CapitaLand China Trust (AU8U) Earnings Call Transcript & Summary

Hi. Good morning, everyone. Welcome to CapitaLand China Trust 1Q 2024 Results briefing call. I'm Nicole, IR of CLCT. I have with me today Tze Wooi, CEO, Joanne CFO; and You Hong, Head of IPM. Our agenda for the next hour would be to begin with a short presentation before proceeding to our Q&A section. So we will take questions after the meeting. So we appreciate if you could raise your hands if you have any questions, and I'll direct the time over to you. I'd like to pass the time on now to Tze Wooi, please.

Thank you, Nicole. Good morning, everyone. Let me just dive straight I think most of you are very busy in several announcement results coming on. So let me just very quickly walk you through the 1Q 2024 CLCT's business updates. Zooming in at key highlights, I think, for 1Q 2024, our leaner and fitter our 9 retail malls are continue to lead the recovery. As you know, we have exceeded operations at Qibao also divested Shuangjing, but post AEI and 9 retail malls continue to contribute equally strong revenue versus the 11 of last year. If you look at on a like basis, if we remove the effect of Shuangjing and Qibao, the current 9 retail portfolio would have grown in terms of revenue, about 5.7% year-on-year. If you look at the retail metrics of shopper traffic and tenant sales in the first quarter, things are continuing on the gradual up path. If we look at the shopper traffic double digit, tenant sales double digits, gradually improving the operations post our AEI. Moving to the net property income level, I think the new economy segments, the logistics in terms of the revenue and in terms of the business part, we also did not receive as much of the government's tax incentives for this current quarter. So that's sort of bring down in terms of the year-on-year effect of the portfolio. If you look at the 3 asset classes that we have today in terms of retail business parks and logistics, retail is our biggest segment, it continues to be driving at a high level of occupancy, business parks stable. Logistics is the one where we are taking a little bit of asset specific leasing actions to address some of these current demand supply challenges. I'll talk a little bit more later on. I mentioned, if you look at the 3 segments, occupancy for retail largely all our assets are back to the healthy level of more than 95%. If you look at our core assets, especially, they are closer to the 99% to 100%. So I think that gives us a firmer footing as we approach the year. I already mentioned in terms of the traffic, it's across double digits. Beijing do a little bit better because of some of the efforts that we have put in, in the last couple of years, you see Beijing malls are almost reaching the pre-COVID levels. Similar picture if you look at the sales side, post AEI, things are running up much better year-on-year and also reaching or exceeding the 2019's effect. Largely, if you look at the business parks and logistics, I think we are all aware that these 2 segments in terms of the market, if you look at where the market vacancies are temporary this year is going to face a little bit of that, more supply coming in, but more business are redoing their footprint and very cost conscious. So I think these have been taken into effect as we balance the occupancy and also the kind of rental expectations for land lord. So if you look at what we have done, I think we look at the logistics, we have particularly derisked 2 of our assets. They are more exposed to single tenant. So that has been already completed in terms of our lease renewal of bringing the Kunshan to 90% and Wuhan to almost full capacity as a result of that, we have to align some of these rentals to keep them. Shuangjing has already been completed, [ Qibao ] have been repatriated back in 1 quarter. This has been used to pay down our borrowings. So we would see later on gearing will improve. That will also have a flow-through effect in managing our cost of debt and interest expense for the year. If you look at where things are, our gearing has come down relative to a quarter ago to a more healthy level of 40.8% bringing RMB for this period of time are relatively stable for the balance sheet we're reporting, although at the P&L side, we continue to see year-on-year close to 5% relative weakness compared to a year ago. Due to our active debt management, that comprises more of us shifting a little bit of that borrowing mix to RMB also enjoying the RMB's LPR loan reduction and also because of us actively refinancing our onshore loans. So all these actions have helped us to mitigate the rising interest impact. The proceeds have been used to pay down more expensive debt. So again, if you look at the average cost of debt that has been managed stably and coming down. Moving on to the maturity profile. You can see again quite consistent. We do not have any refinancing tower that are due for concern. We have completed everything for 2024, nothing is up until 2025. As we speak, we are also actively looking to allocate and rebalance some of our onshore borrowings across several assets. So I think we are able to take this opportunity to refinance across our onshore loans to achieve better overall cost of borrowing. So I think that effect will start to be seen coming into the second quarter and into the second half of this year. So we have to pushed all the refinancing of onshore debt to 2029. So I think that's an important point for us to take note. The other thing is we have been progressively as part of debt mix intent to shift more. I think last year, we were closer to 10% -- last year and we are about 20%. This quarter, we have continued to move progressively to 23%. Our target is to move closer to 30% this year. So I think all these initiatives will help us to manage the overall cost of debt down. In terms of fixing the fixed loan, I think we continue to maintain a relatively high 77%, 75%, 80% kind of fixed rate. If you look at what we are trying to shift in the portfolio, I think overall, you can see that effect playing out. I think over the years, we have actively taken back space from the anchors, the lower yielding. So I think part of the AEI effect, you can already see now the Supermart anchors for the last 3 AEIs have been competitive and reduced. And therefore, you see it's income less weighted to it. As a result of the space that we take back, we have been pushing more towards FMB, which is a trade debt that is increasing in sales and capturing spending. On the other hand, we also see room for us to do more. And I think you can see services also improving versus a year ago. So I think these are all the leasing directions that we are shaping the portfolio. And I think CLCT today continues to be 1 of the real out there to be very well diversified in terms of its revenue streams. I think 70% comes from retail, 27% comes from business parts and less than 3% from logistics. And if you break it down top 10, less than 10% exposed and the largest tenant is only about 1.6%. So I think these are all the diversification, the revenue streams that we want to build resilience, and I think this has been shaped accordingly. Looking at retail, I mean, we have now 9 retail malls and if you look through the 9 retail malls post our AEI efforts, I think they are doing much better. I think if you look at the leading indicators of traffic sales in terms of what they have been capturing footfall and demand in the last 1 quarter, Chinese New Year, things are trending well. And especially if you look at this quarter, the 3 malls that we had completed the AEI contributed more than half of the incremental sales improvement. So I think this is a good encouraging sign that what we have done to refresh the mall offerings are capturing the consumer return and spending. Across the trade set -- trade categories, we are pushing more F&B. These are doing well. Services, as I mentioned, in this quarter, leisure and entertainment are also coming back in the sense that we are able to sign a little bit more tenants along those fronts. So I think generally, an environment is, I would say, gradually improving to a more normal state that we have seen before. I think if this sales this traffic, this positive data plan continues to play through, I think you start to see a little bit more healthy cycle for us to improve our rental in the next cycle. I mentioned already, if you look at all our retail malls besides the 2 smallest one, which is Aidemengdun and Xizhimen, which is trending around 95%. The rest of the assets are already pushing closer to that kind of 98% and 99% full occupancy. Typically, for period-end reporting, we do see close to 2%, 3% additional vacancy as somebody will follow up before someone will come in. During COVID, you have seen that opening up to maybe 5% over to even 7%. So I think generally, you can see most malls are now back to 98% as a whole as the tool that are weaker, we have to do a little bit more to strengthen it. This quarter, if you look at where things are in terms of the churn. I think generally, the retention has improved relative to a year ago. We are closer to 61% in terms of retention. So I think that's a sign that things are generally stabilizing. So that gives us a little bit more room to control the downtime. And consistently with the last few quarters, the general occupancy cost that we are tracking are back to industry norms. And looking at where we are capturing the new tenants, who are coming into our mall. These are the few sectors that continue to see the F&Bs continue to be the big push services, I mentioned earlier, leisure and entertainment. And for selected malls, I think fashions are continuing to do well, especially in our lower-tier cities, for example, in Harbin and in Nuohemule, I think they are a strong mall in the catchment. They continue to be able to bring in more interesting brands to service the catchment. Just a quick snapshot of how things are. I think I mentioned quite a lot on this. Generally, the AEI has improved, and this impact will continue to drive improved positioning and also be able to capture rental productivity for the coming year. Let me move on to the business parks side. If you look at business parks, we are 5 across the 3 cities, again, the different parks have different unique strength and positioning across -- if you look at where things are, again, if you look at where market vacancies, they are typically trending around 20% to 30%. If you look at the market survey, our parks have continue to maintain a very stable occupancy of above 90%. The 2 Hangzhou, we have mentioned quite a few times that the demand supply in the short term will create a little bit of that churn where businesses are still very, very cost conscious. Some of those tenants that have been with us maybe attracted away because of them taking on their new real estate themselves or being incentivized because of very low rental into other districts. So I think there's a little bit of churn but that said, I think in the first quarter, we do see a little bit of more leasing volume that we signed in, which is a good sign compared to a year ago. Looking at where things are, I mentioned, if you look at Suzhou, which is very steady. We continue to be able to do quite new leasing volume in the first quarter, 20,000 and at a 4% rental reversion. So that's a healthy sign. And we continue to see MNCs actually expanding in some of our business park footprints. So I think that continues to be a good sign. At the same time, we are also signing in new leases that are in the trade sectors that we are targeting to diversify that kind of reach. So I think this is a good sign. And the Xi'an, there are the 2 assets. The smaller one, we do have a lot of leasing volume for 2024 and the bigger 1 of AIT, I think for the first quarter, we continue to see some new sign ins. I think more is for the second half of this year, where we have several bigger lease expiry profile coming up. So that's something that we are working in the advance to secure or to get replacement as they come and due. For Hangzhou, I mentioned, I think, again, quite a healthy 8,000 over square meters of leases signed from the different trade centers, and we'll continue to work within our own internal and using some of the government agencies and external network, the tenant community to help us reach out to some of those community or leases that we can bring in. In terms of business part, the retention is a little bit more quite typical. I think 75% are being renewed, and we are bringing about 25%, and we continue to see sectors likely electronics, the biomedical areas that we want to target our efforts. Moving to logistics. I think we have 4, I mentioned, if you look at the general landscape, I think we know that a lot of the logistics real estate was built because of the expanding e-commerce growth. But I think that part of the demand has little bit moderated. And I think post-COVID, I think there's a lot of supply chain movement. So I think this is the macro landscape. And if you look at where things are in terms of rental, because of these, asking rental are softer and the places that we are in will be new supply coming in. So I think this is the kind of leasing environment that we have to handle. So looking at where things are, we have solved 2 of our major leasing focus for last year end. So Kunshan and Wuhan, we reached the leasing and now back to 90% or full occupancy. Chengdu, we continue to be able to sign smaller multi leases into the building because it's more catered for smaller setups. So we continue to see demand coming from logistics players who are servicing the end consumer retail products. So I think that is an area of focus. And our location continues to be able to near the airport and close to where the transport mode are. So I think this is going to be the focus. And for 2Q, I think we have secured the releases. I think this Chengdu should be able to progress from 60s in last year, the 70s this quarter, and we are progressing to the 80s this year. Let's start with the Shanghai one. With the exit of our last logistics, the 3PL tenant, we are now weighing options or whether we want to do a more short term trying to find out similar kind of operators who like that location. The location is still good because it's near to the ports, and it's very suitable for players who are playing the sea-freight and then this area generally service a lot of those car manufacturers, the EV. So I think this is an area that we want to spend a bit more time to capture. So this one area of work. The other area of work that we are trying to do is to see whether we can take some time to CapEx the building and suit some of the tenants that can then lease this area for a longer time. So I think these are the 2 listing options that we are weighing as we look at the opportunity. So to conclude, I think we continue to stay very focused in the current environment, driving asset performance, watching the operations to make sure that we tighten all the controllable expenses, the margins, et cetera. We have unlocked value for many of the mature and some of these non-core will continue on the path to look at what opportunities we can continue to do that. At the same time, we have completed a series of AEIs and those assets are now contributing much better to a leaner and fitter retail line assets. So I think this is going to be the strategy and focus going into 2024. And I've already mentioned, I think if you look at where things are, 2024 is going to be a very important year for China's economy. First quarter numbers slightly ahead of analyst market expectation. And I think you continue to see the government putting a lot of policy emphasis trying to stabilize the property sector to shore up the business confidence and household consumption is going to be a big pillar of that 5% GDP growth. So I think you're going to see more policy intention moves to this area. So I think we are in the right sectors. I mean in terms of our asset class, we are aligning very favorably to where the China's own economic priorities are at. So I think for retail, you continue to see us doing that. And business part, we have to be a bit more local in terms of working through the local government on who they want to base those sectors, those industry names that you would like to house within the catchment. And same thing for logistics. I think we will continue to push occupancy, while being very pragmatic about what we can in terms of the rent and also the tenant quality. So I think with that, I'll open up for Q&A. Thank you.

Thank you Tze, for your presentation. Let's now proceed to the Q&A statement. I see 2 raised hands on the right. So can I pass the time to [indiscernible].

I have a few questions. Maybe I'll take them one by one. Are you able to share the reversions across the 3 segments for this quarter?

Logistics, I think we have guided. I think it is very much in line with what we have guided. I think the 2 major assets that we have secured the leases. The reversions are around a negative 20%. For this quarter, if you look at our business parks besides Hangzhou, which is going through that churn. So Hangzhou is in the negative. Other than that, the other 3 business parks are still on the single-digit positive park. Retail is the 1 where you start to see that divergence. If you look at this quarter among our 9 malls essentially the bottom 3 are the ones that continue to exhibit a little bit more negative pressure that is actually [ streamline ] still going through a little bit of negative. But I would say this quarter, the negative overall is less negative compared to a year ago. So I think we are moving towards that park. The second mall that is still under a little bit of more pressure are the smaller ones, right? The other one the Aidemengdun and [ Xinnan ]. The bigger ones like Xizhimen, we are already in a positive mode. The strong ones I mentioned Nuohemule and Xuefu, these are very dominant assets in their local catchment. They continue to exhibit their stability. So if you look at this quarter, I would say 5 of our 9 are already flattish or slightly positive. That gives us that 2 to 3 they are main negative. So that give you the full picture.

Okay. Okay. For the retail reversions, there should be still some NPI from the AEI work that you've done in the past 1 to 2 years, right? Does that still helpful?

Yes. In terms of the revenue growth that will play through into the revenue and the NPI for this coming year, but in terms of reversion because we had already calculated the new merit in our previous quarter. So we won't be reporting then reversion numeric. But what has been signed in terms of those leases. I mentioned like the Grand Canyon, the Rock Square and Yuhuating, these improved leases give us the flow-through effect into 2024. So that is only for the AEI loss. I also want to highlight, if you look at our lease structure today, 90% or 80% of our lease structure is still very much on the higher or the fixed percentage of [indiscernible], whichever is higher. That's still the #1. So as the sales become better, we see more and more chances of us getting the incremental. So I think that's a point to remember. The second point is, we have always been signing maybe typically it's about 3 years. So within the 3 years, there are also rental escalation organic step up. So there with each typical year, let's say, 20%, 30% is coming up for renewal. The 70% is still steady, but with a bit of escalation. So all in, I think if we can push occupancy, we can push sales traffic I think generally, we are moving into a state that is better, and it's helped by the fact that we have exited, I would say, the weaker performance assets and we'll continue to look for opportunities to do so. So whatever has retained continues to be stronger performer in the typical catchment there. So I think that is what we are trying to shaped the portfolio.

For the function logistic asset, the strategy is to either continue to look for a tenant within the 3PL or potentially CapEx to suit another tenant. When we talk about CapEx, what kind of, let's say CapEx are you thinking about? Is it a cold storage or other kinds of use?

When we say CapEx, generally, it means that the tenant profile that we would like to bring in, sometimes they may have certain needs to suit their own business model, take for example, certain zones, they may need certain special lift because this building has first floor, second floor. They may need certain selling high assets in certain places. So what I meant CapEx includes all this. if it's a cold storage kind of tenant typically, they will also do quite a little bit of more the M&E, the health of refrigeration area. So I think this is something that we are open-minded. And the R&D is about us putting in CapEx, such that we can work through the tenant that we want and we can build in a longer way and how we can [ rentalize ] some of these CapEx. So I think it is something that we are working on one half the other way, obviously, as you see whether there are other 3PLs that can come in and take the space for its use.

Can I pass a time to Terence, please? .

Thanks for the presentation today. Now I just want to ask again, maybe a follow-up on the [indiscernible]. How long do you expect the downtime to be, when should we expect this to recover?

It's a very good question. I think we are -- on various parts, I think things can be quick if they are good indication of people who can commit. I think we are still narrowing down on a few options. I think if anything, we probably need to have 3 to 6 months of a period for us to commit and be able to bring it up. So I think it's something that we have to look at. It is a new tenants that we need to CapEx. I think the duration will probably be longer because there also a little bit more work to be done. But if somehow we can come in and take the space faster. So I think good indication will be probably 3 to 6 months is something that we are working on.

And in terms of -- you said that we are actually looking at increasing the proportion of RMB that. So in terms of financing costs, how do you see your financing cost trending? What should be the expected rate for this year?

Generally, I mentioned we have 2 markets, the buckets, the sing dollar bucket and the RMB market. So the RMB bucket today, you see us our weight is closer to 20% to 25% RMB number. That market will start to see reduced interest expense as we go into 2024 because of the LPR reduction that we already enjoying, that's the #1 point. The #2 point is we are consolidating all our RMB borrowings to refinance and to not only enjoy the lower LPR plus improved credit margin. So I think that is a big initiative that we will do such that we manage down because the RMB loans today are far and below. We have already divested Shuangjing and the proceeds have been used now to pay down our more expensive sing dollar bucket. If you look at this chart, you can see today the big portion that we have, so called, reduce our borrowings are coming from the sing dollar the MML bucket and also the sing dollar floating bucket. So this now in terms of the dollar value has come down. And this is also another big area that we are managing now our interest expense. So I think these few moves will help to neutralize some of those fixed rate hedging contracts that will be coming up for renewal this year. But as we speak, majority of those fixed rates are only up for renewal towards the last quarter of the year. So on a net basis, I would say we can manage broadly our average cost of debt, not higher than what we have done for last year.

Okay. So we should expect sort of like a flattish for the full year?

I think all things concerned looking at where the market is thinking about the second half, the interest rate level based on what I just mentioned earlier, we should be able to control within the 3.5%, 3.6% level that we have shown last year.

Okay. And final question for me. In terms of asset monetization, do you have any updates for asset monetization this year?

I mean this is obviously being looked at all the time. I mean such things is very hard for us to pre-commit not to compromise some of these businesses that we are trying to do, right? I mean, obviously, our philosophy is always to monetize smaller assets more mature assets that are harder to compete, and they are not going to be a big contributor towards the overall portfolio. So I mean, that gives you a sense on where we are focusing our efforts. In today's landscape, more likely than not, we are catching local buyers. You saw us do that last year with Shuangjing. So I think we will continue to use our local network to seek out such opportunities as we look at monetization for those more mature assets that we hold.

Is it only limited to retail malls or would you consider divesting some of your logistics given that there's some headwinds there?

We will consider. We will consider. Definitely nothing is no when we talk about our business. I think the key here is to how we can, first of all, operate the business. Second, if there is a better use of our capital and if someone can come in and start a deal with us that makes sense, we can use the proceeds that will be cycled to improve our financial strength that involves reducing the gearing that will be accretive. And we -- if we have no proceeds coming in or combination of reducing gearing and growing share buyback. These are things that will be much, much more accretive. So we are definitely seeking opportunities on these fronts.

I said last question, but you just mentioned share buyback. So I noticed that you didn't put that in as in the proposed use of proceeds for the divestment, the strong sales. So would you consider doing a buyback now given especially how the share price has been -- is actually quite low right now?

I think in our announcement, we did put there in the Use of Proceeds that when the first quarter came in because we have to balance a little bit of that distribution payment, right? Because in March, we have to pay distribution and also to watch our gearing, looking at where the RMB against Sing is, I think, we wanted to be a bit more prudent to at least reduce the gearing as our first objective. But definitely, we will look up for opportunity, which is why I mentioned earlier, we can monetize some of our existing holdings. It makes sense for us to do that. We are open to the assets. We are not shut to any. You mentioned specifically logistics, I mean if someone -- we can do a deal with, I think we are open-minded about it. And I think the proceeds can be used to reduce gearing and to do share buyback which would be accretive. And that's something that we will definitely consider. In our AGM just 2 days ago, we also saw the investors mandate, and we had actually enlarged the mandate to 5%. So I think we are actually preparing the capital management tool and flexibility when opportunity arrives, yes.

Can we have Joy please?

Two questions from me. First on retail. Could you share a bit about your [ up ] costs? And also in terms of your income, what percentage of GTO you're getting now versus maybe pre-COVID?

Yes. The first question, let me see in terms of [ up ] costs, generally stayed quite constant with what we had indicated in the last quarter. Most of the malls are trending in the teens to maybe about 20%. So I think this is what I feel is a more industry healthy state in the days where -- if you continue to maintain this level of up cost where the next lease cycle comes up, I think everyone will be in a better position to look at what is more realistic rent range. Last 2 years have been particularly difficult as we all know, retailers are still going through that recovery mode. General sentiments are still cautious, I would say, in terms of expanding. So I think people need to give them a bit of time to do that. But I think in terms of what we have done to the specific malls, the sales, the op cost, I think we're moving closer to a more healthy state. The second question is in relation to GTO. I think broadly, the spread of our GTO component still lies between about the 3% to 5% range depending on various malls. On this particular quarter, I do see improved GTO incremental coming in from a stronger malls. So you start to see a little bit more of that in our Xizhimen [indiscernible] been shared for in Nuohemule. So I think these are exactly what I meant that as you rebase some of these fixed rent and because of our lease structure having that higher of the two, we start to see a little bit more flow in from the GTO. But by and large, because of the way we structured the lease, it's not going to be very, very different from -- it's not going to be very, very volatile. What was a little bit more during the COVID years, if you recall, we moved maybe from 3 to 5 to maybe 5 to 7 because we were signing a little bit more short-term pure GTO lease structures. Now, I think, we are a little bit going through that cycle where we don't have to renew on a pure GTO basis, we'll rebase them to be a fixed percentage GTO whichever is higher. So for this quarter, it is still within the 3% to 5% range.

I see. I guess you have quite a bit of reversion coming up this year, right? So in terms of how aggressive you're going to push rental you're still going to be more measured, even though the sales are already actually trending above pre-COVID, rents are actually below pre-COVID. So actually, retailers are doing pretty well. Is that fair to say?

It's a fast statement to say that the malls are gradually doing better. But as we look at total sales, as we look at specifically filtering down to the various trade categories and specific tenants, we need to go down to the granular because part of the up cost, part of the total sales are also because of a very active shift in NLA mix and the trade category. So we are pushing more F&B today because F&B today's ability to take on that up cost has improved relative to 10 years ago because of the different formats of F&B. We are no longer doing very big format F&B that have a lot of CapEx. Therefore, their up cost ability is much lower. Today, if you look at average rent of some of the smaller format, like the 50 square meter up to 100 square meter kind of foot format, the passing rental are not too different from a similar, let's say, 100 square meters of fashion. And you do see that shift over time. So I think that is what I meant by the rent up cost will move in relation to the trade techniques that we have in the mall. And I think we are looking at individual trade [ techniques ] to see whether we are in the right cycle to improve rent. So I think definitely, as we move towards the next cycle, things should shape up better then, yes.

Okay. Got it. And my second part question is on [indiscernible]. So based on your conversation, if we were to find a tenant today, would your sign-up rent be equivalent to a 20% negative rental reversion or you need to give more incentives?

I think ballpark what in market now it's looking at, I would say ballpark, generally 30%, asking below it's something that is quite prevalent. So I think we should stand ready to be able to do something that's between 20% and 30%, depending the kind of tenant quality we want and also the kind of credit worthiness that we think we want to bring in. So I think this is the part where I say there's a little bit of deliberation, whether we want to find someone who can take up the space or take up half the space [indiscernible] little bit in the remaining zones. I think these are some of the things that we are working through currently as we speak but rental would be lower than what was passing, yes.

And how do you think that will affect that valuation?

Good question. I mean if it's -- I think if you really look at the market demand, supply and what's the outlook, I think for this temporary 1, 2 year if the market rental is going at that 20%, 30%, we do expect a little bit of that contracted rent period to have that effect in terms of the valuation. But as for how that valuation plays out, I think we will continue to take market data and the valuations feedback, but I do feel that the if all demand supply continues, market rental is being packed down, there should be a bit of downward pressure to our portfolio. I mean, we took a little bit of early revaluation at year-end last year to, I think, move down closer, was it 3% or 4% down. So I think we stand really potentially if the internal market don't turn down positively soon, there might be a little bit of this negative that we have to look at.

Derek.

Tze Wooi, can you hear me?

Yes.

I'll just ask question. I'm just focusing on your business part assets, right? So I'm just looking at both Suzhou and Hangzhou, right? The market occupancy is around similar levels of 70-percent, and while you can hold your occupancy for now for Suzhou, I'm just wondering whether should we keep a closer look on whether your occupancy levels should be able to be hold at about 80%, 90%? Just wondering to get a sense on whether there's downside risk to that?

For Hangzhou, I think, generally, we had 2 big -- 2 components, I would say, 1 is more like the suburban R&D of this nature. The other component is more of like the industrial nature. I think the industrial nature is one where we feel that the demand outstrips supply, and we continue to see healthy demand. So I believe that part of the segment continues to be highly committed. I think that's the first point. The second point for the R&D part, I would say that there will always be a little bit of the ins and outs, tenants of our business model not able to do as well, going to be attractive. Generally, business are very cost-conscious now corporate footprint are consolidating. So for the R&D, the business area, they may be temporal that kind of operational vacancy. But overall, I think our part in Suzhou continues to be very well regarded. And I don't think there will be a big swing. So that's for Suzhou. The one that I had been watching a little bit more it's the Xi'an, I mentioned earlier, Xi'an in the second half of this year, potentially, there might be certain consolidation of some of new tenants because currently, the tenants due to previous year's expansion, they have footprint around different places. So they might need to develop consolidation. So I think for Ascendas Innovation towers, I think second half is where we want to do very early work. That one has potentially has beyond in and out. The smaller part, I think, is more or less there. I think the big tenants have renewed last year -- 2 years that will carry us to 2025. Hangzhou is the one where I mentioned of supply. I think if you look at the vacancy, we are actually already being pragmatic about our rent to make sure that occupancy can, sort of, be driven up. So I think for Hangzhou we should stabilize around this level, we seek improvement as we balance little bit of the asking rent.

Got it. Got it. Sorry, if I can just follow up. So you have Hangzhou Phase I, Phase II, the difference in occupancy is also a function of the type of industries that's located there or just a function of the expiry profile?

I think it's more a function of the tenant types that we have signed earlier on. I think Phase 1 carries more e-commerce and some of them are like our subtenants they may pick up space from us and then they do the small sublease behind, but I think some of these business models are shaping and reshaping. So I think Phase I we do feel a little bit more of growth churn that we need to do.

Got it. Got it. Sorry, last one is if you look at this business park, right, I mean logistics, we understand things are a little bit tough. But for business park, do you think the strategy, let's say, to retain tenants, is there a risk that you have to also offer fairly in good rents for keep the tenants, i.e., do you see a 20% drop in rents in business park side or no?

Business park side, I don't think the rental landscape is as, how to say, this is not as like...

[indiscernible] that's what is somebody told me.

Generally, business parks is still a more controlled kind of asset class. Logistics, a little bit more different landlords different behaviors are quite different. I think our business parks is not any kind of business parks. I think our business park has really been treated and positioned with local government as a JV partner. So I think we continue to want to use, what we say, our own leasing network that is the CapitaLand's platform, and also riding on external network, which comes from our government partners and some of our existing tenants, their downstream, upstream tenant network. So I think this is something that we continue to do. So to answer your question, Hangzhou I mentioned this year, to balance occupancy. I do feel that the reversion we have to be realistic, so negative, but not to the extent of the logistics there.

Vijay, can we have your questions, please.

Tze and Nicole, a couple of questions. My first question is generally, in terms of business parks and logistics, the businesses still seem to be struggling a bit. Can you give some color in terms of the rental defaults or the rental arrears for these spaces in the last 1 or 2 quarters, especially some of the business has gone down. Have you seen rent defaults increasing in your portfolio, especially in business parks and the logistics space?

Generally, as part of our lease management, we typically would have that security deposit that we hold. So we don't have a lot of all these arrears or those default happening that cap to relatively a small percentage of our total portfolio. If you look at the year that just passed in the last 3 months, I would say arrears tend to fluctuate around that 2%, 3% level of our revenue. But that is again having security deposit that we hold. And actually, part of the leasing strategy is sometimes we have to exit these tenants. And that's why the occupancy reflects that decision that we have already exited a tenant who are no longer healthy. So part of the big decision to derisk you see that playing through in logistics already, right? Some of the tenants are having difficulty. So by continuing to let them be there, it serves no purpose. So that's why I think in Shanghai, we have strike deal that they leave. We have given them some rebate for the last few months. But overall, when they leave, we manage to then use the security deposit to offset. So I think these are some of the groundwork that we are always looking out for. So overall, I would say it's managed to that level of 2%, 3% arrears, not too alarming, and we always take early actions to manage that exposure.

Got it. So basically, security deposits haven't covered some of this.

And if the tenants are seeing arrears and through negotiation through working our installment plans through understanding their business profile, if we see that is not working out, then we have to arrive at a decision to part ways. And then that's when the occupancy maybe we get a little bit of that friction, and then we look for new ones. So I think this is what is playing through in this market at this more challenging time. Generally, we have to appreciate that the economy is not chiming as quickly as in the past. There's a bit of business consolidation, very corporate, cost-conscious in terms of where they want to footprint their resources. So these are going through the marketplace currently.

My last question, in terms of tenant sales. Tenant sales in Beijing seems to be lower despite higher foot traffic compared to tenant sales in non-Beijing malls, which are higher despite lower foot traffic. I mean, is there a difference between Tier 1 and Tier 2 cities spendings? I mean the general narrative out there is Tier 1 and Tier 2 cities are doing well in terms of consumer spending and economy. But in your portfolio, it seems to be the other way around. Is there some difference?

Let me just figure that out, you are looking at this slide, am I right?

Yes, the foot traffic in Beijing malls is about -- up 21%, but the tenant sales is up 9%, whereas non-Beijing malls the foot traffic is about 15% but the sales is up 15% -- more than 15%. So what's this difference?

I think these numbers we just have to be cognizant. We should not take a one snapshot of view and just [indiscernible].I think generally, for traffic, we are seeing quite a return to our malls in Beijing for this particular quarter year-on-year. So you can see actually the footfall improvement coming through to Xizhimen, especially and also Grand Canyon. Grand Canyon obviously is because post reopening of out AEI basement, we tend to see more people coming in, which is to be expected over this period of time. . The year-on-year increase for Beijing sales, I would say that typically, these are our big assets. So the base is already at a relatively high level. So the incremental sales as a percentage of a big road potentially it's not going to be that much. But that said, if you look at Beijing, of that 9%, I think you are looking at, Grand Canyon is the one that is contributing the most towards that 9% because of AEI asset. So Grand Canyon, in particular, for this quarter, is growing at about 20-over percent. So I mean that gives you a sense, right? And then looking at the non-Beijing malls, again, primarily driven by the 2 AEI malls of Rock Square. Again, Rock Square, we show double digit, quite in line with the 15-over percent and also for Yuhuating, which also grew double digit like 20-over percent. So I think that this gives you a sense that it is more driven by our AEI incremental impact.

Got it. Got it. Just to get a broad view, is the consumer spending picking up more in Tier 1 cities compared to Tier 2 cities? Or how is the pattern? And how would it impact rent reversions as an effect?

Yes. It is a good question. But it's very hard for us to just use very limited data point and just generalize this way. I would say that across our Tier 1 and 2 cities that we operate, it's more asset specific driven. I mean, if you look at F&Bs, for example, I would say so long as you bring a good F&B that's relevant to our mall, it grows very well, same for services. So I find that based on our own data point, it's harder to just imply that Tier 1 is better than Tier 2 or the other way around. It's more driven by what are the actions that we have done to the mall in particular. And if you have the right mix, the right brands, you do see the influx of traffic and sales, yes.

Can I pass a time to Joel, please?

Can you hear me?

Yes.

I just have 2 questions. The first is regarding the financing environment. So I was just wondering how receptive are banks currently in China and perhaps versus Singapore in providing the loans or refinancing your loans? Has this improved from the past?

Generally, I would say that I think due to our parentage CapitaLand branding in China, I think we are still accorded very well support. Second, I think for most of the banks onshore, the Chinese banks you're referring to, they are also reviewing their own loan book and who they want to extend lending to. And I think on both grounds, we stand on good state because of our parentage names, the CapitaLand branding and also the REIT business as a whole, the banks are very comfortable lending against us because we are primarily are very cash flow driven kind of business. So they are very assured that we are not like those developer sector that we are seeing through a lot of that challenge. So we are able to continuously refinance our onshore borrowings. In fact, we are able to get better terms which is exactly what I was trying to highlight earlier on. If you look at across our onshore books as what this picture shows, right, if you look at just the green bars, so we have different term to maturity. So we are now trying to consolidate and refinance a leaf of these different terms and just push everything out to 2029 to catch improved credit margins at this point in time. So I would say, generally, our ability to tap local bank is still very strong. And I think that is our clear competitive advantage. At the Singapore site, I think this is quite business as normal. I mean we are well supported. We are able to take different sources of funding, increasingly, you see banks knowing what we want and that's exactly why we see a bit of that products. The hedging instrument, different types that we are entering. So I mean, lastly, you saw us we are the first issuer of the FTZ bond. The first Singapore entity to do that. So again, I think this gives the emphasis that our name, our business can tap this wider source of funding and help improve our cost of debt.

Good to hear. I'm just wondering, for the Chinese banks, are you spread across a few Chinese banks or just...

Yes, yes. So very much like in Singapore, we are well spread among all the local banks. In China, we are similarly also well spread among the Chinese local banks, yes.

Yes. Okay. Got it. My next question is regarding any upcoming supply. I understand that in Rock Square, in Guangzhou the significant supply coming into the market being [ Taikoo Li ] and MixC mall, this comes in 2025, 2026. So just wondering, any concerns from your end, what's your strategy because I know it's quite a significant increase in the retail supply nearly 200% in the whole area. I'm just wondering what are your thoughts?

I think when we look at supply, we probably need to distill it to the direct catchment and direct district that we are in. I think for Guangzhou, Rock Square, I think we are relatively in a very mature catchment, our mall is actually linked to the residential catchment. They are on top of MRT station that has 2 lines on that note. So I think we are in a fairly, fairly steady state in terms of the mature catchment. The one that you mentioned, I need to maybe take a look at how far it is to our mall whether it is in same district. At the end of the day, we are doing very captive business around our 3 to 5 kilometer radius and those kind of trains that connect to our mall. I think that is something that we will continue to look at. So far, I don't see a direct thing [indiscernible] something new. I mean if you look at China, the Tier 1 cities, typically they are new supply. For those cities that are better planned, they are typically new supply that is whether a little bit who support a new residential catchment that they are trying to form. So ours is more of a mature area.

Can we have [ Nomura ] please?

Just 2 from me. First is what is supporting the health of Chinese consumer to push our tenant sales up to more than 13%. And how sustainable is the tenant sales?

I think what we see is that our mall positioning is still very much targeted at the household family spending. And I think that segment continues to be driven by essentials and continues to be driven by the lifestyle improvement. So we are not really pitched at a segment that is very volatile and driven by [ moat ] and exuberance. We are less exposed to them. And I think year-on-year, if you look at that sales improvement, large part is people are now normalizing back. That's the first point, right. People are normalizing but people still need to come out to a social place to spend time and to gain experiences and also to meet their consumer spending needs. So what we have done is we are remixing our content in the mall. We can see F&B. We can see less pressure. You can see more services, more leisure, more beauty and health care, et cetera. So it is a combination of us having new mix brands that then now as people normalize back, they will want to experience new things. And I think it's a combination of that, that you see for the current quarter, year-on-year, we see that improved sales. I saw in 1Q, I think the market general sales is probably around at 5% level, 1 quarter 4.7% level. So I think our portfolio data supports that level. Of course, I say this quarter is because of us post AEI have a lot of new content, new experiences people come in. So I think it has a bit of effect. That's why our portfolio sales is trending above the market. But generally, if we can continue to grow at about that 5% level, I think that's a very healthy state for everybody doing this business.

Yes. That's very clear. My second question is what government incentives have you all seeing supporting the property market or consumer spending?

You are referring general government policies?

Yes, general government policies.

I think the government policies have been quite active, right, in terms of stabilizing the property sector. I think you already see them rolling out quite a few measures on the residential side. I think the government's focus is primarily to make sure the end resi buyers made home projects that should be completed to deliver. I think they are making sure that they are funding in that access to funding to the right projects. So I think that part is quite clear and I think they have also removed quite a lot of those earlier property managers. So I think that is quite an important area for them to stabilize the sentiments around the property sector. For the commercial real estate, I think it has to be a little bit more thoughtful. I think they are also targeting a little bit more on the small enterprises ahead of time. So people who are smaller, they may consider some kind of tax incentives for the smaller enterprises. So I think this has something that the government is going through. I mean household side I think, yes...

Yes, pushing -- they are pushing through the equipment upgrades and trading of consumer goods. So I think they are trying to push on the domestic consumption front. So I think recently, they just also announced that they will be doing and encouraging more trade-ins and consumption of above items like home appliances, automobiles. So this will encourage the likelihood of reaching its growth target without relying too much on the property market.

But as we speak, I think we all feel and we all hope that [ Xizhimen ] can have a little bit more direct and targeted measure to go to the household because ultimately, this year's GDP is going be driven a lot by consumption. As you know, the external environment is not that conducive for China's certain exports and those kind of intention. So I think domestic consumption is going to be key. And that's why the property sentiments have to stabilized, household income got to be stabilized. And if they can get a boost, I think the consumption will pick up. Generally, cautious mode, but when things are a bit better, people still need to spend. So the key is when people need to spend, are we able to capture that frontal wave of where they spend. So we have to keep refreshing our malls to ensure so long as we are in the top quartile of the catchment the business that we want to do, I think we should be able to catch it when people take back to normal. Ultimately, people still need to spend on the essentials and lifestyle choices.

So we reached the hour. I was just wondering if there's any last questions that anybody might have? Okay. Then thank you very much, everyone, for joining. Thank you, Tze Wooi, for your presentation insights. Would you like to share any last words that you might have that you like us to take away.

I think 2024 is going to be a very important year for China. I think as a China-focused business, we are all watching the data point very closely. What you see us being able to manage more actively, you continue to see us driving asset performance in operations. We'll look for opportunities to really shape our portfolio quality, I mentioned, looking at opportunities to monetize some of those assets along the way really enhancing our financial strength. So that we can have that financial capacity to do actions that will improve the kind of DPU in the share price. I think that's something that we are totally focused on for 2024. Yes. Thank you.

Thank you, Tze Wooi. So we hope there has been a thoughtful discussion and you have managed to obtain a better color on our operations and outlook. So thank you all for joining us for the call, and have a good day.