onshore? Thanks.
Yeah. The first point is because it was the offshore loan that is up for refinancing. Technically, if I can borrow onshore and free flow the money out offshore, that would be something that I would be keen to do. But today, the cross-border repatriation does not allow us to do that. It is an offshore refinancing, with the straight offshore. To your question, today, if I were to take an onshore five-year loan, the LPR is set at 4.3%. Based on the negotiation, sometimes we can work within 30 basis points to even 50 basis points below. We have done 30 basis points below. We are negotiating for even better. That is where things stand. We can do onshore borrowing at about 4%, whereas offshore we are probably doing 4.5% , so to speak.
But as long as that repatriation does not get resolved, it is not fungible, right? You cannot really increase onshore borrowing at this stage.
That is correct. Onshore borrowings can only be used for onshore needs. For example, some of these AEI CapEx, some of this dividend flow back, where we exhaust some of the cash onshore for other purposes. But it is not easy to flow them out like for like. Yeah.
Got it. Thank you.
Actually, yeah, very technically, in places you borrow onshore using SPV to borrow, of course, the cash can only be used onshore within the SPV. So technically it is a bit difficult for us to bring back to actually refinance offshore loan. Of course, I mean, we need to, I mean, we are trying our best to see if there are other ways to actually refinance the high yield bonds which are offshore, that give us more favorable.
Rates.
Lower rates than offshore borrowing.
All right. Thank you. That is all from me.
Thank you, Joy. If you have any questions, feel free to just raise your hands. I would like to pass the time on to Derek, please.
Hi. Thanks, Nicole. Hi, Tze Wooi. Can you hear me?
Yes.
Oh, hello. Hey. H i. I just want to go back to your portfolio of business park and logistics. I look at Hangzhou .
Yeah.
When occupancy is at this level, I am just wondering whether there will be demand, but where is demand, at what price? Are they coming in at your asking rents, or do you think you need to drop rents a little just to fill up the remaining 5%-10%? Just curious.
I think it depends really on how deep the relationship, how fast each other want to close the deal. All things constant, there will be some pressure on asking rent because of new supply coming in, and everybody is also trying to capture the relevant demand. I think there is a bit of that going around. That is what I was trying to explain, that as you look towards 2023, if you want to close deals in the first quarter, likely that you have to be a bit more accommodative on the rental side of things. That is exactly why we are also assessing the situation, trying to balance whether it makes sense for us to drop how much to allow that to happen and whether the tenant is someone that we want, that once you bring them in, you can build the tenant community around it.
I think these are some of the business decisions that we are working closely with our property teams. I hope that gives you some color on the business side.
Okay, no problem. I just wanted to get a sense. Filling up the property certainly is much better, I guess, because empty space doesn't earn any income, right? I just want to look at, apart from Hangzhou, if you look at Suzhou or even for the Innovation Towers, are we potentially at risk that we could see occupancy fall off a little bit?
I think if you look at the current tenant exposure we have for each of this Xinsu and the two Xi'an's, I would say they are stronger in their park positioning and in the kind of new demand, replacement demand or renewal demand. Some people who are already in our park who may want to expand space.
Yeah.
Why I single out Hangzhou is really because of the last few years, I think we have been waiting quite a fair bit towards the smaller players.
Yeah.
And I think that is also a resultant of the business environment changing, and some of these players may not be able to play the same, and I think there will be some adjustments on that front, time, and also the new selection of tenants. I think you see that a little bit more peculiar to Hangzhou. But for the two Xi'an's, I think we have been bringing it up to that 90%. I do not think that is far away. And I think Xinsu, very early, I start off by saying that it continues to be very steady.
Yeah. I think in terms of profiling each of these, I think the Hangzhou is probably one that this year we need to spend a bit of time to fill it up and at what rental and who to fill up with.
Okay. Got it. Then, sorry, just to go back to your logistics. I know you have addressed it earlier, but if you look at in-place rent versus where the signing rents are, do you reckon that we would see stability for whatever leases is coming up for renewal this year?
Well, we are gunning for flat. Yeah.
Okay. No problem. Flat's the new black, so it's great. Okay. I just wanted to go to your asset recycling. Is that in your slide 34? You mentioned that you wanted to diversify. I think just wondering whether in terms of acquisitions, do you think that there's a window for you to buy well and at a good price? Do you think the window will close as China reopens? Similarly also on your, previously you talked about selling assets to fund some of your acquisitions. I just wanted to, if you don't mind, just refreshing our memory on this. Yeah.
Yeah. So, very good question. I think we have always guided that ideally we would like to monetize something to unlock, recycle, to fund wherever we have intention to bring them in. I think this approach remains the same. I think from the divestment front, in fact, as we move into the first quarter of this year, more people are able to travel, more people are back to the drawing board. I think that hopefully will help us on that front. Once we can unlock value, recycle, I think it makes the conversation easier for us to look at some of the targets that we are already identifying. The other good thing is if you look at last year, I think there's a lot of more volatility both on the debt and equity side.
I think as we roll into this year, with China reopening, and I think interest rate, I think we have mentioned we are really leveling off. I think that should help us. Of course, I think we have to think about the sources of funding and how much and what deal size. I think these are something we have to calibrate more carefully. Yeah.
Got it. Sorry, just last one from me. I just look at your retail, right? I think the metrics are looking very encouraging, but generally what we have also noted is that rents tend to lag the sales up. Just wondering if you try to look at 2023, if let's say tenants continue to do well, your reversions for retail, are they going to be leading the recovery this year? Or you think you will be a bit more careful and let your tenants gain back a bit of their profits first before you start to move that rent?
Yeah. If you look at our retail strategy, the main reversions drivers will come from the few AEIs that we mentioned. That is also to drive the whole portfolio. With the AEI space and what we are bringing in on a net basis, the portfolio is actually on the positive territory. That will allow us more space for the organic bread and butter to renew. There will be a little bit of that downside pressure, still selectively, especially for the first year, if you want to bring in stronger brands. I mentioned earlier that most of the negative reversions that you saw arise because of us replacing some of these more fashion-oriented space. But over time, that fashion is going to become less and less of our portfolio in terms of passing. Hopefully that will then help us to avoid bigger negative.
If you look at where the F&Bs are trending, the services, the leisure, even the health and wealth, sports apparel. I think these ones you mentioned, if they do good sales, it gives us better room to ask for higher rental, in the subsequent years. Good thing is, if you look at our occupancy cost across our portfolio, I would say in the first quarter with the sales coming up, with some of these rental adjustments that we have given to the retailers, they are now much better in a healthy zone, about 20%. Right? I think you will know in the COVID situation, it was much, much tougher. I think with that, give them a bit of time, outlook improving, traffic, sales picking up. Then I think we enter into a more normal kind of occupancy cost structure structure that we can then move on from there.
A lot effort these few years is actually on the AEI. We started off with Xizhimen, with Wangjing, with Yuhuating, and then now we are doing Grand Canyon and Rock Square. These are the key ones that will help us move that reversion. Year on year, if you look at where things were last year, first quarter and one half, there are several malls that went through quite tough times, right? Your Harbin, your Inner Mongolia. This year, I would say easily they will do much better, right? Because things are opening up. These are the malls that will help to give us that year-on-year effect, as we take that opportunity to do AEI in the first half of some of the selected ones I mentioned with their contribution coming in the second half.
That is how we try to, as we work through the portfolio, that is how we think about 2023.
Okay. All right. Okay, Tan, thank you very much. Sounds very good. All right, thanks.
Thank you, Derek. Can I pass the time to Terence, please?
Hey, thanks again for taking my question. I wanted to ask a little bit about, I understand today you spent some time in China, you visiting the malls. I wanted to ask you to perhaps you can share some of your observations. I understand that there are some concerns right now as to whether on the strength of China's retail sales recovery, coming out of COVID, there is some who feel that it should have been stronger. Do you feel that the retail sales, and of course, CLCT's retail sales are actually growing at a stronger pace versus, let us say, overall country retail sales. How are you seeing the Chinese consumer and how is your portfolio doing on the ground? Maybe some on the ground insights. Thanks.
Yeah. We have 11 cities. Each city, each sub-market catchment, one thing to talk about China is sometimes we need to be very cognizant that it is very hard to generalize. We are so used to Singapore, right? Singapore is just this one market. As I go to Guangzhou has its own point of recovery relative to, let us say, Beijing or Harbin or even Inner Mongolia. Just now I mentioned, if you look at where things left off in the northern sector, I would say that the first quarter of 2023 is encouraging, because last year, the fourth quarter, essentially, most of our northern malls are not able to operate properly. In the first quarter of 2023, you see them coming back.
A lot of the sales year-on-year growth arose from that component over what I mentioned earlier, the post-AEI effect of some of our Xizhimen and Wangjing that is driving. Yuhuating, after our AEI, I think that will also progressively help in the second quarter of this year. What is my observation? First thing is definitely business activities are leveling up, and it is leveling up month on month sequentially. If you go to the airport, you see more people. If you go to the office lobby, you see more people. You travel on the roads, you see more cars and jams. These are signs that business activities are coming up. I think on the whole, this is good. What is not so apparent, or what is not so good, is that I think there are some scars from the COVID.
If you talk to a lot of people, some of them are staff, some of them are retailers. I think you need to give that a bit of time for the consumer sentiments to come back. Things are improving, but probably the pace is not as soon as some of us expect it to be. This is only the first quarter of 2023. I mentioned January, February is relatively quiet, so only March you see a bit more. I think let that trajectory run its course. I think that is good. What is on the mind of people that I talked to when I was in China, I think a lot of people are also looking at their income, their jobs.
I think it is quite real that in the past few years, family income could have been impacted, and therefore people are a little bit more cautious in where they spend.
I think that is very important for us to know that when people spend, their first spend would be channeled where. I think F&B is probably where we see a lot of spend, a little bit on that healthcare, their wellness. The younger people are into all this athleisure. I think these are some of the trends that we are seeing on the ground. I think the key is whether we can capture and lease the space concepts, be able to bring them in and attract some of this spending. Among the cities, I would say Changsha, it is less impacted. They are very fortunate. The people over there, I think in terms of their mind, they are more able to go back and spend more time outside. I think this is very much in their culture. We do see that happening. Where did I miss?
I mentioned about North Beijing is improving well. Guangzhou is recovering well as well in terms of people coming out.
Thanks. Actually, just to clarify, did I hear correctly, you said occupancy cost is now about 20% for your malls?
Yeah. As the portfolio for the first quarter, where we end first quarter, because of the improved sales and also some of the passing rent adjustments, like I mentioned earlier, especially in the first year, some of these new ones that we brought in, we give them sometimes the first half to one year. So they are now trending around the 20%. If you followed us, you would know that it went as high as 30% last year.
Thanks. That is very encouraging. Finally, I guess, maybe a little bit more on the acquisition front. I guess previous guidance was that you are looking a little bit more at the business parks from your sponsors portfolios. Is that still a similar guidance as from last quarter?
Well, we have been focused on wanting to strengthen our retail holdings. If we can unlock value from that to channel the capital towards bringing in new economy, that is our ideal focus. I think that stays. Yeah.
Okay. Thanks so much.
Thank you, Terence. Over to you, Joel, please. Hi, Joel. I think you're muted. Let me try to unmute you.
Hi, can you hear me?
Yes.
Yes.
We can.
Hi. Hey, thanks Tze Wooi and Nicole for the presentation. I just had two questions. The first is regarding the footfall and sales for first quarter 2023 against first quarter 2019. Is this on a same store basis? I know you said that it's 95% pre-COVID.
Yeah.
For sales. What would it be like?
Yeah, essentially they are on the same basket of assets, adjusted for the holding period, because I think 2019, we do not hold certain assets for the full financial year. I think we were also trying to compare on a full year basis, what that means. If you look at the retail assets, there's only in 2019, there are some assets that the holding period is not for the full year. We do count, if you have held it for a full year, what that number would have been. The other small change would be in relation to we swap an asset in Inner Mongolia for CapitaMall Saihan with Nuohemule. I think in terms of looking at the basket, this is essentially that small change. Yeah. But other than that, the number is measured on the same store basis. Yeah.
Understand. Could you share that percentage in terms of footfall 2023 versus 2019? Is that like, I don't know, 90% recovery?
Yeah.
80%?
Sorry, can you repeat because we couldn't really quite hear you.
Yeah, sorry. The question is, for footfall, what's the recovery percentage like? Is it 80%, 90%?
If you're looking at March itself, I think that's already in the 80%+ versus 2019.
Sure.
Yeah.
Okay, thanks.
I think the recovery is a range depending on the mall. So, obviously for our malls like Xizhimen, Yuhuating, Nuohemule all these have already reached the 90%+ , 90%, 95%. Then there are some that are still recovering a little bit slower. Say, for example, Grand Canyon. On a portfolio basis, I think we are looking at around 86% for the Beijing side, around 80% for the non-Beijing malls. Yeah.
Okay. All right. Thank you. One more question is regarding, because I was looking at data from across in Hong Kong, and I actually saw a sharp pickup in certain luxury brands and fashion apparels. So I was wondering if you see something similar or is that more like a tourist or Chinese tourists going Hong Kong and making those spend rather than the crowd that you cater to at your malls. Just wondering if you could share some insight on that.
It is difficult for us to comment on whether someone else's Hong Kong portfolio is because of tourism. It's difficult for us to comment, but our malls are oriented more towards the catchment family spending. So it's less playing to the kind of touristy traffic flow, so to speak. Our portfolio are shaped more towards the daily necessities, the lifestyle, the kind of brand mix, the kind of trade catch are more to support the family, to orientate them to come to our mall. So luxe is probably not an area that we look at. But we did share with you that if you look at the sales, we do able to see uptick, especially in the F&B, in some of the beauty and healthcare, in terms of jewelry, in terms of services, in terms of leisure and entertainment.
These are some of the ones that our data points suggest that 1Q with that flow back of people, the spending, these are the main categories that we see capturing.
Sure. All right. Thank you so much. That is all from me.
Thank you, Joel. Do we have any last questions? This is actually the first quarter that we have that we actually end one hour on the dot. Thank you everybody. Feel free to just reach out if you have any questions. Would you also like to give any, yeah.
No, right. I think we have given you the business update. I think key message is 1Q. We are moving into an improving business environment. Hopefully with more pro-growth policy support and the stimulus the government is looking at, the business confidence and consumer sentiments continue on that trajectory. On our hands, whatever AEI we have done last year will help to provide us that stable and uplift while we take some of the other asset spaces to continuously do the AEI that will then start to contribute in the second half of this year. On the new economy I mentioned, we are capturing the new demand I mentioned earlier on the BP. Then for logistics, we are looking at renewals.
I think this is a focus, and if we can recycle some of the capital, I think it opens up window for us to look at acquisitions that continuously strengthen our portfolio. All right. With that, I think thank you very much for your time. See you next time. Yep.
Thank you. Thank you all. See you.