Good morning, and welcome to the Cromwell European REIT's first half 2023 results briefing. We will begin with a presentation by the Cromwell European REIT management team, followed by Q&A. During Q&A, please click the Raise Hand button to be placed in the virtual queue. Now, I'll hand across to the CEO of the manager of the Cromwell European REIT, Simon Garing. Simon, over to you.
Thanks, Kiara, good morning to everyone, and thank you for joining us today. By way of introduction, Cromwell European REIT, or CREIT, as we will refer, owns EUR 2.4 billion or almost 2 million square meters of European commercial real estate, managed by over 200 Cromwell staff located in 14 cities across 10 countries.
Today, we are pleased to report that CREIT has effectively reached the important milestone of being 51% or majority weighted to logistics and light industrial, post the pending sale of Bari Europa. We will continue to drive this portfolio weighting higher. Turning to the next slide, the macroeconomic conditions in the first half have been challenging, with headwinds on many fronts. This slide provides a good illustration of how we see CREIT's mid-year scorecard and demonstrates our ability to effectively mitigate the challenging period.
Firstly, cap rate expansion has put pressure on asset valuations, but our portfolio has been resilient, with a modest decline to the latest valuation, supported by higher rent growth and leasing success. Secondly, the ECB lifted interest rates in July for a ninth time in a row to 3.75%, with perhaps one or two more increases to go. Although we are not immune to higher interest rates, we were able to effectively mitigate this through a high level of fixed hedge debt, while recent margins on our new debt aren't too much higher than previous facility costs. Thirdly, Eurozone headline inflation has been trending down from its peak in October last year, but core inflation continues to persist.
As most of our rents are indexed to inflation, this has benefited CEREIT through higher net property income, with first half 2023 rent reversion up 5.9%. Lastly, secular trends, coupled with weak economic growth momentum, continued to affect office space demand. Therefore, the pivot to majority towards logistics has mostly insulated CEREIT's portfolio income and valuation. Slide 5 provides a snapshot of the first half performance, which we discuss in detail later on. There are two overarching points for investors to take confidence in from these results. Firstly, the balance sheet is in very good shape. We were able to sell EUR 135 million worth of assets at a 5.4% premium to valuation and keep gearing below 40%.
NAV is still a very high EUR 2.30 per unit, compared to CEREIT's unit price on the SGX of EUR 1.55. With our recent refinancing, we have EUR 500 million of ample headroom now to MAS and loan covenants of 50%. We have no debt facilities expiring until November 2025. Secondly, the DPU is still very resilient. Overall occupancy is maintained above 95%, with like-for-like industrial NPI growth of 8.7%, with almost enough income growth to offset the rise in interest costs. Our DPU, that we announced today, of EUR 0.0779 per unit, annualizes to a 10% yield at today's unit price, well above the sector average.
Why has our valuation only moderately declined 1.6% in the half, or 3.2% over the past 12 months since the cycle turned? This chart shows that the portfolio's relatively high initial yield of 5.9% has provided that conservative cushion to the rise in European interest rates, a result of our acquisition strategy aimed more at the small to mid-size core plus and value add assets, rather than the generally larger and lower-yielding prime assets most impacted from the recent rise in interest rates. Notwithstanding that our valuation cap rates have moved 74 basis points higher, that's less than prime yields reported by Savills, but the higher rent growth and strong leasing results have mostly offset, offset this headwind.
European real estate investment markets were extremely quiet in the first half, with European commercial property acquisitions falling to the lowest level since 2010 in the second quarter, as you can see on this right-hand column chart. Inactivity was spread fairly evenly across Europe, with all major markets and sectors reporting major decreases from the average.
Private investors are buying in this market and tend to be in the EUR 20 million-EUR 50 million lot sizes, again, mostly where our portfolio is situated. Governments are also using this opportunity to buy strategic assets back, again, supporting CEREIT's process. The rate of decline in prime green office yields have started to slow down as we get further into the rate cycle, with less than 20 basis point cap rates reduction in the second quarter.
Savills are forecasting around only a 10 basis points more to rise in prime green office yields, while secondary office yields may move by up to 50 basis points, reflecting the softer occupying markets. Logistics prime yields are expected to lift only another 20 basis points on average across Europe. These market conditions provide the context to my next slide, where we continue to execute our investment strategy, heading towards that majority weighting to light industrial and logistics. As I mentioned previously, over the last year or so, CEREIT has sold six assets across four countries, amounting to EUR 135 million, at that blended 5.4% premium to the most recent valuation.
Most recently, Piazza Affari, which was our Grade A office asset in Milan, was divested for a healthy EUR 93.6 million at a EUR 12 million or 15% premium to the purchase price, and EUR 200,000 above the recent June valuation, and on a yield around 3%. We're on track to divest EUR 200 million this year out of the EUR 400 million divestment program that we announced last year as our strategy over the next two to three years. While it's taking longer for buyers now to secure finance generally across Europe, the Europe-Ukraine war is limiting the foreign buyers engaging in our Finnish and Polish sales process, with thus less pressure on the domestic buyers to close on these assets more quickly.
The Bari Europa Tax Police asset sale process is coming along well, with most of the major CPs now reached. We plan to close this sale by the end of the year. CEREIT's resilience of income is underpinned by our tenant roster, with close to 850 tenants, to mostly government, MNCs, and larger blue chip companies across more than 1,000 leases. There is plenty of diversification and high credit quality in our tenant roster. Our top 10 tenants now account for only 28% of the portfolio's total headline rent. While no one customer tenant industry segment accounts for more than 16% of the portfolio, this is a very important metric, particularly for our bond investors. CEREIT is now one of only three Singapore REITs with a leader MSCI ESG AA rating.
It also recently advanced one spot to claim the number seven place amongst the prestigious NUS Business School Singapore Governance Index, retaining its place in the top 10 for the fourth year and achieving the second highest base score, again, reflecting Cromwell's culture, governance culture. We just completed CEREIT's fifth GRESB submission, and I'm pleased to share some of the ESG highlights from the 2022 environmental performance on this slide.
With the introduction of the PropTech tool, Deepki, across the portfolio, we are more efficient in data collection and analysis, so we're already well prepared for the introduction of ISSB, which is the new ESG code under IFRS, and are moving to reporting under Article 8 in Europe's very stringent SFDR framework. With that, I'll hand over to Shane to run through the financial performance and capital management. Thanks, Shane.
Thanks, Simon. First half, Net property income was EUR 68.5 million. This was up by 1.8% compared to the prior corresponding period, or PCP, and this was mainly due to higher rental income from inflation indexation and acquisitions which were completed during FY 2022, only partially offset by more recent asset sales of EUR 135 million. Total interest costs increased by 50%, which was mostly offset by the NPI gain. The increase in interest cost was largely due to the three month Euribor, which in one year has moved from 0% to close to 4% today, as well as a smaller impact coming from refinancing at higher margins from the old facilities. The hedge rate through most of the period was 75%, before we lifted to 94% when the rates hit 3%.
First half 2023 adjusted DPU of EUR 0.0779 was moderately down 4.5%, excluding income recorded in the first half of 2022 from the two Italian assets that are now under development. The board has decided to preserve capital gains and not provide for a distribution top-up in the first half to offset the lost income from those developments, given the weaker macro fundamentals and tighter credit markets. The actual DPU was down 10.4% due to this more conservative payout decision. This next chart shows the positive impact from the pivot to logistics and that the benefit that's had on NPI, with the sector's contribution increasing to almost half of the portfolio NPI, up from 34% two years ago. Notably, though, the office sector did show a better performance both quarter-on-quarter and half-on-half.
In the first half, the office sector NPI was 1.2% higher than the PCP on a like-for-like basis, and this excludes Nervesa and Maxima. A slight increase in vacancy in the office sector was more than offset by rental growth from indexation. Turning to the waterfall chart, so this is really an effective way to show the major drivers of the difference in DPU in this half year compared to the PCP. As I mentioned, the stronger NPI growth offset close to 80% of the interest cost increase. The third factor to note was the EUR 0.005 impact, or approximately EUR 3 million of six monthly income previously earned from Nervesa and Maxima assets being under development now. Nervesa is expected to be income producing in the first half of 2024....
While divestments didn't have a material impact in the first half, the sale of Piazza Affari occurred in the end of June, and will have around a EUR 1.5 million impact on NPI in the second half. However, the RCF was repaid with the proceeds of the sale, therefore, we wouldn't expect much impact on the bottom line. It was pleasing to note that operating costs were well contained in the first half of this year, at EUR 31 million in total, compared to EUR 31.2 million in the PCP. Offsetting service charge income, the net non-recoverable operating expenses was EUR 11.9 million in the first half. This was only 5% higher, which is considered a pretty good result in such a high inflation environment, and underlining, underlying the good work of the asset management teams. On to the balance sheet.
Quite a lot to talk about on the balance sheet this time. As at 30th of June, CEREIT had EUR 140 million of cash, with EUR 94 million of that coming from the sale of Piazza Affari, which occurred at the end of June. This cash was used to pay down the RCF in July. Next to note is the contracted sale of Viale Europa 95, which was announced in early June. This sale still has some conditions precedent, so we do not expect completion of this until 4th quarter of this year, at the earliest. We are holding this as an asset, at a sale price above the latest valuation, as an asset held for sale.
You will note that we continue to highlight there is a contingent liability from the original acquisitions of these Italian assets, which we are still negotiating with the previous owners. NAV was EUR 2.30 per unit, following a modest fair value decline in investment property valuations in June, and from the debt-funded development CapEx, not fully captured in the valuations. We are pleased to announce two recent refinancings. Firstly, a new five-year sustainability-linked revolving credit facility for an aggregate amount of EUR 165 million. The signing of this RCF follows the recent full repayment of the old facility. Secondly, a new four-year sustainability-linked loan facility of EUR 157.5 million, to refinance the last of the FY 2024 debt expiries, leaving CEREIT with no debt expiring until November 2025.
Weighted average debt maturity stood at 2.5 years at the 30th of June, although this would increase to close to three years on the basis of the new facilities signed being fully drawn. Margins were around 50-70 basis points higher than previous facilities, reflecting the tighter credit conditions. However, we are pleased that all traditional bank lenders for these facilities have renewed their lending to CEREIT. While CEREIT's aggregate leverage ratio recorded was, or on a headline basis, was 41.5% as at the 30th of June, this reduced in July to 39.5%, following the Piazza Affari sale. The current leverage is well inside the loan covenants and MAS limits, while we continue to operate inside the board policy of 35%-40%.
We are in advanced negotiation for the sale of selected non-strategic assets, which will continue to be used for liability management and to offset any further decline in valuations. We remain committed to maintaining CE REIT's investment grade rating of at triple B- , with stable outlook. The all-in interest rate in the first half was higher at 2.85%, compared to 2.38% at 31 December. If we were to draw down fully on the new RCF, the effective rate would be closer to 3.3%.
As a sensitivity, a 100 basis point increase in the three month Euribor would increase the all-in interest rate to around 3.4%, and the impact on full year DPU would be about 0.38%, around 2% impact, assuming the refinancing is in place and the RCF was fully drawn. If the RCF is undrawn, then the impact would be only 0.6% or EUR 0.09. Turning to asset management. On Slide 20, you can see the chart on the right-hand side that shows the portfolio weighting by country to really keep in perspective the occupancy, by, by country on the left-hand side. The Netherlands, Italy, France, and Germany account for 75% of the portfolio, and these are all above 94% occupancy.
Finland and Poland office show a weaker performance, which is explained by the secondary locations and grades of these assets. We have already initiated sales programs for some of these assets, which only makes up 12% of the portfolio. In the second quarter, tenant retention was high at 67%, taking the half year retention to 74%, while for the overall portfolio remains above 4.4 years. While, a little shorter at 3.4 years, due to the break options with the Italian government and the typical French leases in particular. The next slide reflects CEREIT's portfolio occupancy, which remains close to 95.4%, slightly down from the previous quarter, but underpinned by 128,000 square meters of leasing in the first half of this year.
Rent reversion was 5.9% with 74% tenant retention, as I mentioned, with the statistics showing some moderating of growth on a smaller size, smaller sample size of leases completed. We have less than average number of leases expiring in the next two years, averaging around 10% each year. In addition to the new leases closed in the second quarter, we have de-risked almost 50% of the next six months of lease breaks and expiries, as at the 30th of June. A large part of the impending industrial vacancy risk is the expiry of a rent guarantee in Sognevej in Copenhagen, and the lease surrender indemnity in Vittuone, Milan, which enabled a major AEI to be undertaken.
We have good prospective tenant interest in both of these assets, with significant leases already signed with LesiPlex for 4,700 sq m, starting from October 1st this year in Sognevej, and Stellantis for 11,000 sq m, starting on August 1st in Vittuone. Advanced discussions are already underway for our key 2025 office leases across our well-located Dutch Grade A office assets, generally reaching higher rents to fund accompanying AEIs and energy saving measures.
We recently secured a new 10,000 sq m lease in Haagse Poort to a global asset manager, who acquired a business from our largest tenant in that property, Nationale-Nederlanden, and they occupy 52,000 sq m. We are in good discussion with this key tenant on its renewal requirements. We have also secured new leases in Den Bosch and Utrecht. On the downside, a major bank has given notice not to renew 5,000 square meters in one of the Krakow assets in 2025. With that, I'll now pass back to Simon to discuss the sectoral information in more detail.
Thanks, Shane, just giving some color on both of our, our key asset class segments. Slide 23 reflects the light industrial occupancy, which remains close to a record level of 98%, flat on the quarter, and underpinned by 64,000 square meters of leasing. Rent reversion was a very positive 6.9%. It was actually 11.4% in the second quarter. Some examples include a five year lease in Jena, in Germany, for a 23% increase in rent, ensuring a 100% occupancy in that property, and a new three year lease in Naverland 8, in Copenhagen, was also signed at a 19% rent reversion, and displaying that income in this sector is continuing to grow. The sector WALE has been maintained at a very healthy 4.9 years.
More specifically, in logistics, this record occupancy of 97.9% can be explained by the continued leasing activity and increased occupancy across most of our countries, with five countries at 100% occupied, while the green line, you can see Denmark continues to improve. Pleasingly, Parc des Docks, our flagship asset in Paris, has moved occupancy up 5 basis points to 95%, lifting France to 98% overall, as we continue to rotate older tenants on lower rents to upgrade at significantly higher rents. This strategy has underpinned both the income and valuation growth of around 60% since we acquired this asset. We are also making good progress with the planning authorities for a substantial redevelopment of this site. This next slide shows European market data for the logistics sector.
The chart on the left, top left-hand side, shows the high quarterly take-up of logistics space during the last few years, with another good start into 2023, in spite of the slowing economy. The green line shows that overall European logistics vacancy sits at a new record low of 2.3%, a new record low of occupancy at 2.3%, similar to our own portfolio statistics. This situation is partly explained by the chart on the top right, where we continue to see growth in the e-commerce sector continuing to accelerate since COVID. Some of the key markets in which we operate, we still expect further room as a percentage of total retail sales for e-commerce to growth, as shown in the pale blue boxes on that top right-hand side.
Occupier desire for supply chain resilience and security continues to be another major driver of light industrial and logistics. Recent events like the pandemic, the Ukraine invasion, and protectionist national policies, have illustrated the risk of having long, complex supply chains, which is leading occupiers to store more inventory and localize supply chains. This takes time. It's not a quick task to move production from Asia to Europe, as an example, so it's a long-term tailwind that we expect to continue.
A good example of onshoring to protect local industries from future supply shocks, is the new European conductor policy to lift European chip production from 9%- 20% of global production by 2030. A recent Savills report highlights that the EUR 43 billion of planned investment could lead to demand for a further 10.8 million square meters of warehouse and industrial space.
We're also pleased to have secured ASML, Europe's largest chip fab manufacturing machinery producer, as an office tenant in one of our Dutch buildings now. Turning to office, leasing activity in the office portfolio accounted for substantial 60,000 square meters of new leases and renewals, with a positive 5.7% rent reversion rate, again, driven primarily by demand for Grade A offices. This is a theme we've spoken about for the last 18 months. Overall, the half-year occupancy for the office portfolio remains slightly below 90%, and the WALE slightly decreased to 3.6 years. An example of a major lease was to Vodafone, renewing a lease for 12,000 square meters for six years in Ivrea, Italy.
The next slide shows office leasing in the second quarter was still dominated by renewals, which explains the high 79% tenant retention rate. The drop shown in Italy was largely caused by the mathematical impact from the sale of Piazza Affari, which was 100% leased at the time of sale, and so is no longer part of the portfolio stats at the end of June. Once Nervesa 21 development is completed in Milan, it will also be added back into the stats and expected to be fully leased by the early next year on completion. It's also pleasing to see that the Dutch portfolio is stable, with office tenant demand attracted by quality and energy efficient space in the core office locations.
We've also benefited from the increase in rent coming out of the key car park in Rotterdam, which again goes to the back to work, back to the office, trends that we're seeing. We recently secured a new 10,000 square meter new lease in Haagse Poort in The Hague, to a global asset manager, who acquired the underlying business from our largest tenant, Nationale-Nederlanden, and has elected to continue for another 15 years in this building. We're in positive discussions with our largest tenant in this asset on its renewal requirements, due in the next couple of years. A global energy company also commenced a lease for over 6,000 square meters in Haagse Poort, taking occupancy to almost 100%. We've also secured new leases in Den Bosch and Utrecht.
On the downside, as Shane mentioned, we have received notice not to renew a 5,000 sq m lease in one of our Kraków assets, not out until 2025. We've commenced a leasing marketing campaign now. Also, given it's quite topical, just to point out that we have no exposure to WeWork, with only less than 3,000 sq m out of almost 2 million sq m leased to two smaller co-working operators. Two of our Polish assets are in advanced stages of sale to local developers, where current occupancy levels are not a key priority, given the pending conversion projects. We expect overall leasing activity to remain muted as our portfolios in the B-grade assets in Paris, Helsinki, and Poland, where vacancies of such assets are materially higher than that of Grade A.
Of course, we are partly compensated by this by the higher running yields that we acquired these assets at. The next slide shows the European office sector leasing activity, where rental values continue to grow positively for well-located grade A assets. More notable in the middle chart, CEREIT's grade A office vacancies are substantially lower, at 3.5%. Grade A office markets in our key cities that we invest in, very tight, 3.5%, and this is only up about 10 basis points from a quarter ago. Milan, pleased to announce, now has a grade A vacancy of only 2.4%. Vastly different condition to other global office markets.
The chart on the right-hand side shows the high vacancy in the Polish and Finnish markets at 14%, continuing the decline from the last quarter, which does give the context for our intention to divest CEREIT's office assets in both these markets in the medium term. We do believe that our focus on rejuvenating suitable, older, but well-located assets in Milan, The Hague, Rome, and Amsterdam, will drive superior risk-adjusted returns in the medium to long term, and take advantage of the tenants' increasing needs for attractive staff amenities, energy efficient buildings, and green label assets. This next slide, we'll whiz through. It's really just demonstrating a previous topic, that the majority of leases these days really are being targeted at the, at the grade A, substantially higher than where we were pre-COVID.
I'm really pleased to show on Nervesa 21 that we're on track for completion by beginning of next year and on budget. The structures are 100% in place, civil works are at 70% completion, and importantly, all major components and parts are now on site, so, in terms of key construction risk, that's now behind us. From a development leasing perspective, really pleased in the last couple of weeks, we've taken the leasing now up to 70%, still six months ahead of planned completion.
The incoming tenants that we've attracted include a very substantial global entertainment company, a tech unicorn backed by Tencent, and a global relations agency with revenues over EUR 1 billion. When we commenced the project, our feasibility rents at the time were only EUR 250 a square meter, and with this growth I've spoken about, we are now achieving well over EUR 350 a square meter, highlighting the limited of options to tenants seeking such quality space. The next slide just highlights the completion of one of our Czech Republic projects, Lovosice ONE. It's been delivered in two phases, in December last year, and more substantially and more recently, last month, for a total cost in line with budget of EUR 15 million, which is for around 18,000 square meters of 5- units.
We are pleased with the leasing to date, with over half the units now leased, advanced negotiations underway for the remaining 3- units to international e-commerce and 3PL operators. In conclusion, CEREIT has now achieved a majority, 51% majority weighting to logistics and industrial, pending the completion of the Tax Police asset in Bari. As a reminder, this is a strong pivot that we commenced 3 years ago. CEREIT divested EUR 135 million in assets at a 5.4% premium, executing on our recycling strategy to fund enhancing projects such as Nervesa 21, which is well on track to exceed our expectations. Valuations were moderately down 1.6% for the half, leading to NAV per unit of EUR 2.30.
LTV is sub 40%, below that psychological barrier, and with EUR 500 million now, or 20%+ headroom to the 50% MAS limits and our loan covenants. Occupancy remains high at 95.4%, helping to drive positive 4% like-for-like NPI growth, and almost 9% like-for-like growth in our logistics portfolio, which largely offset the impact from the higher interest costs. So first half 2023 dividend per unit was EUR 0.0779. That's only 4.5% lower than prior corresponding period, adjusting for the more conservative approach and no top up out of realized capital gains to be made in this first half.
Notwithstanding that, global real estate fundamentals aren't expected to improve for a year or so, but Europe is expected to outperform the other major markets, with supportive tailwinds in logistics in particular, while inflation indexation, which is common in Europe, is helping to offset the rise in interest costs in the short term. We continue to progress further divestments to guard against the potential impact to valuations from slowing economic growth, and enable the funding of our ongoing AEI and asset rejuvenation program. While these may have a short-term impact on DPU, the risk return profile of the portfolio is expected to continue to improve and provide a more sustainable footing over the medium to long term.
The Cromwell European REIT's annualized 10% DPU yield at today's unit price, and 35% discount to NAV per unit, does compare favorably to the 7% yield in the sector, and only the 4% discount to NAV per unit, and the premium that the industrial and logistic rates are trading at, which we now have a majority weighting to. We're confident in the medium to longer term cyclical recovery, and we will be well placed with Cromwell's teams on the ground to take advantage of our competitive position when the market stabilizes. With that, Chiara, thank you, and we'll open it up to questions. Thank you.
Thank you, Simon. We'll now begin with the Q&A session. As a reminder to the audience, if you'd like to ask a question, please select the Raise Hand button at the bottom of your Zoom screen to be placed in the virtual queue. For those who have dialed in, please select star nine to raise your hand and star six to mute or unmute. Our first question comes from Dale. Dale, if you'd like to ask a question.
Hi, hi. Morning, Simon and Shane. Just want to check, can you hear me clearly?
Morning, Dale. Loud and clear.
Morning, Dale. Yep.
Morning. Okay, I, I just wanted to ask, two questions first. I think the first one being the capital gains, distribution. I think, you know, previously it was guided that, you know, capital gains would be used as a, a means to, you know, top up, absence of income from redevelopments. Just wanted to understand, you know, why the change in, in, in, in, in this distribution in this first half, and how should we, see it going into the, you know, the rest of the year as well as into next year?
Thanks, Dale, and yes, it was a long debate in the board meeting on Friday on this, on this topic. You know, really, you know, where the unit price is situated at such a high yield and with such a big discount to NAV, we just felt it was the prudent thing to do in terms of retaining capital. That's the first point. You know, again, secondly, we wanted to make sure that gearing remains that below that psychological level of 40%, which differentiates us with many of the other REITs. With the rising in debt costs, and obviously our very high cost of capital, we just felt it was more prudent to retain.
I think we're now sitting on about EUR 21 million of realized capital gains, and we just felt it was the right thing to do for this point in time. I think by the factor that, you know, you can see that the board takes this capital management decision, quite, quite seriously, it's, it's premature to provide guidance, because really it's set at the time of the results, taking into account everything that we've spoken about.
Okay. Okay, got it. I mean, going forward, you know, how, how should we be looking at this capital gains distribution? Should it be, you know, looking at a total yield perspective or, or, you know, your, your discount to NAV, or, or how, how should we, you know, make assumptions for this?
Yeah, I think when, when you go back to, to this chart that, that Elena has put on, you know, with this loss of income of, of 0.5%, really this is, this year is the lowest of the, or, or the widest of the impact, because from beginning of next year, we'll start to receive the income, from Nervesa 21, and then perhaps a year or 18 months after that, depending on the decision on Maxima, it will also start to be income producing. In terms of the biggest impact to dividend, we would expect it to be, to be this year.
Okay. Okay. Got it, got it. Okay, moving on to my next question, it's for Shane with regards to financing cost. Correct me if I'm wrong, you were saying that assuming the RCF, when RCF is drawn down, financing costs will hit about 3.3%. Just wanted to reconfirm this, and what is the expectations for, you know, this drawdown in the RCF?
Yeah. I guess 3.3% is sort of, you know, worst case scenario, fully drawing the RCF of EUR 165 million, right? We wouldn't expect to completely fully draw it, but we're just showing that as a sensitivity, at, at, you know, the, the outside end of the spectrum, I guess. You know, definitely with the new financing and with the increase in the three-month Euribor getting close to 4%, you know, we're looking at the 3%, you know, above 3% as the all-in interest cost.
Dale, we've seen some research across the sector, and look, we're really thrilled to be able to show that for the next 2.5 years, we're at almost 100% hedged or fixed, really taking away that uncertainty around rising interest rates, how much longer to go, what is your impact, how will it come through your DPU? So, in Shane's pre, prepared remarks, again, you could hear that there really isn't going to be much of an increase in costs in spite of the rise in rates, in part because of the hedging, and in part because we have no debt maturing for another 2.5 years.
You know, we've really taken that risk out. The other aspect from a risk management perspective is, our loan covenants have now been increased to 50% in line with the MAS limits, so that gives us a good EUR 500 million of buffer before those limits. Again, you know, that question around certainty, we've really removed.
Okay, got it. Just also wanted to confirm, you know, is the guidance that, you know, all-in financing would still be around that 3% come year-end?
That's right.
Okay. Okay. Got it. Got it.
So, so-
Okay.
It's 94% hedged now, and we will obviously use the RCF for ongoing development, CapEx, but the 3.3 is on the basis of fully drawing on that, which is unlikely.
Okay. Okay. Got it. Okay, that's all from me for now. Thank you.
Thanks, Dale.
Our next question comes from Terrence. Terrence, if you'd like to ask your question.
Hi, just a test. Can you guys hear me?
Morning, Terrence. Hi, Terrence. Thank you for joining.
Morning. Yep, I have a few questions. The first one is, what is your expectation for 2024 rent growth amidst this slowing inflation print? Perhaps could you discuss how much broader market rent growth you would expect in 2024 versus how much leases in your portfolio that are still on the market? That's the first question.
Okay. Look, we, you know, we're obviously gonna be reluctant to provide too forward looking guidance, but specifically, we get a lag effect from inflation. If you think about inflation this year, when we come to our indexation of rents next year, it's based on the preceding inflation, we get a really nice, you know, one-year lag. That's the first thing I'd say. I think the second aspect, and we're, I think, one of the only REITs that provides this information.
From our valuers, we've provided our reversionary yield, which today is 7.4%, versus our initial yield of 5.9%. What does this mean? Well, this means the valuers are expecting that substantial income growth to drive the yield from 5.9 up to 7.4. That's taking into their view of market rent growth, or ERV, as they call it, plus their view of occupancy. 5.9% initial yield, 7.4% in sort of the next four to five years, gives you a very good flavor as to how the value is forecasting our cash flows.
Got it. How confident is management of pulling off more divestments, saying, especially in Poland? I mean, the first half, as you mentioned, was tough in Europe as it is, and borrowing costs have only gone up further since.
Yeah. As we said in our pre-prepared remarks, you know, there's still a very good bid in the EUR 20 million-EUR 50 million lot size by private investors, not needing much debt. Really, the big slowdown is in the EUR 100 million-plus property sales, which have almost dried up. That's the first point. The second point is, we also said in our pre-prepared remarks, we're, we're on track to deliver more than EUR 200 million of divestments for the full year, and that includes the EUR 94 million that we've conditionally sold the Tax Police in Bari, Europa in Italy.
We're expecting that to close before the end of this year. Specifically on Poland, we're in very advanced discussions on three of the six assets. On Finland, we're not as advanced. That's a, a smaller market for us, around 2.5% of our exposure. It certainly is a, is a much tougher market, to, to capture the bid, but, but certainly making good progress, across the rest of the portfolio.
Got it. Now, last question. On page 26 of the financial statements announcement, note 13 C, which is basically your valuation assumptions. Developers have moved up the capitalization yields, but they did not do so for the DCF method. The question is why, and if they had done so, would valuations have fallen further?
There are two valuation techniques. There's the DCF, and then there's the income capitalization method. On the DCF, they absolutely lifted the risk-free rate and the risk premiums, and also the exit cap rates, were also lifted. On the income capitalization method, cap rates were lifted 74 basis points.
Maybe that's all for now. Thank you.
Thanks, Terrence. Thank you.
Thanks, Terrence. Just as a reminder to the audience, if you would like to ask a question, please select the Raise Hand button at the bottom of your Zoom screen. I'll just take a pause to see if there are any additional questions. Simon, there are no additional... Oh, sorry. We do have an additional question from Dale. Dale, if you'd like to ask your question.
Okay, thank you. I, I mean, since there's no question, maybe I'll continue grilling you guys. Okay, I just, just wanted to-- I think congrats on the strong pre-leasing at Nervesa 21. You know, I, I understand that it is expected to complete in the 1Q of next year. Just wanted to understand in terms of the income flow, should we also be expecting it in the 1Q or 2Q onwards?
Yeah, it should start to come through in the first quarter.
Okay. Okay.
There, there were, you know, as you'd imagine, there were some small amount of tenant incentives provided, in particular, a few months of rent-free, and that will obviously be amortized over the first term of the lease of the, of the, of the, leases. You know, again, the rent growth we've achieved relative to when we started this project is very pleasing.
Okay. Okay, got it. On your other, you know, redevelopment plans, I mean, you, you guys just started on Maxima, but just wondering, you know, has there been any progress on the other redevelopment plans?
We're, we're, three quarters of the way through the strip out works at Maxima in Rome. The board should make a decision sometime in the fourth quarter about when to proceed with the general construction contract. Certainly some pre-leasing activity has already happened, even before we've made the decision to hit the go button. Haagse Poort, as part of our renewal discussions with Nationale-Nederlanden, we're very well progressed with some amazing enhancements to that building. We've also received now draft master planning approval on the De Ruyterkade, which is our very exciting grand Amsterdam asset, which is on that top right-hand side. That's making very good progress.
On Parc des Docks, I was over there a few months ago with the mayor, and we're coming to some pretty pointy decisions around density in the planning master plan. Politically, that's got very good support in Paris. Again, as a reminder, it's 10 hectares. You can see on that bottom right-hand chart, very close to the new Olympic facilities in Paris, and it's only 3 km from the Champs-Élysées. As a last mile logistics hub, it's in a grade A location. We're quite excited about the progress there.
Got it. Got it. Simon, just going back to Maxima, you were saying that you're still waiting to hit the go button. Just wanted to understand the, the thinking behind that. Is it a function of cost or a function of pre-leasing? And, you know, it could... I mean, the, the ultimate decision, potentially impact the estimated cost of, of this project?
No, the costs are pretty well understood in this project. The rents have been moving higher, as, as in line with very few opportunities in Rome. I think Grade A office vacancy in Rome is now sub 2%. So we've got the confidence on the leasing side. We've got the confidence in the construction side. What we're waiting for is really to see where our valuations settle by the end of this year.
Obviously, with gearing at that sort of 39% level, with the expected proceeds from the sales, particularly Bari Europa, not due until November, December, we just want to make sure that, you know, all of our financing ducks are lined up before we progress. You know, we've worked very hard in the last 18 months on recycling, on reducing our gearing, and, and we will continue to, to stay focused on that.
Okay, okay. In terms of the completion then, would it be materially impacted, you know, depending on, on this, this financing?
No, no. At this, at this stage, we're on track in terms of the phase two decision-making in fourth quarter. That hasn't been delayed. I'm just trying to set out for you how the board is thinking about the green light. The, the, the alternative, obviously, is to bring in either a joint venture development partner or indeed to sell the site to, to another developer. Again, they're backup plans. That's, that's not plan A. Again, nothing's been decided yet.
Okay, okay, sounds good. Sure hope you guys get to keep the entire profits from this redevelopment.
There's certainly a lot of su pport internally for it, too, let me tell you.
Okay, okay, good to hear. Okay, that's all from me. Thank you.
Thanks, Dale.
Thanks, Dale. Our next question comes from Raphael. Raphael, please go ahead and ask your question.
Hello, guys. Hi, this is Raphael here from PRUWise. I just had a couple of questions around the loan. I think the first one is talking about your first loan, RCF. I just wanted to understand, am I right to calculate that the interest rate on that RCF facility is around 6%? I was just working backwards based on the incremental interest rate. That's my first question. The second one is regarding the sustainability-linked loan. Can I also check that the interest rate is, for that is around, also 6%?
I wanted to understand how much CapEx must we incur or do you project to incur to hit all the sustainability goals? Because I, I went through the, the, the loan terms and conditions, it seems like you do have to improve the portfolio in certain ways. I'm just trying to understand what kind of costs do you think you need to incur? If we don't hit the costs, what, what is the? If we don't hit the goals, what kind of penalties does the, does the sustainability-linked loan carry? For example, does the interest rate go up by another 50 basis points, 60 basis points? Maybe you can provide some thoughts around that. Thank you.
Okay, I'll deal with the first part, and then, maybe Shane can deal with the KPIs. Again, from an RCF perspective, remember, this is a working capital facility. In the six years that we've, or 5.5 years we've listed, we've never drawn on that facility by more than sort of EUR 80 million-EUR 90 million. Yes, if the margin is roughly 200 basis points, if we were to draw today, then the base rate is, is that 3.5%-3.75%, STR rate. Your math is pretty good at just under 6% if we were to draw on it today.
You should see it more as a working capital facility, and certainly not a permanent loan. In terms of the recent term loan, that replaces an old existing term loan that was already hedged. When you think about our average hedge rate, when we talk about 2.85%, that's including this new loan. We're not drawing down at that much higher level of, of, of floating rate, because we've already locked in the floating rate that that debt relates to. Does that make sense?
Yep. Okay, I understand. Thank you.
Thank you.
On the sustainability-linked loans?
Yeah. Thanks, Raphael. Well, the two most recent refinancings will be the third and the fourth loan facilities, where we have KPI, sustainability-linked KPIs, and they are consistent across the board in terms of their the makeup. The first one is just in relation to the GRESB score. The second one is the number of buildings in the portfolio that have green building certification. The third one, which is an interesting one, is the percentage of leases which contain green clauses. The five year, four to five year target is very consistent with the targets that we had in our earlier loans. Then, they're also built into the KPIs of the senior management team.
In terms of impact, I think you sort of put forward a proposition of 40- 50 basis points of not meeting the targets. It's, market practice is really for a very immaterial impact to the loan cost, should we not meet those 3 KPIs. It's really about driving behavior and ensuring that we have public commitments to continue to improve on our ESG components of this portfolio.
I see. Okay. I, I hear you. What you're saying is that there isn't much material AEI that is needed to, to reach these goals. They are already part of your plans that you've already had in place?
Correct. If you think about, if you think about one... Excuse me. The KPI with regards to green lease clauses, that requires no CapEx. All that requires is the tenant coming into our building agrees to do two things: They agree to provide us their own consumption and waste emissions data. As many triple net leases, the tenant is generally not required. You know, that's known as Scope 3.
They're now required to provide us that data. Secondly, they also agree to work with us to improve the operating performance of each of the assets that that particular tenant occupies. It's more of an agreement to work. In terms of the BREEAM building certification, you might recall at the time of the IPO five years ago, we had zero buildings BREEAM certified. Today, we're at around 75% of our office buildings.
We did this not just because of this is where debt and equity investors want us to get to, but more importantly, it's where tenants want to move to. With only 20% of the entire European commercial stock being BREEAM green certified, our 75% makes us a lot more competitive with existing tenants, and this is a big differentiating factor in Europe. Not, not so material here in Singapore, but it's a very material differentiator, for those landlords that are ahead of the game like us in Europe.
Okay. All right, I understand. I have no further questions. Thank you. Thank you very much.
Thanks, Raphael.
Our final question comes from Derek. Derek, if you'd like to ask your question.
Morning, Derek. You must be on mute.
Hello. Hello. Can you hear me?
Hi, Derek.
Hi, Derek.
Yep.
Hi. Good morning. I just wanted to just have two follow-up questions. I just noticed in the slides, right, Slide 49, while broadly, you know, your logistics portfolio, you know, has shown fairly good reversionary matrix, but here it appears to be quite mixed. I'm just wondering whether, you know, going forward, which part of the reversionary trend can we expect it to be? Is it closer to zero, or are we gonna see double digits based on what-
No, we've I think we've provided guidance in the past, that we do expect sort of, you know, 3%-5% is a normal rate. Certainly, underlying market rent growth, on a quarterly basis is around 2%-3%. The, there's still a fair bit of catch up to go, so, you know, there will be these examples of 20%-30% increases. Generally,
Yep.
You know, we would be expecting 3%-5%.
Okay. Okay, got it. Got it. If I move on to office, right, I mean, things have been flattish, but, I mean, I understand that your reversions, I mean. I mean, I understand that there has been a little bit of, of, headwinds recently. I'm just wondering whether is flat the new black? I'm just curious. Are you do- are you outperforming your peers at this moment in time, in terms of reversions?
Yeah, as, as I think I mentioned, to Raphael's question, we're certainly outperforming-
Yeah.
From the take-up perspective...
Okay
... and tenant retention, because we, we have the capital, we have the asset managers on the ground that are prepared to work alongside the tenants, you know, two to three years out before their expiry. We're very advanced already with our 2025 office expiries. I, I think that, you know, I think a lot is to be said for the very experienced on the ground asset managers in our portfolio.
Okay.
We're also still getting the indexation growth.
Yep. Yep.
We're still getting those tailwinds in office. You know, many other markets don't, don't benefit from inflation kickers, so we're getting those inflation kickers. Even our like for like, NPI growth this period was positive 1.2%, yet our occupancy, particularly in our B-grade offices, fell slightly. We're still able to get overall income growth, notwithstanding the decline in occupancy. On rent reversion, still able to get, you know, 5%, 6% rent reversion. We mentioned, you know, the, the benefits in the Basel with much stronger rents. We're. You know, to Dale's, you know, probing questions, please start Rome. You know, we'd love to start Rome, Amsterdam, Rotterdam, The Hague and take advantage of, of this bifurcation of, tenants seeking A-grade office space.
Okay. Got it. Got it.
This is not the U.S., right? I mean.
Yeah.
Lines could not be more different.
Yeah.
Okay? We're not 20%-30% vacancy in Grade A.
Yeah.
You know, we're 2.4% in Milan. We're 1.8% in Rome. We're, you know, 3.5% in Amsterdam. This is a very different environment in Europe.
Got it. Got it. Got it. Okay, my last one is, I mean, Simon, could you just give us a bit more input? I think in terms of, let's say, interest rates increase, right? Europe is also seeing a fair amount of interest rates increase, that will certainly lean into, you know, tenant profitability. I know you are well diversified, but if you break down, say, within, maybe in logistics space, are they still at a point where they can accept your kind of reversions? Because costs certainly will, will rise, and I'm just wondering why are they not pushing back that 20-.
Yeah, if you have a look at the studies-
Yeah
It's actually the 3PLs and the logistics industry segment that's passing on full costs to their customers. The retailers themselves are absorbing some of the inflation. Certainly the 3PLs... The other thing that shouldn't be underestimated, it's kind of off the radar screen. You know, this time last year, we were looking at $300 a megawatt per hour for energy. Today, we're at $30, or $0.30 a kilowatt. I mean, no one has been asking us around energy costs versus a year ago. You know, if that large impulse last year to a lot of our tenants was extremely high, then that's certainly coming down materially this year. You know, it's still fluctuating. I'm not saying we're out of the next winter cycle, but compared to a year ago, we are materially in better shape.
Okay. Okay, Thanks for the input. That's all I have. Thank you.
Thanks, Derek.
Thanks for your question, Derek. That brings our Q&A session to a close. Simon, I'll hand back to you for closing remarks.
Yeah. Thanks, Kara. Look, you know, we're really pleased to be able to say we're now at a majority weighting to logistics and industrial. Our results, again, demonstrate the NPI growth, the high levels of occupancy, and the tenant demand for this space. We expect those tailwinds to continue. That's the first point I'd make. The second is around the gearing levels, that, you know, we really understand investors' concern about that psychological 40% barrier. We're really thrilled that we've been able to get that down below 40% with some recent asset sales. We have more asset sales pending, in part to offset any further valuation weakness, but also to help fund our AEI and asset rejuvenation program.
While we were more prudent in topping up the distribution by not including a capital return, this period, still on an annualized basis at today's unit price, that's a 10% dividend yield, and still trading at a 30%-35% discount to NAV. Finally, you know, being one of three REITs, having that double A ESG MSCI rating, really is very important to attract not just equity and debt investors, but also our banks.
Our sustainability-linked loans have been really important in the last couple of weeks to get those behind us now for the next four to five years, and enjoying the benefit of all of the hard work that the ESG and IR teams have been putting in to get that recognition of the strength of our ESG compliance and culture here. With that, we're in pretty good shape to get through the next six to nine months, and then be in really good position when the cycle improves sometime next year. Thank you, everyone, today.