Good afternoon, and welcome to today's Cromwell European REIT's first quarter 2023 business update briefing. We will begin with a presentation by 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 will hand across to the CEO of the manager of the Cromwell European REIT, Simon Garing. Simon, over to you.
Thanks, Operator. Hello, everyone, and thank you very much for joining us today. I will start with a brief recap and overview of CEREIT before I hand over to Shane for financials and for the portfolio highlights, then, obviously, Operator will moderate Q&A. As an introduction, CEREIT owns EUR 2.5 billion, or around SGD 4 billion of European commercial real estate, almost equally weighted to office and logistics as we continue to pivot towards a majority held in logistic assets. It's a sizable portfolio, with almost two million square meters, with an average asset size of around EUR 25 million, a liquid market segment. Around 86% of the assets are located in Western Europe and the Nordics. We have identified almost 20% of assets for substantial development and rejuvenation opportunities to enhance and further future-proof the portfolio.
Turning to slide four, it shows that CEREIT's current high distribution yield of over 10% is underpinned by over 1,000 leases. 92% of our rent is backed by government, MNC, and Blue Chip companies, providing income resilience in a slowing economic environment. Our cash collection was close to 100%, and aged debtors is lower today than a year ago. As part of our portfolio construction, no one industry trade sector makes up more than 15% of the portfolio, with tenants from the finance industry only accounting for approximately 11% of the total rent. The top 10 tenants now account for around 27% of the portfolio, helping to reduce concentration risk, an important factor for our credit rating and bondholders that are on the line today. Cromwell Property Group is the sponsor and asset manager of CEREIT.
Cromwell has a strong alignment of interest with all unit holders, with EUR 400 million invested through a 28% stake in the REIT. One of CEREIT's key strengths and point of difference is Cromwell's highly experienced local teams in the 11 countries across 14 offices, with over 20 years of track record in Europe, sourcing off-market opportunities, operating in the local leasing markets, and managing vast networks to support CEREIT. Slide six summarizes the first quarter's strong portfolio performance. Net property income grew 3.6% compared to last period, mostly due to the 16% growth in the light industrial logistics sector. Like-for-like NPI growth was up 4.2% on the PCP, with the logistics sector 9.5% higher and office still up a credible 1.8% on a like-for-like NPI basis.
CEREIT's strong operational performance was mainly driven by active leasing, growing the occupancy with positive rent reversions of almost 7%. Especially in office, with high annual inflation indexation in most leases also contributing. While we don't pay a distribution for the first quarter, in light of the market volatility, we have shown an indicative DPU for the quarter of EUR 0.0412, which is marginally higher compared to the most recent December quarter distribution on a quarterly basis. Only 2.4% down on the first quarter last year. The higher finance costs from higher debt from our CapEx program and higher margins have offset the positive rental income. Gearing is slightly above the board policy range of 35%-40%. This should be addressed by upcoming investments.
Our recent refinancing of EUR 250 million leaves us with no debt maturing until fourth quarter of next year. We increased our hedging recently to take advantage of the very inverted yield curve in Europe. Moving on to sustainability, we just published our fifth annual sustainability report. Some highlights here. We are making great progress in collecting data, with energy data now gathered for 91% of the portfolio. This is up from 29% from the 2019 pre-COVID levels. CEREIT's total recorded absolute greenhouse gas emissions was 61,000 tons, a drop of 14% compared to pre-COVID levels. Renewable and low-carbon energy sources now account for 43% of total energy consumed across the portfolio.
In other metrics, water consumption intensity fell by 26%, and the amount of recorded waste that we recycled was nearly double that, again, the pre-COVID 2019 levels. It's also really important and pleasing to note that we are only one of four S-REITs with a double A MSCI ESG rating. Turning to slide eight, we now have 32 buildings that are BREEAM green certified, of which 25 are office assets, representing 77% of the overall office portfolio by value. Our 77% is significantly higher than the European office market, which CBRE estimate only 20% of the total office stock is green certified, providing us with a very competitive advantage as tenants are increasingly looking for these green certified buildings with improved staff amenities. Green leases now represent 24% of CEREIT's total leases, up from only 10% a year ago.
Again, this reflects the change in the mindset of tenants, who are now also keen to reduce their own environmental impact and work with landlords such as us to achieve results. I'll now turn over to Shane to run through more details.
Thank you, Simon, good afternoon. I'll firstly run through analysis of the key line items of the first quarter results. Firstly, gross revenue was 4.2% higher year-on-year, mainly attributable to rent inflation indexation and from net acquisitions made in 2022. Operating expenses were 5.2% higher on the back of higher inflation. However, it's pleasing to note that the non-recoverable expenses portion was EUR 6 million, and this is the same as the same period last year. This means that any increased costs have been able to be passed on to tenants. Overall, net property income was just over 3.6% higher year-on-year, and this was mostly due to the strength in the light industrial logistics sector, which, as Simon mentioned, was up 9.5% on a like-for-like basis.
Finance costs were considerably higher due to a combination of new borrowings to fund acquisitions and developments, higher interest rates on our floating debt, and higher margins on new facilities signed recently. I'll talk more about this in the capital management section later. These higher finance costs, as well as the absence of rental income from the two office properties under development in Milan and Rome, resulted in the indicative distributable income coming in 5.8% lower. If we include a top-up of realized divestment gain in lieu of these two properties vacated for development, then the indicative DPU, including this divestment gain, would only be 2.4% lower than last year and actually higher than the last sequential quarter, as Simon mentioned. Turning to slide 11.
The numbers in the dark blue boxes show the like-for-like DPU in the five years since listing. The underlying DPU growth of 1% per annum since IPO should be seen positively in the context of COVID, rising interest rates, and the Russian invasion. It really underpins CEREIT's resilience. In the first two years, management fees were paid in units, which provided an artificial benefit, as this cost actually gets added back to, for DPU calculation. It effectively means the distribution payout in the first two years was more than 100% of the earnings. In FY 2020, we started paying the management fees in cash, which had a one-time reset effect to bring the headline DPU down to the underlying earnings.
This operating DPU in the blue boxes provides a truer picture of operating performance by excluding the artificial boost from the fees paid in units out of capital in the first two years. It is interesting to note that more REIT managers have recognized this and recently started to pay some or all of their management fees in cash, not in the form of new units to themselves. Based on market information, nine out of 40 S-REITs now pay 100% of their management fees entirely in cash, and more than half, around 23 of them, have opted to pay at least 50% in cash. This improves the overall quality of the S-REIT distribution payouts.
CEREIT's aggregate leverage ratio was 40.6%, well inside our covenants, but marginally higher than the board policy of 35%-40%, largely due to a temporary timing difference between development expenditure and our divestment program. We are in advanced negotiation for the sale of selected non-strategic assets. We remain committed to maintaining CEREIT's investment-grade rating of at least BBB- with a stable outlook. In March 2023, we amended and restated an existing facility with new commitments into a EUR 70.6 million, 3.5-year sustainability-linked loan with our existing lenders. Following this, CEREIT has no near-term refinancing requirements until the end of 2024. The interest coverage ratio has remained high at 5 times, well in excess of loan and EMTN covenants.
We have also commenced discussions to refinance the next maturing debt facility, which is only due at the end of 2024, as I mentioned, and plan to extend the revolving credit facility for up to another five years. Last year, we bought an interest rate cap for a notional EUR 210 million at a 60 basis point strike. This took CEREIT to 75% of total debt being hedged or fixed until the end of 2024. The interest rate cap currently has a fair value of almost EUR 10 million. Recently, we entered into a notional EUR 100 million cap at 3% and collar at 2.25%, which now takes us to 84% hedged, fixed until the end of 2024 and 64% to the end of 2025, as shown in the red line in the chart.
The three-month Euribor is now above 3%. We expect the all-in interest rate to increase to around 2.85%, up 40 basis points since December, when the three-month Euribor was at 2.13%. The higher Euribor with the higher margins on the new debt facilities, coupled with asset sales to reduce gearing, will have an impact on DPU this year, all other things being equal. Now I'll move on to discuss portfolio asset management. Slide 15. This shows CEREIT's portfolio occupancy and net reversion. In the first quarter, we leased almost 5% of the portfolio with a positive rent reversion of 6.7%. Similar to the positive rent reversion of 7.6% seen in the second half of last year. High inflation and favorable market fundamentals across both office and logistics continues to support higher rents.
Portfolio occupancy remains high at 95.8%, 100 basis points higher than the equivalent period last year, and largely unchanged quarter-on-quarter. In addition to the new leases closed in the first quarter of 2023, we have de-risked 35% of the next six months of lease breaks and expiries as at the 31st of March. Advanced positive discussions are already underway for our key 2025 office leases across our well-located grade A Dutch office assets, and this is generally at higher rents. On slide 17, the chart on the right-hand side shows the portfolio weighting by country to keep in perspective the occupancy by country side on the left-hand side. The Netherlands, Italy, France and Germany account for 75% of the portfolio, and these are all above 95% occupancy.
Finland and Poland office show a weaker performance, which is explained by the secondary location of these assets. We have already initiated sales program for some of these assets, they make up in total about 13% of the portfolio. In the first quarter, tenant retention was high at 76% for the portfolio. The WALE remains above 4.5 years, while the WALE is a shorter 3.2 years due to the break options with Italian government and the typical French leases in particular. Slide 18 reflects CEREIT's light industrial logistics sector occupancy, which remains close to a record level at 98%, underpinned by 44,000 square meters of leasing. Rent reversion was positive 4.6% with a tenant retention of 58%.
One highlight in this sector was a new lease closed at Parc des Docks in Paris, 3,500 square meters signed at rents that were 9% higher. We are now regularly securing rentals of EUR 160 per square meter in this property, up from EUR 90 per square meter five years ago. Also, a nine-year lease at Parc des Docks in Paris was signed at a 13.5% positive rent reversion, and five new leases and renewals of various durations at Vianen Markt in Amsterdam were signed at between 12.5%-14.5% positive rent reversion. The sector WALE here has increased to 4.9 years. These charts show the European market data for the logistics sector.
The chart on the top left shows high quarterly take-up of logistics space during the last few years, with another good start seen in 2023 in spite of the slowing economy. The green line shows that the overall European logistics vacancy sits at a new record low of 2.3%, actually similar to our own vacancy of 2% in this sector. Take-up has slowed down marginally with few empty sheds available to be leased and reduced supply underway, rents continue to grow with the latest quarter-on-quarter increase reported at 2%. This situation is partly explained by the chart on the top right. Europe e-commerce growth has accelerated since COVID. Some of the key markets in which we operate, e-commerce is expected to have further room to grow as a % of total retail sales, as shown in the pale blue boxes.
For example, Italian online sales in proportion of the total retail sales is projected to grow another 6.2%, the Netherlands by 7.8%, and even the U.K. is expected to grow by a further 6% to almost a third of the sales being online. This further projected take-up of e-commerce and continued onshoring of industrial, such as the microchips and renewable energy industries back into Europe, validates our pivot to the majority of logistics assets in our portfolio. Slide 20 shows CEREIT's office portfolio occupancy and rent reversion. We estimate that approximately 75% of CEREIT's office portfolio can be characterized as grade A, with 25% being older and higher yielding grade B and grade C. This slide shows the leasing activity in our portfolio actually picked up pace this quarter.
The teams signed new and renewed leases for 39,000 square meters, or approximately four times this space as compared to a year ago. We secured a healthy 8.1% rent reversion with a substantial 83% tenant retention. A new 2,600 square meter lease was signed in [Amersfoort] in the Netherlands for 10 years at a positive 21% rent reversion, and this was with a major energy company. As mentioned earlier, we are in advanced discussions for the key 2025 office lease expiries, which will considerably de-risk the portfolio and should have a positive impact to valuation. Slide 21 shows the European office sector leasing activity, where rental values continue to grow positively for well-located Grade A assets.
What many investors may not appreciate here in Asia is that European office space take up has been heading back to pre-pandemic levels. Along with low supply, this has led office vacancy rates to fall to 8.5% for all grades of office vacancy across all of CEREIT's office markets. This shows the EU market, office market in particular, are really outperforming the U.S. peer group. More notable in the middle chart, CEREIT's key Grade A office markets have substantially lower vacancy at a very tight 3.6%, with Milan down to 2.7% vacancy, a vastly different situation to other global office markets.
I earlier mentioned the lower performing Polish and Finnish Grade B office assets. The chart on the far right shows the higher vacancy of these office markets at 13.2%, which gives further context to our intention to divest some of these assets in these two markets in the medium term. We believe that our focus on rejuvenating suitable older but well-located assets in Milan, Rome, and Amsterdam will drive superior risk-adjusted returns in the medium to long term and take advantage of tenants' increasing needs for attractive staff amenities and green labeled buildings. With that, I'll pass back to Simon to talk about the economic outlook.
Thanks, Shane. Oxford Economics forecasts the Eurozone GDP to grow by about 0.8% this year and 1% in 2024 before picking up beyond. The improvement appears to be limited to services and is slightly uneven across the countries, with Southern European countries in a better position, with flattish growth in Germany and France. Restrictive financial and credit conditions, alongside tighter monetary and fiscal policy settings, may prevent recovery from gaining momentum in second half. Slide 24 shows the ECB has downshifted its hiking pace to 25 basis points in May last week, signaling that it's nearing the end of its tightening campaign. Oxford Economics forecasts two further 25 basis point rate hikes in June and July this year and expect the ECB to pause after this.
While Cromwell's in-house research team expects that rates may peak slightly higher at around 4%, in the back end of this year. In terms of what that means to the dividend, a 100 basis point increase in the Euribor of 4% could impact CEREIT's annualized DPU by EUR 0.0029 per unit or only 1.8%. In other words, we're largely through the interest rate cycle and the impact on earnings. Headline inflation inched up to 7% in April, breaking 5 straight months of fall readings, notably still well below the previous peak. As you can see on the chart on the right, as Europe enters the warmer spring and summer period, energy prices no longer contributing to the rise in inflation.
While coal inflation eased for the first time in a year, there are a number of themes identified on this slide which could cause inflation to be higher for longer. As you can see on slide 26, European real estate investment activity was very weak in the first quarter, down 50% in volume as compared to the same period a year ago. The rise in financing costs and reduced leverage available by lenders has predictably led to heightened uncertainty and difficulties in pricing assets. These challenges translate into a drop in liquidity across all European real estate markets and could impact the timing of CEREIT's planned EUR 400 million asset sales over the next two to three years and put some upward pressure on our LTV.
The Russian-Ukraine War has certainly impacted investor confidence in the bordering nations like Poland and Finland, even if the fundamentals are not as materially impacted by the war. Valuations across the board are under slight pressure as a result. CEREIT's portfolio average initial yield is a healthy 5.7%, which provides a good buffer to the finance costs. Our number one focus this year is to manage the balance sheet and asset sales and gearing levels, and provide confidence to our bond and equity investors to help close the current 33% gap to the NAV of CEREIT's trade of EUR 2.33 billion and EUR 0.15 to par value on our November 2025 MTN and obviously the high perpetual securities yield.
In conclusion, we point to active asset management, delivering on our long-term investment strategy and responsible capital management to support a higher unit price. Starting with asset management, our focus remains on active but like-for-like income growth, maintaining high occupancy and long WALE. The sound European market fundamentals support our view that we will see further inflation increases in both Grade A office and logistics market rents to offset the pickup in the financing costs. This should also offset some of the valuation impact from rising cap rates. In terms of investment strategy, I'm confident that we will reach a majority in the portfolio weighted to logistics and industrial by the end of this year. Given CEREIT's current high cost of capital, we have put a temporary hold on acquisitions.
Selective divestments in office and in other aspects will help fund the development pipeline and offset the potential pressure on LTV. We've commenced discussions with our banks to refinance the 2024 maturing debt and the RCF to further reduce the balance sheet risks. I am pleased with the support from our banks shown to date and the hard work of Shane and our treasury team. The selective sales and de-gearing program, along with the rising finance costs, will have a short-term impact on earnings. We are doing everything possible to minimize this impact. Also taking the opportunity to improve the overall quality of the portfolio and provide investors with transparency on our path forward. I thank you for your continued investment and support as we navigate the macro headwinds with our resilient portfolio and dedicated management team. Thank you.
Now with that, Kiara, we open up to some questions. Thank you.
Thanks, 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 screen to be placed in the virtual queue. For those who dialed in, please select star nine to raise your hand and star six to mute or unmute. We have our first question from Felicia. Felicia, please go ahead and ask your question.
Hi, Simon, Shane. Can you guys hear me?
Yes, Felicia.
Okay. Hi. Thanks for the presentation. I have two questions. First of all, what is the liquidity like in Europe? Has the REIT manager confirmed that you can execute your divestment program for 2023? The second question is, on Parc des Docks, how much will it cost over the period, and how are you funding it? What are your expected returns? Will the stabilized yield be higher than your cost of debt? Oh, sorry, I have a third one also. Sorry. The third one is, what is the cost of debt like in Europe now? Are you as a REIT, rather, borrowing at Eurobond plus a spread?
Sure. Thank you for the questions. On the liquidity, we mentioned that the total volume of transactions in the first quarter was down 50%. We're fortunate in that many of the assets that we're looking to sell aren't the big EUR 500 million or the billion-dollar mega deals that are struggling to find appropriate levels of financing. Our average asset size is around EUR 26 million. It's a much more liquid part of the market. Not only is it the institutional end, but we're also seeing private client investors also in that sort of bite size, which is dentists and doctors, et cetera. In terms of our confidence, we've made the comment that over the next two to three years, we've identified around EUR 400 million of assets.
That's more than we need from a CapEx and a redevelopment pipeline. It's got a conservative buffer in there, but certainly the signs of the current stages of negotiations with our current sales, it's not the full EUR 400 million. Obviously, we're not selling all 400 this year. What we've targeted for sale this year, we're very pleased with the progress we're making with the various buyers. Some of our assets are being sold to local developers. Some of these very older B, C-grade office assets are able to be converted to condominiums or student housing or university buildings. That's being sold to higher and better use, if you will. Some of our other office assets are in the very core markets, such as Milan.
Again, we point out that the office markets in grade A space is very tight at only a 3.6% vacancy. In Milan itself, 2.7%. We've got some really good traction on one of our Milan office assets. Again, because the property fundamentals are very strong. In terms of Parc des Docks, for those that are online, Parc des Docks is a 10-hectare logistics site in Paris. In the bottom of that picture is the new Paris Olympic Village for the next year's Olympics, and then a new stadium just to the right-hand side of our property. The new Paris Hospital is just in the left-hand side. Again, very well located.
We're now three years into a five-year planning process with the local Paris municipality, the local council and the French government. It's a very strategic site. It's a little early to outline exactly what will be granted from a commission, building permission perspective. The diagram on the left-hand side, the plan on the left-hand side, should give you some sense of the scale that this is a very substantial project. Could be as much as 200,000 square meters of new commercial space, both logistics, life science labs, residential to accommodate all the new workers in this district.
We are a couple of years away from being able to give you really concrete feasibility analysis, which I think was the second point of the Parc des Docks question, which was around stabilized yields on the project. Just as a reminder, we bought this site for EUR 96 million, and it's currently valued at around EUR 160 million. None of the development upside is currently in the valuation. The valuation is just as an as is basis, given that it's currently about 74,000 square meters of very old last mile logistics, well leased to the likes of UPS, et cetera. A bit early to talk about total project, but we're really pleased with the progress, and we've got some very good dialogue happening with the local municipality and the local government.
We're certainly heading in the right direction. And I guess watch this space as we work through those plans and the project feasibility. Our board is also at pains to point out to investors that we're very mindful of the risk appetite, not just of the board, but also of the REIT investors. Again, we point to the fact that the MAS has a capital of development risk of 10% of the total portfolio being committed in projects. This project could be very long term, could be over 10 years, just given the size and scale. But again, we'll manage the risks appropriately, and we certainly won't put so much on the plate that it risks the overall portfolio. In terms of the third question, I'll hand that over to Shane.
Yeah. Thanks, Felicia. In relation to the debt and the interest cost. I mentioned before we have now 84% of the debt which is fixed. And we have an average rate of 2.7% on that debt. I also mentioned that if the three-month Euribor were to increase to 4%, our total all-in rate would increase to 2.85%. That's only just moving the 16% that is floating. A couple of points is that the 4% of the Euribor, if you look at the yield curve today, longer-term rates are below 4%. Yeah. In fact, Elena, if we can just go back to that slide.
You can see that this is not the yield curve, this is just the three-month Euribor, but there is an expectation that rates will drop over time, and you can see that in the yield curve. We think that that will coincide quite nicely with the expiry profile of our debt. We are fixed for two years and by that, by the end of those two years, we would hope that we see the interest rates down to similar to what the yield curve is showing in today's terms.
Okay. sorry, I just want to clarify earlier. I think for Parc des Docks, you mentioned that it's currently valued at. Is it EUR 116 million or EUR 160 million?
Yeah. Sorry, it's close to 160.
Okay.
We've gone from 96 to 160.
Okay. Thank you.
That's with very little movement in cap rate. That is predominantly rent growth given the last mile logistics demand
Okay. Thank you.
Thank you, Felicia. Thanks, Operator.
Thanks, Felicia. Just 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 to be placed in the virtual queue. I'll just take a pause here to see if there are any additional questions from the audience. Simon, I might pass it back to you for closing remarks.
Thanks, Operator. Importantly, thank you to everyone for joining in this very busy period. In conclusion, we're very pleased to report the very strong operating performance of the portfolio with good high levels of occupancy, very good like-for-like income growth, driven by very strong rent reversion, high tenant retention in our office, and highlighting the bifurcation in the office markets that if you have green certified grade A buildings, that you're certainly picking up or we are picking up market share from the old properties that may not have AC, may not have air filtration systems, that's obviously post-COVID environment a lot of the employers are looking for. That underlying operating performance is almost offsetting the impact from the rise in interest rates.
To deliver a quarterly DPU that's slightly up on December quarter and only marginally, about 2.4% less than the first quarter of last year, we think is a very pleasing result given the macro environment. In terms of our focus over the next six to nine months, certainly gonna be on completing the asset sale program in part to fund the very accretive development pipeline that we have, as well as offsetting any downward pressure that may still be lagging in the valuation cycle. That's something that, again, we're very focused on. With that, thank you very much for everyone's attendance and thank you for your investment and support of CEREIT. Thank you.